A number of key staff changes has seen Australian Ethical Investment's small-cap vehicle slapped with an avoid recommendation by Morningstar.

While the Australian Ethical Smaller Companies fund has a reasonably well-equipped team, Morningstar said it lacked the experience and length of service of its more highly rated rivals.

"The team has had some turnover in the past, and while the firm has been making a push to rectify this, we'll be watching to see how the new hires settle in," Morningstar analyst Zac Wallis said.

However, portfolio manager Andy Gracey was singled out and Wallis said he had done an admirable job since he took up the helm as lead manager in 2008 after the departure of Alistair Clark.

Chief investment officer (CIO) Martin Halloran joined Australian Ethical in August 2008 after the resignation of CIO David Ferris in 2008.

The small-cap fund also failed to impress because of the lack of detail in its stock research and modelling, according to Morningstar.

"The team will invest in stocks that fail to meet the Centre for Australian Ethical Research's criteria when there is a strong enough investment case for it," Wallis said.

"This is an important point investors seeking an ethical option need to know and with which they need to be comfortable."

According to Morningstar data, for returns post April 2008 the portfolio's mid-cap tilt and heavy investment in defensive sectors helped returns when the market fell in 2008. However, when the market recovered in 2009 the portfolio lagged the index and more growth-focused peers.

This research was completed as part of a Morningstar sector review that is due out later this year.