Strong ethical fund performance deserves a bigger following

Trump’s tearing up of the climate change agreement and Sports Direct’s poor treatment of employees have both made the headlines in recent months – underlining the fact that environmental and social issues are very much front of mind. However, when it comes to our investments, the expectation that socially responsible investing (SRI) will gradually gain a wider and more receptive audience has yet to come to fruition.

While retail investors have piled more than £23 billion into UK authorised funds so far this year* – surpassing the annual net retail sales in both 2015* and 2016*, funds under management in ethical funds represent just 1.2%* of the industry total. This is despite continued strong outperformance of non-ethical funds.

The performance case for ethical and socially responsible investing remains strong. Moneyfacts.co.uk recently examined the performance of ethical funds versus conventional non-ethical funds over a number of investment periods. It found that, over the past year, ethical funds have had the edge over their traditional counterparts, posting an average growth of 16.8% compared with 15.2% from the average non-ethical fund. Funds such as Elite Rated Standard Life Investments UK Ethical delivered returns in excess of 30%.

Ethical funds versus non-ethical funds (percentage growth)**

Fund performance1 year3 years5 years10 years
All ethical funds16.81%30.42%76.17%75.83%
All non-ethical funds15.20%29.13%64.14%83.03%

Over three years, the average ethical fund (30.4%) also beat the average non-ethical fund (29.1%). However, it is over five years that ethical funds have truly excelled, with the average ethical fund returning 76.1% – well above the average non-ethical fund return of 64.1%. The figures go to show that you don’t need to sacrifice investment returns for your principles.

Elite Rated EdenTree Amity UK is the longest-established ethical fund in the UK. Over the past three decades, ethical investing has evolved from a focus purely on negative screening – filtering out companies that do unethical things like supplying arms, tobacco or alcohol.
Today we are also seeing more positive screening in the mix, with fund managers actively looking for companies that are doing good things. Acting in an environmentally and socially responsible manner can give companies a competitive advantage and also makes them more likely to treat shareholders well.

Millennial behaviour is also having an impact. They are demanding transparency and accountability and are distrustful of financial institutions. With their adoption of technology in most aspects of their life and willingness to search online for information, guidance and opinion, those who have the money to invest already are far more engaged.

Only time will tell if this finally means ethical funds get the following they so deserve.

*Investment Association, July 2017
**Source: Moneyfacts/Lipper Investment Management. % Growth as at 1 July 2017, total return, UK net, no initial charges.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.