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Despite strong performance FE Trustnet urges caution when looking at ethical funds

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Research from FE Trustnet shows that over the past decade eight out of the top 10 best performing ethical/sustainable funds have outperformed their specific IA peer groups by double-digit returns.

This week has seen specific emphasis on ethical funds given that it is Good Money Week, an annual event in which the industry looks to to raise awareness of what it has to offer. To coincide with this FE Trustnet has looked at the top performing ethical funds over the past decade and how they have pitted against their respective sectors.

The best performer over the last 10 years according to FE Trustnet was the Kames Ethical Equity fund, managed by Audrey Ryan. Over this time period to 22 October 2015, the fund returned 160.33% versus the IA UK All Companies average fund return of 96.21%, an outperformance of 64.12 percentage points.

Of the top 10 performing funds over the time period, eight are in the IA UK All Companies sector and two – Edentree Amity International and Henderson Global Care Growth – sit in the IA Global sector.

Despite this strong performance Charles Younes, a research manager at FE Research, urges investors to look carefully at such funds to assess if they are aligned with the investor’s view on what ethical investing is.

“For example some funds may invest in large companies which have been found to avoid paying the amount of taxes or bribery scandals, while other firms may outsource business to companies with a less ethical stance,” he says. “So it’s worth really looking into the components of a fund. Ethical investing can be very subjective so you need to look at how you feel about certain practices and make a call depending on that.”

Meanwhile Younes says that when analysing the historical performance of ethical funds, it should be noted that some managers simply negatively screen stocks meaning they exclude some sectors such as oil or gas.

“As a result, some of the relative gains were achieved from strong sector allocation rather than stock selection,” he adds. “What is worth looking for is a manager who is a consistent stock picker and who is able to add value across the cycle.”