Ethical funds outperform conventional equivalents

Analysis of performance from six ethical funds with conventional equivalents found that five of these had outperformed over the three years to the end of August. Four of the ethical funds also came out top in the first eight months of 2019.

While far from an exhaustive analysis of ethical funds, the research, outlined in the table below, suggests investors should carefully consider which version of a fund to use.

Moira O’Neill, head of personal finance at Interactive Investor, which carried out the analysis, said: “The data provides further evidence that you don’t have to compromise returns to invest ethically. In many cases, ethical funds have a solid track record of outperforming similar funds run by the same investment house.”

Some of the ranges included in the analysis are already popular choices for many investors. They include bond funds managed by Rathbones manager Bryn Jones, Asian equity funds run by Stewart Investors and Unicorn’s UK equity income funds.

However, a look at the sizes of the funds included suggests ethical approaches still have a way to go in terms of attracting investors. Rathbone Ethical Bond (GB00B77DQT14) has around £1.3bn, dwarfing the £190m in Rathbone Strategic Bond (GB00B6ZS2486), but in other cases the conventional fund tends to be more popular than its ethical sibling.

Stewart Investors Asia Pacific Leaders (GB0033874214), for example, has around £7bn in assets, while its sustainability-focused counterpart has some £285m. Unicorn UK Income (GB00B00Z1R87) has £618m, compared with £28m in the ethical version of the fund.

Some of this comes down to the tenure of ethical funds, which are often a more recent development than conventional funds. But funds with an explicit ethical focus also appear to have struggled to establish much market share in recent years.

Figures from UK asset management trade body the Investment Association (IA) show that ethical funds had around £20bn in assets at the end of July. However, this came to just 1.6 per cent of total industry assets, representing just a small increase from a 1.2 per cent market share in 2009.

Investors do still have an appetite for funds run in line with certain values. In its latest annual survey of the investment industry, the IA found that 26 per cent of assets under management covered in its research were invested using a "responsible" approach. This can encompass a variety of slants, from a focus on environmental, social and governance (ESG) criteria to sustainability-themed investing and impact investing, which aims to solve social or environmental problems.

Research indicates that ESG investments have also held up well in performance terms. Earlier this year Morningstar, which has compiled a set of ESG-oriented investment indices, found that 41 of its 56 ESG indices had outperformed their non-ESG equivalents.

The study found that ESG indices tended to include companies that were “less volatile and possess stronger competitive advantages and healthier balance sheets than their non-ESG equivalents”. However, ESG approaches can end up excluding some high-growth names. Some ESG investors tend to avoid companies such as Facebook (FB) and Amazon (AMZN), for example.

Ethical funds vs equities (total % of annualised returns)