The term 'ethical' is often used as a catch-all term to describe any fund that is managed with social, environmental, or other ethical criterion in mind. In reality, there are a number of different ethical strategies and a fund manager may employ one or more of these when managing the fund. The main approaches to ethical investing are as follows:
An ethical investment fund which has strict negative screening in place could be referred to as having a 'dark green' ethical approach. Funds which focus more on positive screening or engagement could be referred to as 'light green'.
Ethical funds come in many shapes and sizes. It is important to clarify a fund’s approach, particularly towards ethical screening, to ensure it meets your objectives. A strict ‘dark green’ approach, which excludes certain industries entirely will suit some investors, while others will be happy with a ‘light green’ approach, which seeks companies operating in a socially responsible way and striving to improve their industry, regardless of what industry that is.
The in-built biases many ethical funds have will influence performance and potentially make them more volatile. UK smaller and medium-sized companies performed poorly in the wake of the UK’s referendum on EU membership, for example, and this affected funds with a bias to this higher risk area. However, in the few years prior to the referendum a bias to smaller and medium-sized companies was generally positive.
On balance we prefer an unconstrained approach to investment because this gives fund managers the flexibility to invest wherever they see the best opportunities. We believe this should result in the best returns for long-term investors.
Many ethical funds share certain characteristics that can affect their performance (positively or negatively) when certain areas of the stock market are performing well. These characteristics include:
The areas ethical funds tend to have a bias to have generally performed better when the outlook for the economy or stock market was good. In contrast, larger, defensive companies, in a strong financial position, with stable earnings and high dividends have tended to perform better during uncertain times.
Source for performance figures: Financial Express
A UK-focused fund with a bias to higher-risk smaller and medium-sized companies and more economically sensitive sectors. We consider it to have a 'dark green' approach.
Tobacco and pharmaceutical companies are excluded from Audrey Ryan’s investment universe, and the fund has limited exposure to mining and oil & gas companies. These companies derive a significant portion of their earnings overseas and comprise a large part of the FTSE 100. They performed well in the early part of 2016 and then proved resilient in the aftermath of the EU referendum. The fund’s limited investments in these areas was negative for performance.
In contrast, domestically-focused small and medium-sized companies, to which the fund is biased, have struggled. Significant exposure to financial companies, including property-related and life insurance companies, and consumer-services businesses, including retailers and travel & leisure operators, also dragged on returns.
Despite this short-term setback long-term performance has been impressive. Audrey Ryan has been at the helm of this fund for more than 17 years and, in our view, she is one of the few managers to have handled the constraints of an ethical fund well over the long term. We continue to believe this fund deserves its place on the Wealth 150. This fund holds shares in Hargreaves Lansdown plc.
This fund invests predominantly in investment-grade corporate bonds and has ‘dark green’ ethical screening criteria in place, which excludes sectors such as tobacco, arms and gambling.
The fund has outperformed peers in the corporate bond sector under the tenure of Iain Buckle and Euan McNeil. This is impressive considering the constraints placed on the fund by its ethical investment approach. The managers are backed up by a well-resourced team at Kames which we hold in high regard. We view this fund as a good option for investors seeking an ethically-managed bond fund.
This fund invests globally in companies of all sizes including higher risk smaller companies. The emphasis is on positive, rather than negative, ethical screening – a ‘light green’ approach.
David Gait invests in the shares of companies deemed to have a positive impact on society, the environment and health. This approach means they are unlikely to invest in certain companies (tobacco, alcohol, weapons etc.), but they are not specifically excluded. The track record of this fund is short, but it is managed by a team we have held in high regard for many years and we believe they will do a good job for long-term investors.
A global fund which combines negative and positive ethical screening alongside engaging with company management. This is a ‘dark green’ ethical fund.
Robin Hepworth, the fund’s manager, has maintained a bias towards Asian and emerging markets and away from the US in recent years. This has been the wrong call as the latter has performed much better. However, he continues to believe Asian and emerging markets have good long-term growth prospects and will ultimately reward investors. The recent performance has been disappointing, but we believe Robin Hepworth is a good investor with the potential to bounce back.
This is an investment-grade corporate bond fund using a ‘lighter green’ approach which seeks companies aiming to make a positive impact, as well as excluding those in industries such as alcohol, gambling and pornography.
The main attraction of this fund is that it is managed by the experienced Eric Holt and his team. They are willing to look for opportunities off the beaten track, in areas under-researched by other investors. This has helped them deliver impressive long-term returns, although it has been more volatile at times.
Invests in FTSE 350 Index companies selected according to ethical and environmental guidelines meeting Ethical Investment Research Services (EIRIS) criteria.
Companies significantly involved in water pollution, intensive farming, gambling, adult entertainment, weapons manufacturing and tobacco sales are filtered out of the FTSE 350 index. The fund then aims to track the performance of the remaining companies. To achieve accurate tracking of the performance of this modified index, it invests in a broad spread of representative companies from the index.