Defence became one of the biggest themes for investors in 2025, as ongoing geopolitical tensions led to places such as the UK pledging to increase military spending to 2.5% of GDP by 2027.
See also: European markets boosted by defence stocks
As a result, share prices for defence companies rocketed up, with the FTSE World Aerospace and Defence index delivering a 43.2% total return. By contrast, the wider FTSE World was up just 15%, according to FE Analytics.
At the same time, some investors have started to reconsider their views on defence within their portfolio, according to Hargreaves Lansdown (HL).
Dominic Rowles, head of ESG at HL, said in their 2022 sustainable investor survey, nearly half of respondents ruled out firearms entirely, but this figure had fallen to just 27% in the December 2025 survey.
Further, HANetf research in 2024 found 94% of wealth managers had considered defence companies ESG-friendly.
For investors reconsidering their stance on defence companies, industry experts identified funds that can provide exposure to this growing theme.
For Paul Angell, head of investment research at AJ Bell, the BlackRock European Dynamic fund seemed compelling.
Portfolio manager Gilles Rothbarth pushed the weighting in defence companies to 15% of the total portfolio in 2025, with aerospace and defence providers such as Saab, Safran and MTU Aero Engines among its top 10 holdings.
“Rothbarth impresses as he articulates macro views, which are incorporated within the bottom-up assessment of companies by BlackRock’s 20-strong European equity analyst team,” Angell said.
Rothbarth also targets companies with the “best cashflow and earnings stories”, but is not afraid to be dynamic, as demonstrated by the decision to rotate into more cyclical names in 2020, according to Angell.
In 2025, the fund was up 16.9% in sterling, a positive total return, but underperforming the IA Europe ex UK sector average (up 22.5%) and the FTSE World Europe ex UK (27.9%).
However, over the past decade, the strategy delivered 230.8% to investors, the seventh-best result in the sector.
See also: Defence: The battlefield has changed — now investment strategies must follow.
The HL team identified the Legal and General UK index, a tracker fund that closely follows the FTSE All-Share, as a potential option.
“No sector is off limits to the fund,” which means it invests in areas that may be excluded from more ESG-conscious funds. Defence represents 5.9% of the fund, with Rolls-Royce as the fifth-largest position in the portfolio.
However, as a tracker, this exposure is based on each company’s size in the index, meaning it can shift over time.
Last year, the fund rose 23.7%, outperforming the average fund in the IA UK All Companies sector (up 15.4%), but narrowly underperforming the FTSE All Share.
The bear case: Funds to avoid defence
Nevertheless, HL’s Sustainable Investment Survey showed defence was still off limits for some investors.
Gender and age tended to play a big role in this, with 48% of women rejecting it (compared to 19% of men) and 25% of respondents aged 18-29 rejecting it in their portfolio.
For this group of investors, AJ Bell’s Angell liked John William Olsen’s M&G European Sustainable Paris Aligned fund. In line with the Paris Agreement, this strategy fully excludes defence companies from its mandate.
Olsen focuses on “compounding companies” with competitive advantages, durable earnings and good balance sheets, Angell said. Currently, this is leading the fund to favour industrials, with a 11.2% overweight compared to the MSCI Europe ex UK index it uses as a benchmark.
“This clear investment approach, where the manager also seeks to initiate positions at an attractively priced entry point, has been ever-present throughout the manager’s career,” Angell said. “This consistently rewarded investors with outperformance over time.”
However, it should be noted the fund struggled in 2025 and is in the bottom quartile of IA Europe excluding UK peer group over the past 12 months.
Meanwhile, the HL team pointed to the Aegon Ethical Equity fund. Managed by Audrey Ryan since 1999, the fund aims to provide income and capital growth over seven-year periods by investing in UK equities.
Ryan uses a strict exclusions-based approach to avoid companies which have significant revenue from unethical areas, HL analysts said.
As a result, it discounts many companies that manufacture military armaments or civilian firearms, including the previously mentioned Rolls-Royce. Instead, its top 10 is composed primarily of financial stocks such as NatWest.
However, excluding defence was a headwind for returns in 2025, as the fund rose just 2.4%, a bottom-quartile return in the IA UK All Companies sector.
