Ethical funds can make good investment returns
Going green is the new mantra. From politicians to large corporations, care for the environment has really taken off and ethical investment is no exception.
Yet when the first ethical fund was founded by Friends Provident (now part of F&C) in the UK in 1984, it was met with scepticism. The conditions were regarded as so poor that such funds could only be marketed if they carried a wealth warning.
In fact, ethical trade can be traced back to the 18th century when religious groups avoided alcohol and gambling and developed the confectionery trade.
Increasingly, independent financial advisers find that ethical and environmental considerations count as a definite factor for clients, often revealed when asked about their attitude to risk and related investment matters.
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Today, ethical funds account for £4.3 billion. Publicly sensitive firms issue statements on working practices, both in terms of labour and environmental resources.
Savers now have a wide choice and will soon see the launch of an ethical tracker that underweights carbon intensive firms, notably in the gas and soil sectors.
Ian Wishart, director at Edinburgh based Hurley Financial Services, likes F&C's Stewardship Income fund, which has grown to £900m. Focusing on 100-120 shares with a bias towards UK mid-cap and smaller companies, Wishart likes the "dark green" credentials although this means that many top FTSE 100 names are excluded.
It tries to avoid weapons manufacturers, firms that exploit animals or human right abuses or that cause environmental damage. In the ethical sector, the fund was fifth out of 79 for the year to 1 January.
Kate Philip, managing director of the IFA Independent Women, likes F&C's fund but also praises Aegon Ethical Equity. This fund excludes food producers or retailers, or firms involved in aerospace, beverages (including alcohol), pharmaceutical and tobacco.
Investment that promotes long-term sustainability is at the heart of Henderson Industries of the Future, previously known as Henderson Ethical. It is also favoured by Philip, along with Norwich Union's Sustainable future range, which allows investors to have exposure to socially responsible investments.
In the week that saw the United Nations call for governments to act on climate change, the investment bank Lehman Brothers said firms that adapt to the challenges will win friends and make money. Those who fail to heed the warning will struggle to survive.
The globe's largest retailer, Wal-Mart, which owns Asda in the UK, has embarked on a sustainability plan, which means 100 per cent reliance on renewable energy, zero waste and products that sustain the environment.
The decision as to what constitutes "ethical" is subjective. To take equities on board that are socially responsible, fund providers are starting to adopt names to embrace a wider perspective - in a sense from light green to dark green.
Remember that as ethical funds tend to place a greater proportion of their assets in smaller companies, the performance is likely to be more volatile than mainstream funds.
Once technology has been developed to more economically exploit alternative energy, to give just one example, ethical funds invested in that sector should steam ahead. With limited fossil fuels and a political commitment to reduce CO2 emissions, the finance should be available.
For the first time, an ethical fund has taken first place for performance in the Investment Management Association's UK All Companies index of 324 unit trusts and open-ended investment companies. This is the Co-operative Sustainable Leaders Trust, run by Mike Fox. It is recommended by Alan Shanks of Your Staff Benefits Scotland. It achieved a total return of 29.3 per cent in the 12 months to January 31 - more than double the 13.2 per cent of the FTSE All Share Index. This is a significant milestone for green savers.
One forthcoming boost will be the requirement to provide an energy performance certificate (EPC) when selling a home. It will score a property's use of fossil fuels on a seven point scale and is compulsory from 1 June, provided enough trained energy inspectors are in place.
Last year, ethical funds "struggled to outperform their more mainstream counterparts", admits Ted Scott, manager of F&C Stewardship Income & Growth funds. This was because older industries, such as commodities, mining and oil, which are barred from ethical funds, were much in demand.
Yet ethical investments are resilient and should be seen as medium to long-term savings. While savers are looking for good returns, many want their money to be invested with a clear conscience.
Seven out of ten savers questioned as to their plans for their ISA allowance this tax year have said they are considering an ethical investment. The research was commissioned by Co-operative Financial Services. According to the Co-op Bank, ethical consumerism in 2005 was worth £29.3 billion, which is more than cigarettes and alcohol.
The criteria adopted by Old Mutual's Ethical fund prevented it from investing in several poorly performing assets, such as BP and GlaxoSmithKline, according to Anna Perriam, its head of strategy. Instead it has substantial holdings in the financial sector and in key retailers, such as M&S and BA.
Launched in March 1998, the major holdings are Vodafone, Royal Bank of Scotland, HBoS, Prudential and Aviva.
Standard Life's UK Ethical fund aims for capital appreciation. Three sectors dominate: financial (26 per cent), consumer services (22.6 per cent) and industrials (19.2 per cent). Last year, it rose almost 27 per cent and by 21.5 and 15 per cent respectively in 2005 and 2004. Its largest holdings include easyJet, BG Group, Vodafone, HSBC and Invensys.
There is a good range of ethical bonds run by such respected names as Aegon, Morley, Rathbone and Standard Life. They have just been joined by Royal London with ethical screening provided by the Ethical Investment Research Service. The minimum investment is £1,000 with a 3 per cent initial fee.
Source: Scotsman.com
Date: 17.02.07
