It is still commonly believed that ethical investment funds are likely to under-perform against conventional investment funds, i.e. funds of a similar type or sector, which do not have to operate within a restricted, or screened, investment universe.
Surely, says the sceptic, in the brutal and even slightly immoral world of investing, ’ethics’ has no real place? And when the first ethical funds launched in the mid-1980s they were indeed viewed by many as a temporary aberration.
Twenty or so years later there are over 100 funds available to UK investors offering a screened or ethical approach to investing and total assets under management have grown very considerably (
EIRIS the leading ethical investment research service shows around £11bn invested in UK ethical funds).
So do ethical investment funds perform?
There is no evidence that operating within an ethically screened investment universe produces underperformance. In fact there are a reasonable number of ethically invested funds which have consistently beaten many of their non-screened peers. These include:
Kames Ethical Equity
Sector – UK All Companies
Five year performance – 7.08%
Five year performance for the sector – 2.07%
Rank with fund sector – 78 of 244
Aberdeen Ethical World
Sector – Global
Five year performance – 13.02%
Five year performance for the sector – 8.08%
Rank with fund sector – 63 of 162
First State Asia Sustainability
Sector – Asia Pacific Ex-Japan
Five year performance – 93%
Five year performance for the sector – 56.64%
Rank with fund sector – 3 of 60
Ecclesiastical Amity International
Sector – Global
Five year performance – 46.03%
Five year performance for the sector – 8.08%
Rank with fund sector – 6 of 162
This is not to say that all ethical funds perform well, as many do not. As with any fund there are a wide range of factors influencing performance.
Funds that do well often share a number of characteristics, these are typically:
- the headline fund manager has been in post consistently and over a reasonable period of time.
- the parent group is supportive and views this type of investing as part of its overall strategy and the fund has a clear investment style or strategy.
Kames, Ecclesiastical and Aberdeen’s funds have all benefited from their manager’s being in place for over ten years. This is very unusual in an industry where the normal fund manager tenure is around 18 months. In fact it may actually be the case that ethical managers move around between jobs far less, possibly because of the relatively specialist nature of their roles.
In all three of these cases the funds are over £150 million in assets under management (Aberdeen’s fund is the largest at £254 million). This means that the funds are likely to be profitable for their parent businesses and are well established. Some newer ethical funds launch and then significant time and energy must go into raising investment to get the fund’s assets over the £50 million which is required to make an investment fund profitable.
It is also the case that the three funds employ consistent research methodologies and do not tend to vary their ethical investment criteria. The Kames fund in particular operates with a relatively simple set of negative screens and after a stock has passed these screens the manager can invest. This allows the manager to concentrate on buying good companies and not become too involved in screening related issues.
Notes:
- This is not an exhaustive list of the best ethical funds but it does show the more consistent of the top-tier of funds.
- All funds are Retail OEICs or Unit Trusts and are accessible to UK retail investors.
See also:
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