Does it pay to invest ethically?
Multi-asset fund managers Architas analysed the performance of the 39 ethical equity funds on the market and found 53% outperformed the FTSE All Share, including dividends reinvested.
Researchers also discovered that the socially responsible FTSE4Good UK Benchmark beat the FTSE All Share Index, returning 63.5% versus 58.8% over five years (to 30 September).
Adrian Lowcock, investment director at Architas, said: “Longer term ethical funds continue to perform, but they did lag behind the broader market in 2016 as the oil price recovered and mining stocks rebound from their lows.”
Ethical investment is a broad-brush term. Investors can either avoid companies they disapprove of, such as animal testing or arms manufacture, or actively support companies which have positive social and environmental policies in place, such as renewable energy or poverty reduction.
Lowcock says despite the long-term outperformance of ethical funds, their bias towards mid and smaller companies can make them more volatile in the short term.
Also, the fact they tend to avoid certain sectors and firms altogether “means that there can be periods of performance which will differ from the market and the fund could lag a broader market rally.”
Lowcock picks the Jupiter Ecology fund, which invests globally targeting companies which will make a positive impact on the environment, providing solutions to environmental and social problems.
He also likes Pictet Global MegaTrend Selection, which he says does not have specific ethical requirements but looks to invest into eight long term megatrends, many of which are closely linked with the dominant long term ethical themes.
Experts believe ethical investing will continue to grow in popularity. Annual research for Good Money Week, which runs from 30th October – 5th November, found 54% of British investors want their investments to have a positive impact, beyond just making money- a record high since polling began in 2009.
Clive Hale, director of research firm FundCalibre, says: “We believe that funds incorporating a responsible ethos in their investment process will play an increasingly important role in investors’ portfolios in coming years. We have therefore developed a responsible investing sector to help investors find the best of breed funds in this area.”
Hale picks Edentree Amity UK, which invests in a large number of smaller companies, making it different to many of its peers.
He also likes Rathbone Ethical Bond, which invests in quality investment grade bonds but excludes debt of companies in the following areas: mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco.
His final pick is Standard Life Investments UK Ethical. It encapsulates the best ideas from the team at Standard Life Investments.