With the individual savings account (Isa) season approaching, fund managers are parading their wares, and prominent among them are ethical funds.
There’s no surprise in this – of those planning to open an Isa this April, 85% said they would consider investing in an ethical scheme, according to Co-operative Insurance, up from 67% last year. The study also found that the amount of money under management by ethical funds rose 18% to £5.9bn in the fourth quarter. So it’s little wonder that fund groups are jumping on the bandwagon.
But if investors are serious about investing ethically, they’d better be ready to do some research. A report from IFA Holden & Partners points out that the same stocks “appear over and over again in the socially responsible investment (SRI)/ethical funds”, with oil majors, miners and even tobacco stocks a common feature across several funds.
The trouble is that even funds with apparently similar remits operate with varying degrees of strictness. HSBC’s Climate Change fund only invests in companies that make at least 10% of their revenues from activities related to tackling climate change, which, compared with rivals, makes it one of the more strictly ethical funds. However, Virgin Money’s corresponding choice invests across all sectors – its ethical line is that it will only buy companies with lighter-than-average environmental footprints for their sector. In effect, “it’s just a European equities fund with only 10% invested in what it calls solution providers”, Mark Hoskin of ethical financial advice specialist Holden & Partners Hoskin tells The Observer.
But more importantly, what about their performance? Ethical funds have done pretty well in recent years, leading to a general perception that going green doesn’t mean sacrificing profits. However, those days may be over. Generally speaking, any kind of strict ethical screening (as opposed to those funds that pay lip service to the idea) tends to skew the funds towards small-cap stocks.
Ethical funds in the IMA UK All Companies sector have a median exposure of 45% to large caps, says Morningstar, whereas other funds have an average 64% exposure. Morningstar reckons F&C Stewardship Growth Fund is a “reasonable choice” in the sector, but the group also warns that with tougher times ahead, small caps are unlikely to keep outperforming – and that will take its toll on ethical funds.
A better bet for those more worried about returns than ethics might be the US-based Vice Fund (VICEX), which invests in everything from armaments and pornography to alcohol and tobacco, all of which are traditionally considered defensive plays. Over the past five years, it has ranked in the top 2% of US funds.