Christmas is a time for giving, so it’s not surprising at this time of the year that many investors turn their attention to ethical funds, which aim to deliver positive change as well as financial returns.
Research by Axa Investment Managers shows that some 52% of consumers now want to see hard evidence that their money is making a positive social or environmental impact.
Ethical funds have historically had to battle the assumption that ruling out certain sectors or industries, such as alcohol, tobacco and arms, would hamper investment returns. But the strong track records that many of these funds have built up have proved this is not necessarily the case. Moreover, many younger investors prefer to prioritise ethical issues over top-of-the-class performance.
Axa’s research found that 48% of investors are interested in green technology, while 31% see climate change as an attractive area to invest in. One-in-five people surveyed would like financial firms to make investments on their behalf that provide a long-term positive impact on society.
Adrian Lowcock, investment director at Willis Owen, says: “For me, ethical investing has come a long way in recent years. Once it was all about avoiding the bad companies, but today there is a greater focus on companies that have a positive impact.”
He says there is evidence to suggest that businesses which implement ethical, social and governance (ESG) considerations produce higher profits and see better share price performance. However, he does warn that these funds may be more volatile than others as there will be periods that the sectors they avoid outperform and those they focus on are out of favour.
Top ESG Fund Picks
Craig Bonthron, manager of the Kames Global Sustainable Equity fund, says: “Done well, sustainable investing means outperforming the market over the long-term by investing in innovative and disruptive growth companies, which also have a positive impact on the world we live in. By definition, this also means avoiding the disrupted incumbents that continue to do it harm.”
Lowcock likes Aberdeen Ethical World, which has a strong healthcare screen, ruling out any firms involved in animal testing. Screens towards areas such as weapons manufacturing are more lenient, provided only a small proportion of a company’s revenues come from the unethical activity. Lowcock says: “These biases can exacerbate periods of underperformance as they filter out sectors such as tobacco and pharmaceuticals.”
Top holdings include Visa (V) and Taiwan Semiconductor (2330). The fund, which has a Morningstar Bronze rating, has returned 44.9% over three years compared with a Global sector average of 37.9%.
Another favourite is the Royal London Sustainable Leaders fund, which invests 85% of assets in the UK, but also has some exposure to the US and Europe. As well as investing in firms whose products and services are associated with improving the environment, it also backs companies making “above average efforts in corporate responsibility.”
The fund, which has a Bronze Morningstar rating and a five-star quantitative rating, has returned 27.3% over three years compared with a UK All Companies sector average of 15.3%.
Rob Morgan, investment analyst at Charles Stanley, likes the Baillie Gifford Positive Change fund. It focuses on four themes including social inclusion, education, healthcare and quality of life. The high-conviction portfolio contains just 29 holdings. The fund has a Bronze rating and five-star quantitative rating from Morningstar analysts, and has returned 7.2% over the past year while the average Global fund is down 3.9% - launched in January 2017, the track record is short but strong. Morgan adds: “This would make an interesting adventurous option for a long-term investor, as it can be very volatile.”
He also likes the Threadneedle UK Social Bond fund, which focuses on areas including affordable housing, education, employment and training. Morgan says: “The objective of targeting particular social outcomes while aiming to generate attractive and consistent returns, similar to UK corporate bonds, make this fund very different.” It holds bonds issued by Bupa Finance, Transport for London and Anglian Water, among others. The fund has returned 12% over three years - just ahead of the average Corporate Bond fund return of 11.7%.
Of course, not all investors are convinced by the ethical approach. Brian Dennehy, managing director at Fund Expert, doesn’t believe these funds can make a significant difference to the world. He says: “These are undoubtedly very serious themes but they are matters of national and global importance that must be dealt with through effective government action and global co-operation.”
For others who are hesitant about ethical funds, he suggests picking a general fund and gifting the profits to action groups and charities instead.
Lowcock adds: “When investing ethically you still need to decide what you want to achieve or avoid, and what matters most to you as the choice of funds is getting larger and more diverse in their approaches.”
