Benchmarking sustainable funds’ performance

This article is part of
Sustainable Investing - March 2014

While the idea of ethical or sustainable investing has been around for a long time, it has only recently begun to shrug off its image as a niche investment and move more into the mainstream.

Part of what held such funds back was that managers were missing out on strong performance by avoiding certain companies. For instance, funds ignoring so-called ‘sin’ companies such as the large tobacco firms would have missed out on substantial returns in the past two decades.

Funds attempting to invest in a sustainable way do not all follow strict ethical guidelines, but investors still need to be aware of what companies sustainable funds will avoid - or which they will narrowly back - and whether they believe the rewards of the investment approach outweigh potentially missing out on returns from certain industries.

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But in spite of their restrictions (or perhaps because of them) there are several top-performing sustainable funds out there.

Success stories

The concept of sustainable investing encompasses a broad swathe of funds and investment products, from ethical funds and those investing on environmental, social and governance (ESG) issues all the way to alternative energy funds such as solar or wind.

Starting with the sustainable equity funds, there are, as of yet, no widely recognised indices or benchmarks for funds looking to invest in a sustainable way.

It is somewhat difficult, then, to compare like with like, but there have been some considerable success stories in recent years.

The Kames Ethical Equity fund is one of the longest-running funds with an ethical mandate in the open-ended fund universe.

The fund has been run by Audrey Ryan since 1999 and under her tenure it has delivered a return of 220.7 per cent, outperforming the FTSE All Share index total return of 136.2 per cent and the IA UK All Companies sector average return of 139.9 per cent.

The fund operates with a ‘negative screen’, in which the FTSE All-Share index is run through a series of quantitative measurements in order to exclude any company that fails to meet a set of strict ethical criteria. This means no mining, no arms manufacturers and no alcohol.

This culling of many of the large-cap names in the index means the fund tends to have a bias to mid-sized and smaller companies, which has helped performance in the past decade as that area of the market has outperformed.

But the fund is highly rated by analysts, with a ‘silver’ rating from Morningstar and A-grade from Square Mile, and for those investors happy to miss out on the potential returns from ‘sin’ businesses, the fund offers one of the best routes into investing sustainably in the UK.

Away from the UK, a fund group with a very strong track record of sustainable investing is First State Investments. First State’s team, led by David Gait, has generated strong performance on both its Asia Pacific Sustainablilty and Global Emerging Markets Sustainability funds for many years.