Ethical and socially responsible open-ended funds beat the FTSE All-Share index on average over one and three years, and managed to outperform the FTSE 100 over one, three, five and 10 years. Part of the reason for this may be because ethical funds tend to have a bias towards smaller companies, and a number exclude oil and mining stocks.
"Ethical funds are typically structurally underweight to commodity and oil & gas companies as these have high environmental impacts and often operate in countries with poor governance or human rights," says Jason Hollands, managing director at Bestinvest. "These subsectors have had a torrid time of late as energy and commodity prices have tanked - a factor that has worked in favour of the relative positioning of many ethical funds. Secondly, in the case of UK ethical funds, these are often significantly skewed to mid-caps and smaller companies versus the index, parts of the market that have delivered much stronger performance than the FTSE 100 in recent years."
But ethical funds on average do not beat the FTSE 250 or Numis Smaller Companies ex Investment Companies Index over these periods.
However, ethical funds all differ from each other so it is hard to make general conclusions about their performance. They invest in various areas, for example some focus on UK equities, some focus on global equities and some invest in bonds. For this reason there is not an Investment Association (IA) sector for ethical funds.
There is also not one type of generic ethical fund, or standards by which they have to conform, so they are also not really comparable with each other.
The best way to measure performance of an ethical or socially responsible investing (SRI) fund is against the Investment Association fund sector that it is ranked in, as well an appropriate benchmark. For example, an ethical fund that focuses on UK stocks ranked in the UK All Companies sector could be compared with the sector average and major UK indices such as the FTSE All-Share. If it is focused on smaller companies you could also measure its performance against small-cap indices.
Also read the fund literature to see what the fund invests in and if it meets your definition of what is ethical, as well as your risk and investment criteria. Information website yourethicalmoney.org has a list of over 70 funds with a checklist of 17 of the ethical issues it takes into account, such as animal testing, climate change and human rights.
While ethical funds face constraints that broader funds may not, some have performed very well against their conventional peers and broader indices.
Standard Life Investments UK Ethical Fund (GB00B6Y80X40) is among the top 20 performing funds in the UK All Companies sector over one year, and in the first quartile over three and five, out of more than 230. The fund screens companies and industries in or out of the stock selection process depending on their impact on the environment or society. The fund has more than half its assets in FTSE 250 shares and its main sector exposures are consumer services and industrials.
Rathbone Ethical Bond (GB00B7FQJT36) is third out of 80 UK Sterling Corporate Bond funds over three years, and 12th over five. It offers a yield of 5.3 per cent, and its main sector exposures are insurance and banks – manager Bryn Jones currently thinks that financial stocks have been unfairly maligned.
Selection of ethical funds available to private investors
| Fund | 1-year return (%) | 3-year cumulative return (%) | 5-year cumulative return (%) |
