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Ethical sector

Ethical sector

The term ‘ethical’ is often used as a catch-all term to describe any fund that is managed with social, environmental, or other ethical criteria in mind.

Dominic Rowles - Investment Analyst
24 January 2018

The term 'ethical' is often used as a catch-all to describe funds managed with social, environmental, or other responsible criteria in mind.

But there are lots of different ways you could profit from your principles. The main approaches are:

  • Ethical funds – These usually avoid companies that do harm to society like weapons manufacturers and tobacco companies. We call this negative screening.
  • Sustainable and impact funds – These funds invest in companies that have a positive effect on the world, which is known as positive screening. It could mean they make their products from recyclable materials, or they provide clean energy. Impact funds try to measure the positive impact their investments have on the world.
  • ESG integrated funds – Managers of ESG integrated funds consider environmental, social and governance factors as part of their wider research.
  • Passive funds – Ethical trackers follow the performance of an index but filter out certain industries, like oil & gas and munitions.
  • Shares – If you can’t find a fund that meets your ethical needs, you could consider investing in a selection of individual company shares.

If you want more information on any of the approaches mentioned above, please read our latest guide.

Guide to investing ethically

Our view on the Ethical sector

Investing ethically offers the possibility of making money whilst also benefiting society. And it’s becoming more and more popular with investors of all ages.

But ethics are personal. An industry that seems abhorrent to one person might seem like a necessary evil to others. Take pharmaceuticals. Some investors would avoid the industry because of moral objections to animal testing. Others suggest the work of pharmaceutical companies contributes to the development of society.

That’s why you’ll need to clarify each fund’s approach and make sure it’s consistent with your moral views before you invest. We look at the approaches taken by a selection of funds on the ‘fund reviews’ tab of this sector review. But you’ll find a more detailed description of each fund’s investment process in its prospectus.

Striking a balance between investing morally and delivering strong performance is no easy task. We don’t tend to find many fund managers who’ve handled the constraints of an ethical fund well over the longer term. There’s only one ethical fund on the Wealth 50 list of our favourite funds. This is not a personal recommendation – with any investment, make sure it fits your objectives and you are comfortable with the risks before investing. And if you are unsure, seek advice.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

How an ethical fund performs depends on lots of factors, including the manager’s investment process.

Cutting out certain industries completely is one way to make sure your investment portfolio is aligned with your morals, but it will affect performance. For instance, if you invest in a fund without exposure to the oil & gas industry, it will do well compared to unrestricted funds when the industry is out of favour, but it won’t do so well if the industry recovers.

Sustainable and ESG funds normally give the manager freedom to invest in a broader range of areas. They can invest wherever they see the best opportunities and the extra diversification should mean the fund is less volatile over the longer term.

We look at how the various ethical investment approaches can affect performance in greater detail in our guide to investing ethically.

Read our guide

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in the sector

Below we review a selection of funds managed with ethical or socially responsible criteria in mind. They are provided for your interest but are not a guide to how you should invest. If you're unsure of the suitability of an investment for your circumstances seek personal advice.

Comments correct as at 10 January 2019. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future. There is a tiered charge to hold funds with HL. It's a maximum of 0.45% p.a. - view our charges.

Other funds in the sector

Here we look at some other funds of interest following our most recent sector review. Please note the review period may be over a short time period and past performance is not a guide to future returns.

Source for performance figures: Financial Express

A UK-focused fund with a focus on higher-risk small and medium-sized companies and sectors that are more sensitive to the economy. We consider it to have a 'negatively-screened’ ethical approach. That means it won’t invest in areas like tobacco, arms and gambling.

The fund didn't perform as well as the broader UK stock market over the past year, although both lost money. The fund tends to avoid sectors like healthcare and oil & gas because of its ethical guidelines. But these areas were some of the strongest performers in the UK. Sectors like financials and industrials didn't do so well, which didn't help because quite a bit of the fund is invested here. Investments in companies such as packaging company DS Smith and asset manager Standard Life Aberdeen were particularly poor.

Audrey Ryan’s long-term track record is better though. She’s been at the helm of this fund for two decades and we think she’s one of few managers to have handled the constraints of an ethical fund well over the long term.

This fund holds shares in Hargreaves Lansdown plc.

The managers focus on larger, high-quality companies with healthy finances and robust cash flows. They also look at how each company can benefit from, and contribute to, the sustainable development of the country in which they're based. We see this as an ‘ESG integrated’ approach.

