Wednesday 7 May 2014

Ethical Investments

For the socially responsible investor, who wishes to save with a conscience, there are a plethora of 'ethical' funds available. These vary dramatically from fund to fund, and research is recommended, as certain funds may suit an individual’s ethical standards better than others.

It is worth noting that some stats have shown ethical funds to under-perform the market; this could be due to the fact that they tend to screen out sectors like tobacco, oil exploration, defence/arms & pharmaceuticals, which have strong revenue streams and often pay substantial dividends.

This is not to say that ethical investing should be avoided, as although returns may be sub par, it can still offer much better long term investment prospects than holding your savings in cash.

I have sifted through quite a few ethical funds, and below are some of the better performing examples that I came across.

F&C Stewardship Growth Fund - a long standing fund that aims to 'provide capital growth and income by investing in an ethically screened spread of UK equities.' The fund has gained 91.3% over the last 5 years which isn't too bad, but still 4.9% less than their benchmark (UK All Companies 96.2%).
A closer look at the fund offers some interesting insights. Amongst it's top 10 holdings are GlaxoSmithKline, who in the line of their business conduct testing on animals. Glaxo do try and 'prevent or minimise pain and distress before, during, and after experimental procedures.' but this still might not conform to the ideals that an ethical investor might aspire to.
Another holding in the fund is BG Group, the oil & gas exploration spin off of British Gas. Again some ethically minded investors may not be too keen on the idea of funding hydrocarbon extraction.
HSBC is the fund's largest holding, but as bankers seem to be an object of scorn for many, this could prove another bone of contention. 

Another Ethical equity fund which has performed a bit better over the past 5 years is the Standard Life Investments UK Ethical Fund.  It has risen a commendable 131.7%, soundly beating the UK All Companies benchmark (96.2%). There are no pharmaceutical companies to be seen in the top ten holdings and its largest holding is DS Smith who supply recycled packaging for consumer goods, a business which must surely tick a few boxes for most ethical investors! Another top ten holding is Asos, the on-line clothes retailer. There are however two banks present (Barclays & Standard Chartered), and BG Group also makes an appearance in this fund.

For investors with a lower attitude to risk the Royal London Ethical Bond Fund has performed admirably over the past five years, rising 72.3%, substantially more than the IMA Sterling Corporate Bond benchmark which has returned 58.1% over the same period. The fund's 5 biggest sector weightings are: structured products (21.3%), banks (15.8%), utility companies (13.8% - including some renewables e.g. First Hydro), social housing (9.1%) and insurance (8.9%).

As you can see, all the above funds have performed reasonably well, but ethical investment is not straight forward and each fund must be assessed on its own merits. If these are not to your taste there are many other options available (see trustnet table) that positively or negatively screen for many different ethical categories. For example the Virgin Money Climate Change fund aims to ''invest in businesses that are making the right decisions for the environment.'' ''Up to 25% of the fund is invested in what we call 'solution adopters' and 'solution providers'. Solution adopters are companies leading by example in their fields, actively seeking out new ways to lower their environmental footprint. Solution providers are companies developing and manufacturing solutions to environmental problems, including alternative energy sources.'' Unfortunately the fund hasn't performed particularly well, rising only 69.2% over a five year period. 

To sum up there are enough equity and bond funds out there to suit most ethical preferences and combinations of such could be used to match most risk profiles, as long as one isn't too fussy about returns.  

1 comment:

  1. Stocks haven't been the only asset class taking a hammering lately. As Epic research feels Commodities are down too.