InvestmentsFeb 10 2014

Ethical funds reap respectable returns

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To some, the term ethical suggests a niche investment focus, but a quick search of the IMA universe reveals roughly 50 funds related to ethical, SRI, environmental, sustainability or ecology sectors.

This is not including any specific renewable energy or resource efficiency-type vehicles.

This range of funds includes bonds, equity and multi-manager vehicles from providers Aberdeen to Vanguard and covers the UK, global, Asia and emerging markets specifically.

There has been a significant surge in popularity in these types of investments compared to 10 years ago, as just 23 of the current funds have a 10-year track record.

Latest figures from the IMA show net retail sales for ethical funds totalled £207m in 2013, up from just £12m in 2012. As at the end of December 2013 ethical funds held approximately £9bn under management, which accounted for roughly 1.2 per cent of the industry total.

With such a wide variety of funds it can be difficult to compare, as the objectives and strategies of equity and bonds funds obviously differ, as do those of ethical versus sustainable funds.

Ethical funds make up the majority of the funds available at 23, with five of these specifically ethical bonds funds. Vehicles titled ‘sustainable’ or ‘sustainability funds’ account for 16 in the list, again mixed between equity and bonds and a combination of the two. Seven funds are specifically targeting the environment, climate change or ecology, while the smallest section is SRI with just five funds.

Best performers

Based purely on performance in the peer group of 50 – regardless of whether its ethical, SRI, environmental, equities or bonds – the best performing fund for the 12 months to January 28 was the £65.4m Premier Ethical fund, run by Chris Wright since 2009, with a return of 27.54 per cent. It also tops the list in a three-year period with a return of 55.21 per cent. In comparison, the FTSE4Good UK index produced a 12-month return of just 8.13 per cent and a three-year figure of 17.77 per cent.

Mr Wright notes: “These days there is a fashion for ethical just being about alternative energy, but these things come and go. We try and avoid the traditional no-nos, but we also, where we can, invest in and encourage companies that have outputs that are a force for good. So we have a mix of the two styles.”

Elsewhere within the list of the best performing sustainable vehicles in the 12 months was the £414.5m CIS Sustainable Leaders fund run by Mike Fox, which returned 23.54 per cent compared with its benchmark index, the FTSE All-Share, which returned 10.59 per cent. The UK growth-style fund has a sustainable mandate focusing on the core themes of the environment, human welfare and sustainability.

Outperformance

In general the majority of these so-called niche products have outperformed the traditional equity indices such as the FTSE All-Share or MSCI world, with 23 of the vehicles outperforming the MSCI World’s 12-month return of 11 per cent, 26 outperfoming the FTSE All-Share and 32 beating the FTSE World index.

This supports the conclusions reached by RBC Global Asset Management in its 2012 research paper ‘Does Socially Responsible investing hurt returns?’, which reviewed a number of empirical studies into the topic and the differing arguments put forward.

It concluded that an SRI approach did not result in lower returns, and therefore investors could pursue an SRI approach in “the expectation that investment returns will be similar to traditional investment options”.

But it also pointed out that: “The question of whether or not SRI reduces investment returns will never be laid completely to rest. One reason is that this is a difficult empirical question and there will always be legitimate disputes over the quality of the data and the most appropriate methodology to use. Perhaps, more importantly, this question will never be answered to everyone’s satisfaction because many of the people engaged in this debate carry with them strong ideological baggage.”

For many investors ethical and SRI will always be a niche area, but for those requiring specific investment criteria, or those willing to diversify into a different area, the data suggests that as with any investment it is about choosing the right manager and right strategy.

Nyree Stewart is features editor at Investment Adviser