The managers have the freedom to invest across Asia, including higher-risk emerging markets. They tend to invest in established businesses with sustainable growth prospects. That means the fund has tended to hold up well in weaker markets. It’s done well over the past year as concerns over a possible trade war between the US and China held back the performance of the broader region. The team also haven't invested much in big Chinese internet businesses, which have fallen heavily in recent months, because they don’t meet the strict quality criteria or high levels of corporate governance the team looks for in a company.

A global fund which combines negative and positive ethical screening alongside engaging with company management.

Robin Hepworth and David Osfield invest this fund quite differently to its peers and concentrate on the areas in which they see value. A significant portion of the fund is currently invested in Asian markets, where the managers think companies with sustainable qualities are being overlooked by other investors. Asian markets have been held back over the past year because of Donald Trump’s threats to introduce more trade tariffs against China. This hurt performance over the period.

The fund’s performed roughly in line with the global stock market since Robin Hepworth began managing it in 1999. It did well until about 2011, but has underperformed the market since. Investors should note that the manager can invest in higher-risk emerging markets.

This fund invests in shares and bonds issued by UK companies of all sizes, including higher-risk smaller ones, with the aim to generate an attractive level of income. We consider it to have a ‘negatively-screened’ ethical approach.

Catherine Stanley combines her views on the economy and individual businesses to build a portfolio capable of generating income over the long run. She doesn’t invest in companies that make a lot of money from gambling, pornography, tobacco or weapons.

Our analysis suggests the fund’s focus on small and medium-sized companies has helped performance, but the fund has slightly outperformed the broader UK stock market over the manager’s 9-year tenure.

This is an investment-grade corporate bond fund using a sustainable approach. The manager looks for companies that try to make a positive impact on society, and excludes those in industries such as alcohol, gambling and pornography.

The main attraction of this fund is that it’s managed by the experienced Eric Holt and his team. They look for opportunities off the beaten track, in areas under-researched by other investors. The fund is currently focused on bonds issued by financial companies and those that give the bondholder a claim on the company’s assets if it can’t repay its debts.

The fund performed better than the broader market of sterling-denominated corporate bonds over the past year but it still lost a small amount of money. Recent purchases include bonds issued by financial services company Legal & General.

Please note the fund can invest in high yield bonds, which are higher-risk.

This fund invests globally in companies of all sizes, including higher-risk smaller companies. The emphasis is on companies that have a positive impact on society, the environment and health – a ‘sustainable’ approach.

Nick Edgerton’s sustainable approach means he’s unlikely to invest in certain sectors like tobacco, alcohol, and weapons, but they're not specifically excluded. Investors should note the fund has some exposure to emerging markets and invests in a small number of companies. Both of these factors add risk.

The manager’s track record is short, but he’s got support from a high-quality team at Stewart Investors. The fund performed better than the broader global stock market over the past year and we think the team’s got the potential to do a good job for long-term investors, although there are no guarantees.

Charlie Thomas looks for companies that offer solutions to environmental problems like pollution, resource scarcity and water shortages. We see this as a sustainable approach.

The fund doesn’t have many investments in miners, financials and the oil & gas sector as few companies in these industries help to solve environmental problems. That said, just because a company offers an environmental solution doesn’t necessarily make it a good investment. That’s why the manager also looks at other things like the quality of the management team, the company’s position in its market, its financial strength and whether its prospects are reflected in its share price.

The manager has a long track record, although the fund’s performance hasn’t kept pace with the performance of the broader global stock market over his tenure. Plus it tends to invest in quite a small area of the market. That means performance can differ significantly from global stock markets. We’re not currently considering this fund for a spot on the Wealth 50.

This fund invests in companies across the globe that address long-term demographic, environmental and resource challenges. They must also have strong prospects in their own right, and be available at an attractive price. It combines an ‘impact’ and an ESG integrated approach.

The team behind this fund focus on nine sustainable investment themes, which range from resource efficiency and sustainable transport to education and wellbeing.

The fund hasn’t performed as well as the broader global stock market over the past few years. Our analysis suggests a focus on higher-risk small and medium-sized companies should have helped performance, but the managers invested in companies in this area of the market that haven't done so well. We’d like to see the managers build a long track record of adding value through their stock picking before considering the fund for the Wealth 50.

The managers have the flexibility to invest in emerging markets which are more risky than developed ones.

This fund invests in companies in the FTSE 350 Index that meet 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.

Latest research updates

Kames Ethical Equity - profit from your principles?

Kames Ethical Equity - profit from your principles?

Mon 11 March 2019

Audrey Ryan is our favourite ethical fund manager. In this update, we look at where she's found opportunities and share our view on the fund's prospects.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

Fund research

Our expert research team provide regular updates on a wide range of funds.

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