Sarah Jupp is 49 and has been investing for three years. She aims for reasonable to good growth over the longer term by putting away around £50 a month. "I appreciate this is a small sum but I am having a go at hopefully finding a reliable stocks-and-shares investment with the little money I can just about afford to lose if everything goes very badly." She has chosen to invest in two funds based on suggestions that she read in the financial sections of newspapers. "I find it very difficult to understand or find out how these two funds are performing in plain english," she says. "I look at the graphs and language and get the impression the Artemis one is not doing well.
A chartered environmentalist by trade, she likes the principle of ethical funds but also needs some growth and income. "I have serious ethical misgivings about some countries and companies and whether growth is being achieved at the expense of people and wildlife."
Ethical
Long-term growth
SARAH JUPP'S PORTFOLIO
| Name of share or fund | ISIN | Number of units held | Price p | Value £ |
|---|---|---|---|---|
| Artemis UK Special Situations Fund Acc | GB0002192267 | 403 | 378.66p | £1,526 |
| Invesco Perpetual UK Aggressive Fund Inc | GB0033053603 | 1201 | 109.9p | £1,320 |
| Total | £2,846 |
Source: Investors Chronicle. Price and value as at 10 October 2012
Chris Dillow, Investors Chronicle's economist says:
One of the paradoxes of the stock market is that investing in the market is not like investing in individual stocks. For any particular stock, 'cut your losses' is often a good idea because price falls often lead to further drops. For the market as a whole, however, 'cut your losses' is bad advice, as it can cause us to bail out near the bottom of the market.
Your regular monthly investments are generally a great idea, partly because they force us into the discipline of regular saving, and partly because they make us buy more units when prices are low, so we automatically buy shares when they are cheap. I'd encourage you, therefore, to continue your small savings. In a world in which we should assume that investment returns will be low, we should try to save regularly for a long time: 'get rich slow' is dull advice, but useful.
I'd also remind you of one of the first rules of investing - minimise taxes and charges. You can do the former by investing through Isas. Generally speaking, you can do the latter by holding tracker funds rather than actively managed ones - though for reasons I'll not go into, newspapers rarely recommend such funds.
That said, the two funds you hold aren't too bad. Both have slightly outperformed the market in the past 12 months. But like almost all general UK equity funds, they tend to do well when the market does well and badly when the market does badly. This is not so much because the funds are closet trackers, but rather because of the mathematical fact that most largeish collections of stocks will be highly correlated to the market.
As for whether you should be investing in shares at all, I start from the (rough) assumption that the market will offer a 5 per cent annual return, with volatility of 20 per cent. This means there's a one-in-six chance of you making 25 per cent in a 12-month period, and a one-in-six chance of you losing 25 per cent. If these seem like decent odds to you, then equities are worth the investment. If not, they're not.
You say you like the principle of ethical investing. I'd be wary of following this, for two reasons.
One is that what Adam Smith said of wages should also be true of profits; there are compensating advantages which equalise total returns. If part of your return comes from the feeling of having done the right thing, less should come from a financial return.
Secondly, ethical investing rules out some good investment opportunities, and might rule in some bad ones. Many ethical investors avoid alcohol and tobacco companies, but these tend to be low-risk stocks which benefit from the tendency for defensives to outperform. And ethical investors' preference for green companies can lead them to overpay for small speculative stocks.
These two thoughts are consistent with one big fact - that in the past five years very many ethical funds have underperformed the general market; the one run by Kames is a rare exception.
Morality has a cost. But then, if it didn't it wouldn't be morality at all, but self-interest.
Mark Hoskin, a Chartered Financial Planner with Holden & Partners, says:
From what you have said it seems that you have little money to invest and so investing can be a nerve-wracking thing to do. But it appears that you have taken the view that this is long-term rainy-day money and as such you are prepared to take risk.
There are two things that strike me instantly about your investment choices:
1) Your choice to invest in only UK stocks.
2) Your choice, despite your ethical concerns, to invest in funds which invest without any reference to their social or environmental impact.
It would be very interesting to understand the rationale behind your choice in these two funds at outset. Artemis and Invesco are two of the most prominent investment houses to the wider public and I suspect their marketing was successful with you. Neither of them have any ethical fund options. I suspect also the negative comments in the press about performance of ethical funds led you to sideline the concerns you have about what your money is doing. This does not surprise me because it is the attitude most advisers have too when advising clients with 'ethical' concerns, but as with all statistics it is misleading because it always depends over what period of time you are looking.
I have used the Ecclesiastical Amity UK fund as a good example of a UK equity fund that takes into account people, wildlife and pollution to examine the performance of your funds against an ethical fund and you will see that from the month you started investing in February 2006 this ethical fund (although it is not unique) has outperformed both of your choices.
Performance from 1st February 2006 to 8th October 2012
| Investment | Performance |
|---|---|
| Ecclesiastical Amity UK | 33.50% |
| Artemis UK Special Situations | 32.70% |
| Sector : UT UK All Companies | 23.70% |
| Invesco Perp UK Aggressive | 21.90% |
Source: Financial Express
If we look at the same funds over three years the performance gap is much wider, with the ethical fund looking much better.
Your concerns about the Artemis fund also do not appear to be accurate and it is the Invesco Perpetual UK Aggressive fund that has underperformed since you started investing. But I suspect you have been looking at performance over shorter periods of time. The Invesco fund has had a recent surge, but over a year the Ecclesiastical, Artemis and Invesco funds have all outperformed the UK All Companies sector.
Investing is a long-term game and it is asset allocation (the choice of equities over debt or property) more than fund manager choice that is likely to have the biggest impact on returns over a 10 or 20-year period. I think, given your willingness to take risk with this money, that you should stick with your choice of equities, rather than corporate debt, or property, but I think you should reconsider having some funds with international exposure and let your values come into play.
Over the past year or so UK equities have been a good place to be invested for a UK investor, but on a longer-term basis it has been better to be in international equity funds. Ecclesiastical's international (ethical) fund and Pictet's water fund are good performers that may both fit with your values. This is not to say these funds will necessarily outperform in the future as they have done in the past, but simply to give you confidence that you can invest with your values in mind and outperform those funds that have heavy marketing support, such as Artemis and Invesco.
One place to look to see what options you have with values in mind is on www.worldwiseinvestor.com which I have set up to help investors like you see what your options are and what different funds do. You could take the 'values' survey on the site which also points you towards relevant funds. The ethical space is diverse, but I hope you can see that being ethical is not some kind of charitable approach.
