Can ethical funds really deliver the goods?
By
Heather D'Alton
Nov 08, 2005
Investing in ethical funds is more than a passing trend: around £4bn is now held in green or ethical funds. And as a result, of the 42 SRI (socially responsible investing) unit trusts available in the UK, 26 have come into being in the past ten years, says Iain Morse in The Independent. But should you buy these funds?
Performance-wise, there’s very little reason to buy into the ethical funds sector. The best-performing ethical unit trust, the Henderson Global Care Income fund, has returned 121% in the ten years to September. In comparison, in the non-ethical sector, the Marlborough Special Situations fund returned a much more impressive 600.8% over the same period. Compared to their “unrestricted equivalent funds”, says Morse, ethical funds will more often than not “come away as worse performers”. Moreover, SRI funds have also experienced very volatile performances: at the bottom of the sector, for example, you’ll find another of Henderson’s ethical funds, the Global Care Growth fund, which posted just 20% returns in ten years.Why so low? Because ethical funds have fewer investment options - and by denying themselves these options, the funds are more vulnerable to moves in the limited sectors in which they can invest.
Take the technology bubble: although most ethical funds invest in tech stocks, the Ave Maria Catholic Values fund missed out when tech stocks soared - refusing to invest in them as they offered benefits to unmarried partners of employees, says Tim Harford in the FT. When the bubble burst, the fund outperformed, but it had missed all the bubble’s gains.
The second problem is that SRI funds have little or no consistency in their definitions of ethical investing. While some funds will not invest in UK banks (out of concern that they lend to oppressive regimes or to companies making weapons) and will only hold stocks in mortgage banks, others don’t have these restrictions. So if you’re serious about investing ethically, you’ll need to find a fund that fits your ethical convictions. And given the diverging performances, you need to make sure you choose the right manager - a much tougher prospect than selecting mainstream funds, warns Julian Parrot of Ethical Investment Collective, also in The Independent. Funds in the ethical sector that have performed consistently well include the Aberdeen Ethical World fund, says The Guardian, which is invested globally for growth, or, for the UK, the F&C Stewardship Income fund.
But will your ethical investments make a difference to the sectors it avoids? Other than to ease your own conscience, no. As long as non-ethical funds and investors concentrate on financials, they will buy unethical firms (such as oil, gambling, or pornography firms) when they’re cheap, says Harford, therefore reaping rewards where your ethical fund can’t.
Published in Investments
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by
Heather D'Alton
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