Does the performance of ethical funds stack up?

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It is that time of year again when the spotlight is shone on ethical investing, all in aid of Good Money Week, a campaign that promotes investing in 'saint' stocks over the 'sinners'.

But while over the past couple of years the ethical investment sector has been on an upward path, it remains a small part of the £950 billion strong UK industry, accounting for £12 billion of assets under management.

While there is an obvious feel-good factor investing ethically, do investors need to be prepared to sacrifice profit for principle?

According to research from fundexpert.co.uk only three ethical funds out of 35 make it into the top performing 20 per cent of all funds over 10 years. The three funds are: Henderson Global Care Growth, EdenTree Amity International and Stewart Investors Asia Pacific Sustainability.

WILD SWINGS IN PERFORMANCE

Brian Dennehy, managing director at fundexpert.co.uk, puts this down to ethical funds having a greater weighting towards cyclical stocks. Some defensive sectors of the market, most notably tobacco, are not going to be found in an ethical fund.

He adds: 'For those who insist on buying ethical funds, do so with care. The funds can swing quickly from top to bottom of the performance tables.'

The firm does point out, though, that the difference between the FTSE 100 index and the FTSE4Good, which includes those companies demonstrating strong environmental, social and governance practices, shows a different conclusion.

While the FTSE 100 index of blue-chip UK companies has returned 65.5 per cent since 20 October 2006 (to 21 October 2016), the FTSE4Good has outperformed by 3 per cent, returning 68.5 per cent.

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MORE POSITIVE PICTURE

Research by Architas painted a more positive picture. The firm looked at the performance of ethical funds over the same 10-year period and found that 53 per cent had outperformed the FTSE All Share, including dividends reinvested.

Adrian Lowcock, investment director at Architas, says: '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.

'Their bias towards mid and smaller companies can make them more volatile in the short term and focus on new technologies means the sector might be vulnerable in a downturn.'

Lowcock likes Jupiter Ecology, which he says by investing globally targets companies which make a positive impact on the environment.

He also rates Pictet Global MegaTrend Selection. 'This fund does not have specific ethical requirements instead it is looking to invest into eight long-term megatrends, many of which are closely linked with the dominant long-term ethical themes,' says Lowcock.

'These themes include water, clean energy, agriculture and environmental stocks.'


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