How a marmite attitude is holding back ethical funds growth
Good Money Week – which runs from Sunday October 18 to October 24 – is now in its eighth year, having previously been branded ‘National Ethical Investment Week’. However in the last decade it has been noted that assets under management in the industry, which has been around since 1984, have stayed static at the £9.95bn mark.
This represents only 1.2 per cent of total industry assets, a figure which according to the Investment Association has not changed in the last 10 years. This is despite the fact that over the past five years the performance of ethical benchmarks has been better than their non-ethical counterparts.
For example the FTSE4Good UK benchmark has returned 48 per cent over the past five years to October 8 2015, versus a 43 per cent return from the FTSE All-Share. Meanwhile on a global basis the FTSE4Good Global benchmark rose 62 per cent over the same time period, just ahead of the MSCI World Index which was up 60 per cent.
Jason Hollands, managing director at Tilney Bestinvest, says: “The lack of cut-through for ethical investment over many years is really quite surprising when you look at other industries, where it is clear that sections of the public are willing to adjust their economic activity to reflect their values.”
He adds: “This is all the more disappointing given the relatively favourable investment climate for many ethical funds in recent years. Ethical funds are typically structurally underweight commodity and oil and gas companies as these have high environmental impacts and often operate in countries with poor governance or human rights. These sub-sectors have had a torrid time of late as energy and commodity prices have tanked – a factor that has worked in favour of the relative positioning of many ethical funds.”
Of the £9.95bn held in ethical funds, the fund management group Kames Capital manages £2.04bn, giving it a high market share. Speaking at a roundtable on the sector this week, Ryan Smith, the group’s head of corporate governance and ethical research, said he too would like to see the industry move past the 1.2 per cent market share mark.
“A number of funds, including our own, have disproved the performance penalty myth of ethical investing over long periods,” he says. “Research suggests that the Millennials, those born between the early 1980’s and early 2000’s are particularly interested in investing responsibly. This demographic group are tomorrow’s investors. For this reason, the Kames ethical funds, remain a key pillar of our business.”
At present investors have 63 funds from some 31 different providers to choose from, however unlike in other non-ethical sectors, Smith says when it comes to ethical investors money does not tend to move around from group-to-group as much.
“Money is much stickier in the ethical space,” he says. “It does not tend to follow the latest trends and whims and maybe this is why the sector has not been growing.”
He says: “There’s a perception that ethical investing is aimed at a narrow section of the public who are ardent in their beliefs and is focussed on niche areas and is light-weight when it comes to delivering returns, none of which are necessarily true.”
Indeed the Kames Ethical Equity fund, managed by Audrey Ryan, sits first quartile in the IA UK All Companies sector over one, three, five and 10 years. She argues while owning mid and small cars has helped performance, as have not holding mining and gas companies, other sectors she can’t hold such as tobacco, pharmaceuticals have done very well.
“There is always something working for me and against me,” she says. “Indeed managing an ethical fund means you have to think a bit more out of the box than the typical equity manager.”
Hollands is a fan of Ryan’s Kames Ethical Equity fund and additionally highlights the Standard Life UK Ethical fund, as two offerings that have significantly outperformed the FTSE All-Share over three, five and 10 years. However whether or not this outperformance is enough to grow assets is another question.
“For many the whole concept of ethical investing is simply like Marmite – they either love it or hate it and such funds will never appeal to everyone,” he concludes. “However it has a place and with the data showing that well managed funds have held their own when it comes to delivering strong long-term performance versus traditional funds, this market logically deserves to be bigger than it is.”