The extraordinary cost of ethical funds

There is a growing supply of ethically focussed funds, so here we assess whether their performance merits your attention.  Should you indulge in ethical investing?  Here we show the cost to you.

 

Ethical funds are becoming increasingly popular as younger generations place greater emphasis on a more responsible approach to investing.  The argument for ethical funds is well-known: investors can use their capital to influence companies to be more socially and environmentally responsible.  

 

Socially Responsible Investing (SRI) takes into consideration social, ethical and environmental factors. Funds are often classified from “light green” (fewer ethical criteria) to “dark green” (more stringent ethical criteria).

 

But remember, increasing the number of ethical factors can increase the risk and volatility as the investment universe gets smaller.

 

 

Across all sectors: 

 

I want to focus on the UK All Companies and Global sectors, as this is where most funds reside.

 

Looking at the sectors with the largest number of funds, the popular UK All Companies sector has 17 ethical funds:

 

In the Global sector there are 18 ethical funds:

 

 

We created the “Feel Good Cost” to illustrate the cost to investors of buying ethical funds over their unconstrained alternatives

 

Assuming £100,000 invested 10 years ago, the Feel-Good Cost is the amount of money you lost by being in the best ethical fund compared to being in the best unconstrained fund:

 

UK All Companies funds:	£230,040	“feel good cost”
Global Growth funds:	£302,650	“feel good cost”

 

 

Remember that you could only have selected these top funds with the benefit hindsight. What about a real example? If you’d followed a process like Dynamic Fund Ratings how would your investments have performed?

 

In the UK All Companies sector the Dynamic Portfolio returned 152% but 42% better than the sector average.

 

The best ethical fund did a bit better (163%) but that would only have been achieved by throwing a dart at a board to pick the best of the 17 ethical funds available.

 

In the Global sector the Dynamic Portfolio substantially outperformed, returning 276%. That’s 152% better than the sector average.

 

So, if you’d followed a process then you could have pretty well matched the best ethical fund in the UK sector or substantially outperformed in the Global sector. 

 

But remember, comparing with the best fund over the period is only possible with the benefit of hindsight. Whereas a process like Dynamic Fund Ratings is a real outcome you could have achieved.

 

 

In summary on ethical investing, anyone pursuing this route is actively excluding the vast majority of successful investment funds - ticking an ethical box comes at considerable cost.

 

There are some very serious themes surrounding individual funds.

 

But let's not pretend that investors or the fund managers can make a significant difference beyond feeling better about themselves.

 

These are matters of national and global importance that must be dealt with through effective government action and global co-operation, and, where appropriate, through pressure groups and direct action.

 

How about maximising your investment returns, by considering all fund options, and then gift profits to effective action groups and good causes close to your heart?