The Big Theme
If you're looking for the best returns and want to mitigate risk, we don't advise that you invest ethically. All the funds recommended to us have consistently performed below either their non-ethical benchmarks or their equivalent non-ethical funds over five-year periods. Patrick Connolly, certified financial planner at AWD Chase de Vere, says this is because the very best fund managers don't choose to restrict themselves to ethical investing.
However, if you believe strongly in a cause and wish to buy ethical funds whatever the performance, it pays to look closely at the funds as some are much better than others.
The most popular buy suggestions from advisers are Aberdeen Ethical World, Jupiter Ecology, Kames Ethical Equity and Standard Life UK Ethical. Among bond funds, advisers recommended Kames Ethical Corporate Bond and Standard Life Ethical Corporate Bond.
Despite underperforming their benchmarks, these funds have beaten most other ethical funds - the only reason for their recommendation. "They're the best of a mediocre bunch," Mr Connolly says.
Investment trust investors may like to take a look at Impax Environmental Markets, which is one of our Top 100 Funds and is currently trading at an 18 per cent discount to net asset value (NAV). The trust focuses on investments related to cleaner and more efficient delivery of energy, water and waste.
But there is another - potentially much more lucrative - investment trust option that you might not know about. A fund supporting cancer charities - the first of its kind - has just been given the thumbs up for investment by analysts, either now or when the public offer closes on 19 October. Bestinvest expects shares in the Battle Against Cancer Investment Trust (BACIT) to start trading on 26 October at close to NAV or even at a premium.
This is not a traditional ethical fund - it won't shy away from investing in companies that harm the environment or population. However, its underlying cause and philosophy may appeal to more ethically minded investors.
It will be run by a group of leading fund managers and financiers, who are joining forces to attempt to raise £250m from investors when it launches on the London Stock Exchange later this month. The managers will donate 1 per cent of NAV to charity instead of charging fund manager fees.
Rather than changing the way it invests to suit its cause, it will hold 38 funds run by 28 managers in a mix of long only, hedge strategies, private equity funds and other alternative strategies - many of which would not normally be accessible to a retail investor.
The compromise is coming directly from the underlying fund managers' pockets, as all of them are doing this for free. Neither annual management charges nor performance fees will be levied. Since some of these funds would normally charge 2 per cent plus 20 per cent performance fees, this makes them look very reasonable.
Instead of the annual fee on BACIT, there will be a 1 per cent donation to charity (half of this will go to the Institute of Cancer Research and half of it to the charity of the investor's own choosing from a panel support by BACIT). A further 1 per cent a year of the NAV will be funnelled into a drug discovery unit at the Cancer Research Centre.
Returns are set to be promising - and the fund is expected to pay a 2 per cent dividend yield to boot. The manager, Tom Henderson, is personally investing $25m, which is a reassuring sign - but this fund does come with risks.
Finding hedge fund managers to run money for nothing may be difficult when time comes to switch into new asset classes and, although this launch has significant support from the investment industry, investors should note that a previous attempt at a charity fund launch failed a few years ago. The Invest & Give Trust was launched in 2009 to support Prince's Trust charities. It had support from prominent fund managers, but was forced to wind up after failing to attract enough money from investors.
You can buy shares in BACIT at a minimum stake of £1,000.
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visible-status-Standard story-url-Ethical funds - The best of a mediocre bunch.xml