(Good Money Week)
Should you indulge in ethical investing? We show that the cost to you is very high – which also means less to make personal donations for direct impact.
The argument for ethical funds is well-known: investors can use their capital to influence companies to be more socially and environmentally responsible. There are a number of ways that this can be achieved and the funds are sometimes rated on a scale from light green (broad brush negative screening) to dark green (more specific, stringent criteria).
How “ethically” run a business was has, historically, been difficult to measure. Companies often paid lip-service to ethical ideals. With more metrics (FTSE4Good, EIRIS research etc.) and better visibility on environmental, social and governance practices it has become easier to identify those companies that are more ethical vs. those that aren't fully committed.
All that said, do ethical funds pass the performance test? Let's look at the facts:
Across all sectors:
- there are 51 ethical funds across 14 sectors...
- but only 35 with >10 years of performance data across 9 sectors.
- Only 3 funds make it into the top performing 20% of all funds over 10 years:
- Henderson Global Care Growth, EdenTree Amity International and Stewart Investors Asia Pacific Sustainability (closed to new investors).
The popular UK All Companies sector also happens to have the largest number of ethical funds:
- There are 13 ethical funds in the UK All Companies sector…
- …just ahead of the Global sector, which has 11 funds.
- Of these 13, Kames Ethical Equity was again the top ethical fund, up 116% over 10 years
- It has slipped a little since last time, falling outside of the top 20% of performers in its sector over 10 years
- For comparison, the top performing fund UK All Companies fund was up 242% over the same period (MFM Slater Growth).
We agree that there are arguments in favour of ethical funds for certain investors. The idea of "voting with your capital" is certainly gaining traction and there are now more nuanced methods of ethical investment than simply negative screening.
But utilising the whole range of funds available can generate more growth, which gives the freedom to directly impact a chosen cause.
For example, generating more growth from an unfettered (if not unethical!) fund means you have more funds to donate to good causes, whether the church roof or otherwise.
For those who insist on buying ethical funds, do so with care. For example, many such funds still have an emphasis on more cyclical stocks, which means they can quickly swing from top to bottom of the performance tables.
Three sectors with the largest number of ethical funds are: UK All Companies, Global and Sterling Corporate Bond.
Here is a little analysis of each. Plus, at the end is a table showing you the “feel good cost” – this is the difference between the best ethical funds and best unfettered fund in each of these three sectors, assuming £100,000 invested 10 years ago.
UK Growth funds – feel-good cost £126,000
To re-confirm, not one of the ethical funds with >10 years of performance data in the UK All Companies sector make it into the top 20% of performers.
Of the ethical funds within the UK All sector, Kames Ethical Equity stands out because, looking at a decade of performance, and discrete years to December 2015 it is:
- in the top 2 quintiles in 7 years out of 10, and
- only in the bottom quintile in 2009 (it returned 22.40% for that year).
The feel-good cost in this sector is £126,000
Global Growth funds – feel-good cost £82,000
Two of the ethical funds from this sector with >10 years of performance data make it into the top 20% of all funds.
Looking at a decade of performance, and discrete years to December 2015, EdenTree Amity International:
- is in the top 2 quintiles in 5 years out of 10...
- ...but has been in the bottom quintile in 4 out of 10 years.
The feel-good cost in this sector is £82,000
Sterling Corporate Bond funds – feel-good cost £34,650
The top ethical corporate bond fund - Rathbone Ethical Bond - is 35% behind the top "unfettered" corporate bond fund over 10 years. However, the maximum loss suffered by the fund over that period is over 4x that of the best unfettered fund. The Rathbone fund:
- is in the top 2 quintiles in 6 years out of 10...
- ...but has been in the bottom quintile only two times out of the last 10 years.
The feel-good cost in this sector is £34,650
Is there demand for ethical funds?
We encounter little unprompted demand for ethical funds. From a behavioural point of view we would expect greater demand for ethical funds in better economic times where there is more certainty and people feel more positive.
Right now, with such uncertainty over markets, the economy, politics etc, a limited enthusiasm for ethical investments is understandable.
ACTION FOR INVESTORS
- To achieve outstanding growth, more consistently, ethical investors should consider making use of a wider range of better funds and use the proceeds for direct impact.
- Large profits enable greater personal contributions to good causes.
- Investors who wish to buy ethical funds should look under the bonnet beyond the “ethical” label, as there might be hidden investment risks.
FURTHER READING
Table 1: Feel-good cost
Data source:
Universe: Investment Association, >£50m fund size, UK domiciled, filtered on fund name.
Feel-good cost: Assuming £100,000 invested 10 years ago.
Max loss: the largest continuous fall over the last 10 years.
Data run to Last Month End (30/09/2016)