|---|---|---|---|
| Aberdeen Ethical World Equity A Inc | -3.1 | 3.0 | 2.4 |
| Aberdeen Responsible UK Equity A Acc | 5.9 | 4.3 | 4.9 |
| Alliance Trust SF Absolute Gr 1 | 11.4 | 9.2 | 6.9 |
| Alliance Trust SF Corporate Bd 1 | 1.9 | 4.1 | 4.9 |
| Alliance Trust SF European Gr 1 | 18.0 | 9.9 | 6.0 |
| Alliance Trust SF Global Gr 1 | 12.8 | 10.3 | 8.5 |
| Alliance Trust SF Managed 1 | 12.2 | 9.4 | 7.5 |
| Alliance Trust SF UK Growth 1 Acc | 20.3 | 12.5 | 9.6 |
| Alliance Trust UK Ethical A | 20.9 | 13.3 | 10.1 |
| Allianz Global EcoTrends A Acc GBP | 3.7 | 7.5 | 2.0 |
| AXA Ethical Distribution R Acc | 13.7 | 8.1 | 7.3 |
| BGF New Energy A4RF GBP | 4.8 | 7.0 | -1.0 |
| 7IM Sustainable Balance C Acc | 8.3 | 7.2 | 5.5 |
| Royal London Sustainable Div A Inc | 6.0 | 6.4 | 5.7 |
| Royal London Sustainable Leaders A Inc | 15.9 | 13.1 | 10.7 |
| Royal London Sustainable World A Inc | 13.9 | 11.9 | 10.6 |
| Sun Climate Assets A GBP Acc | 8.0 | 8.1 | 6.1 |
| ConBrio B.E.S.T Income Char Inc | 18.1 | 11.2 | 8.3 |
| EdenTree Amity European A | 14.6 | 11.8 | 5.4 |
| EdenTree Amity International A | -1.7 | 5.2 | 2.7 |
| EdenTree Amity Sterling Bond A | 0.6 | 4.3 | 5.0 |
| EdenTree Amity UK A | 18.6 | 11.7 | 10.5 |
| F&C Responsible Global Equity 1 Inc | 15.9 | 11.9 | 8.2 |
| F&C Responsible UK Income 1 Inc | 17.8 | 11.7 | 10.1 |
| F&C Responsible UK Equity Growth 1 Inc | 14.7 | 11.4 | 8.7 |
| F&C Responsible Sterling Bond 1 | 1.1 | 3.4 | 4.6 |
| Family Charities Ethical Tr Inc | 4.9 | 5.8 | 4.0 |
| First State As Pac Sustainability A | 4.1 | 10.4 | 9.7 |
| FL Stewardship Income Life | 7.9 | 10.1 | 9.2 |
| FL Stewardship International Life | 11.2 | 10.6 | 7.7 |
| Guinness Alternative Energy C | -10.7 | 14.1 | -8.7 |
| Halifax Ethical C | 5.1 | 8.6 | 7.1 |
| Henderson Global Care Growth A | 13.4 | 14.1 | 8.6 |
| Henderson Global Care UK Income A | 19.8 | 14.7 | 12.2 |
| Henderson Instl Global Care Managed A | 12.0 | 11.5 | 8.5 |
| FP WHEB Sustainability A | 11.5 | 11.6 | 4.0 |
| Jupiter Ecology | 9.7 | 10.0 | 6.1 |
| Jupiter Responsible Income Acc | 10.8 | 9.8 | 8.9 |
| Kames Ethical Cautious Managed B Acc | 12.6 | 10.9 | 9.1 |
| Kames Ethical Corporate Bond B Acc | 3.0 | 4.7 | 5.5 |
| Kames Ethical Equity B Acc | 22.0 | 15.3 | 12.1 |
| L&G Ethical R Distr | 19.9 | 13.0 | 9.5 |
| Old Mutual Ethical A GBP Acc | 9.0 | 11.7 | 7.3 |
| Premier Ethical A Inc | 19.4 | 18.1 | 13.0 |
| Rathbone Ethical Bond R Acc | 2.2 | 6.2 | 6.1 |
| Royal London Ethical Bond A | 2.0 | 5.2 | 6.2 |
| Royal London UK Ethical Eqty Inst M Inc | 13.8 | 12.8 | |
| Scottish Widows Ethical A | 7.5 | 7.4 | 3.3 |
| Scottish Widows Environmental Investor A | 9.9 | 9.5 | 5.2 |
| Sovereign Ethical Inc | 10.4 | 8.2 | 7.1 |
| SLI Ethical Corp Bond Ret Acc | 1.3 | 4.0 | 4.7 |
| SLI European Ethical Equity Ret Acc | 10.9 | 10.0 | 4.1 |
| SLI UK Ethical Ret Acc | 23.1 | 14.2 | 12.1 |
| Stan Life UK Ethical 2 Pen | 23.4 | 15.1 | 13.1 |
| SVM All Europe SRI Retail | 21.2 | 12.8 | 8.0 |
| Virgin Climate Change | 11.3 | 9.9 | 6.7 |
| Average | 10.66 | 9.78 | 6.94 |
| FTSE 100 TR GBP | 6.8 | 6.6 | 6.0 |
| FTSE 250 TR GBP | 19.8 | 15.1 | 12.3 |
| FTSE All Share TR GBP | 9.0 | 8.0 | 7.0 |
| Numis SC Ex Invt Com TR GBP | 18.5 | 15.2 | 13.3 |
| IA Global sector average | 9.8 | 9.6 | 6.8 |
| IA UK All Companies sector average | 14.1 | 10.6 | 8.3 |
| IA £ Corporate Bond sector average | 1.2 | 3.9 | 4.8 |
Source: Morningstar, yourethicalmoney.org
Performance: as at 20 October 2015
