The two sins of saintly funds

Former HSBC chairman Lord Green ruffled feathers last week when reports – later denied – claimed he had “issues” representing the arms industry in his role as trade minister. But if your job doesn’t depend on you backing the FTSE’s ‘sinner’ stocks, there’s nothing to stop you from choosing stocks according to your beliefs. But should you?

Ethical investing is a growing trend, with more and more funds appearing investing in everything from environmentally friendly firms to ones that are compatible with various religious beliefs. Last month, for example, db x-trackers announced the launch of two new ethical exchange-traded funds (ETFs). The db x-trackers’ Global Fund Supporters ETF tracks the recently launched Dow Jones Global Fund 50 index. This tracks the 50 firms that give the most support to the Global Fund to fight Aids, tuberculosis and malaria, a charity backed by Bill Gates’s charity. The second tracker is the Christian ETF, which follows an index of companies that follow “Christian social doctrines”.

These are just a few of the most recent examples. But before you pile into the first promising ethical fund you find, there are a few issues to consider. Number one is performance.

The FTSE4Good UK index, which was set up to track “socially responsible” companies, has fallen by 1% since it launched in 2001. Over the same period (excluding dividends), the FTSE All-Share is up 15%. That’s not to say that all ethical funds perform poorly – the Aegon Ethical Equity Fund returned 22% last year. But as Garry White points out in The Daily Telegraph, finding good investments is hard enough “without tying your arms behind your back with artificial criteria”.

Which leads on to the second problem. Ethics are subjective – and that makes finding a fund that can both outperform the wider market and fulfil your ethical requirements even more of a challenge. Take the aforementioned db x-tracker Global Fund ETF. To get a place on the index it tracks, a company just needs to donate to the charity, it doesn’t have to be ethical in itself. Both mining firm BHP Billiton and oil giant Exxon Mobil are on the index. Anyone with any concerns about the environment probably wouldn’t consider those stocks for their portfolio. And even within funds that are marketed as eco-friendly, there’s a wide range of tolerances for various types of firm.

If investing ethically is crucial to you, you’d be best to invest time in building your own portfolio, tailored according to your requirements. Otherwise, we’d be inclined to focus on making money first and foremost, and donate some of your profits to the charity of your choice.


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