Every few years SRI and green funds become ‘de rigueur’ and marketing departments of asset management companies find a creative angle that taps into investors’ social consciousness.
Be it protecting the environment, supporting charitable causes or simply trying to ‘do the right thing’, it can become a more interesting story to tell when pegged against a standard UK equity story.
In terms of sales, while the IMA reported 2012 as the highest accumulation of Ethical fund assets to date, with £7.59bn in funds under management, comparatively this sub-sector fell off a cliff, with only £12m of net retail sales of Ethical funds in 2012, compared with £201m the previous year and £347m in 2010.
The IMA confirmed 51 active ethical funds at the end of September.
Is this fall in fortunes down to a sacrifice of returns? According to Ecclesiastical Investment Management, 18% of investors shun ethical products as they have this perception.
Sue Round, head of investments, said: “All too often people also think that investing ethically will sacrifice their returns. However, this is often not the case, with many ethical funds being some of the best performers in their sectors, proving that people can invest to make money, whilst sticking to their principles.”
But while Killik & Co head of research Mick Gilligan believes logic dictates you will likely miss out on a degree of potential returns as the universe shrinks after screens are applied, he concedes that this is certainly not as prevalent as it was several years ago as many larger companies are now more environmentally and socially conscious, and therefore may not be caught by the same filters they once were.
According to FE Trustnet, the average Ethical fund returned 25.30% over three years, compared with 37.2% for the IMA UK All Companies average. Over one year the difference was less so, with 22.5% for Ethical compared with 26.1% for the broader benchmark.
Gilligan says the world is generally becoming more socially aware, with the GINI inequality index – which measures the deviation from a perfectly equal distribution across a range of social factors – gaining in relevance.
Defaqto agreed there was no evidence to support the performance differential. The research company points out that many ethical managers have resisted calling for an IMA sector or other such benchmark on the basis that ethical funds are not all managed in the same way.
“However, well-run companies with strong ethical and environmental principles face less risk of regulatory fines, environmental clean-up costs or shareholder backlash and are more likely to be the companies delivering strong ethical fund performance required by today’s investing community,” it said.
In terms of buying the underlying companies, Killik’s Gilligan says so few private investors have the means to continually monitor the underlying holdings for their placements against screening models, so would recommend funds for most investors.
He says a more relevant bias is around market cap, with the majority of ethical/green companies sitting in the small and mid-cap space, so when these indices do well, so do ethical funds.
According to Jupiter’s Charlie Thomas, who runs the group’s Ecology fund, further economic recovery could lead to a significant pickup in environmental markets.
“Driven by greater production of air pollution, waste, water and the more use of scarce natural resources the demand for environmental solutions typically accelerates,” he points out.
The Ecclesiastical research suggests access is a problem for many investors looking to put their money in an SRI vehicle, with 44% of investors saying they made use of an ethical product, while 25% of those new to the space said they “did not know how to”.
The causes of greatest interest were animal welfare, education and human rights.
