Ethical funds are prohibited from investing in some of the more defensive sectors, such as tobacco, defence, pharmaceuticals and oil and gas. This leaves them particularly vulnerable when stock markets are falling as they are unable to shelter from the storm in the sectors sought by other fund managers. Moreover, they also tend to have a bias towards small and medium sized companies, which also suffered particularly badly in 2008.
Despite this there are funds which have held up well and can rival mainstream funds for performance.
A survey by Experts in Responsible Investment Solutions (EIRIS) found that 90 per cent of wealth managers believed that responsible investment portfolios had performed the same or better than other investments.
The AEGON Ethical Equity and CIS Sustainable Leaders Trust have both returned over 50 per cent in the five year period to 20 October 2009. In the same period the IMA UK All Companies sector returned 35 per cent.
Source: Financial Express Analytics
The performance record of these fund is likely to appeal to investors, as is the fact these two funds are less volatile than the average for the sector, meaning that the fund managers are beating the market without taking on additional risk.
Global Equities
The funds to highlight in this category are the Ecclesiastical Amity International, St James’ Place Ethical and Aberdeen Ethical World.
Source: Financial Express Analytics
By far the stand out ethical fund in this sector is the Ecclesiastical Amity International fund which has returned more than twice the sector average in the last five years. In general funds in this sector are more volatile than those in the IMA UK All Companies sector, yet this fund has achieved these returns with lower levels of risk than the average UK equity fund.
Fund manager Rob Hepworth has been awarded the status of Alpha Manager by Trustnet in recognition of his ability to beat the market. He has managed the fund since its launch in 1999 and has an information ratio of 1.63 showing that he is an outstanding stock-picker.
European Equities
There are relatively few ethical funds with a European mandate and none of these have performed particularly badly, but it’s fair to say that there is certain degree of mediocrity surrounding the performance of European ethical funds. The exception is SVM’s All Europe SRI fund.
The fund has returned 36 per cent since its launch nearly three years ago, more than seven times the average for the sector. It is the best performing fund in the IMA Europe including UK sector for this period – the second placed fund in the sector has returned 14 per cent.
Others
Ethical funds are few and far between in the other equity sectors. First State’s Asia Pacific Sustainability has outperformed its sector over a 3-year period and notched up an impressive annualised alpha of 6.27 per cent.
Despite there being a number of ethical bond funds there are precious few that have kept pace with the 'unethical' funds. Aviva’s Sustainable Future Corporate Bond has returned 11 per cent in the last five years which is in line with the sector average; it has a yield of 4.78 per cent.
We can see that it would be difficult, though not impossible, to build an ethical portfolio of funds with a proven track record of good performance. For ethical investors looking to invest in UK or global equities there are some excellent options, beyond that there are fewer funds to choose from and the investors will have a harder time finding one that can rival an 'unethical' fund.