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The extraordinary cost of ethical funds

Posted by: Brian Dennehy
Membership level: Free
 
There is a growing supply of ethically focussed funds, so here we assess whether their performance merits your attention.  Should you indulge in ethical investing?  Here we show the cost to you.
 
Ethical funds are becoming increasingly popular as younger generations place greater emphasis on a more responsible approach to investing.  The argument for ethical funds is well-known: investors can use their capital to influence companies to be more socially and environmentally responsible.  
 
Socially Responsible Investing (SRI) takes into consideration social, ethical and environmental factors. Funds are often classified from “light green” (fewer ethical criteria) to “dark green” (more stringent ethical criteria).
 
But remember, increasing the number of ethical factors can increase the risk and volatility as the investment universe gets smaller.
 
Do ethical funds pass the performance test?
 
Across all sectors: 
  • There is no single ethical fund sector
  • 78 ethical funds are spread across 16 fund sectors...
  • …and only 48 with >10 years of performance.
  • 43% of all ethical funds sit in just two sectors: UK All Companies and Global
I want to focus on the UK All Companies and Global sectors, as this is where most funds reside.
 
Looking at the sectors with the largest number of funds, the popular UK All Companies sector has 17 ethical funds:
  • This is 20% of the ethical funds available to investors
  • Only 1 fund – SLI UK Ethical – makes it into the top 20% of all funds in this sector over 10 years (162%)
  • …and the performance of the fund is 230% less than the best performing fund in the sector (Slater Growth: 392%)
In the Global sector there are 18 ethical funds:
  • This is 23% of the ethical funds available to investors
  • No funds make it into the top 20% of funds in this sector over 10 years…
  • The best performing ethical fund – F&C Responsible Global Equity returned 186%…
  • …and the performance of the fund is 302% less than the best performing fund in the sector (Baillie Gifford Global Discovery: 488%)
 
We created the “Feel Good Cost” to illustrate the cost to investors of buying ethical funds over their unconstrained alternatives
 
Assuming £100,000 invested 10 years ago, the Feel-Good Cost is the amount of money you lost by being in the best ethical fund compared to being in the best unconstrained fund:
 
UK All Companies funds:
£230,040 “feel good cost”
Global Growth funds: £302,650 “feel good cost”
 
Hindsight analysis?
 
Remember that you could only have selected these top funds with the benefit hindsight. What about a real example? If you’d followed a process like Dynamic Fund Ratings how would your investments have performed?
 
In the UK All Companies sector the Dynamic Portfolio returned 152% but 42% better than the sector average.
 
The best ethical fund did a bit better (163%) but that would only have been achieved by throwing a dart at a board to pick the best of the 17 ethical funds available.
 
In the Global sector the Dynamic Portfolio substantially outperformed, returning 276%. That’s 152% better than the sector average.
  • The best ethical fund returned 187%...
  • …89% less than the Dynamic Portfolio.
So, if you’d followed a process then you could have pretty well matched the best ethical fund in the UK sector or substantially outperformed in the Global sector. 
 
But remember, comparing with the best fund over the period is only possible with the benefit of hindsight. Whereas a process like Dynamic Fund Ratings is a real outcome you could have achieved.
 
The Ethical cost
 
In summary on ethical investing, anyone pursuing this route is actively excluding the vast majority of successful investment funds - ticking an ethical box comes at considerable cost.
 
There are some very serious themes surrounding individual funds.
 
But let's not pretend that investors or the fund managers can make a significant difference beyond feeling better about themselves.
 
These are matters of national and global importance that must be dealt with through effective government action and global co-operation, and, where appropriate, through pressure groups and direct action.
 
How about maximising your investment returns, by considering all fund options, and then gift profits to effective action groups and good causes close to your heart?
 
ACTION FOR INVESTORS
  • To achieve outstanding growth, more consistently, ethical investors should consider making use of a wider range of better funds and use the proceeds for direct impact.  
  • Large profits enable greater personal contributions to good causes.
  • Investors who wish to buy ethical funds should look beyond the “ethical” label, as there might not just be hidden investment risks, but huge hidden costs.
FURTHER READING
 
Table 1: Feel-good cost
UK All Companies sector
 
10 yr perf. %
10 yr return £
Top ethical fund
Standard Life Investments UK Ethical
162.00
 £          262,000
Top unfettered fund
Slater Growth
392.04
 £          492,040
Feel Good Cost
   
        230,040
       
Global sector
     
Top ethical fund
F&C Responsible Global Equity
186.00
 £          286,000
Top unfettered fund
Baillie Gifford Global Discovery
488.65
 £          588,650
Feel Good Cost
   
        302,650
 
Table 2: Ethical funds for UK All and Global (sorted on 6 months)
UK All Companies
     
Name
Fund Size(m)
6 months
10 years
Liontrust Sustainable Future Global Growth
255.7
13.05
145.43
F&C Responsible Global Equity
460.6
11.85
186.76
M&G Global Select
752.2
10.13
149.07
Janus Henderson Global Sustainable Equity
791.7
8.83
172.54
Aberdeen Ethical World Equity
149.0
5.09
97.00
Halifax Ethical
175.6
5.09
114.01
SJP Ethical
123.7
4.70
84.89
Jupiter Ecology
582.4
4.66
100.72
Quilter Investors Ethical Equity
133.3
3.80
119.50
EdenTree Amity International
231.1
3.53
140.84
       
Global
     
Name
Fund Size(m)
6 months
10 years
Liontrust Sustainable Future UK Growth
353.5
11.66
148.00
Royal London Sustainable Leaders Trust
646.9
11.12
152.89
Liontrust UK Ethical
430.9
10.92
138.06
Scottish Widows Environmental Investor
218.7
10.78
74.65
Scottish Widows Ethical
118.4
10.45
57.63
F&C Responsible UK Equity Growth
430.4
9.82
140.44
Epworth Affirmative Equity
95.5
8.31
108.10
BlackRock Invest Mgrs UK Ltd Charishare Restricted
122.8
8.22
106.89
EdenTree Amity UK
151.3
7.92
148.21
L&G Ethical Trust
322.4
6.20
110.96
Royal London UK FTSE4Good Tracker Trust
146.4
5.60
75.32
Standard Life Investments UK Ethical
322.4
5.44
162.87
Kames Ethical Equity
608.0
5.37
134.94
Janus Henderson UK Responsible Income
174.4
4.96
136.53
Family Charities Ethical
198.9
4.59
48.79
Jupiter Responsible Income
63.7
4.04
87.81
Premier Ethical
180.0
2.02
159.73
 
Chart 1: UK All Companies sector
Chart 2: Global sector
 
Data source:
Universe: UT & OEICs, >£50m fund size. Note that some funds are not available to all investors e.g. BlackRock Charishare
Feel-good cost: Assuming £100,000 invested 10 years ago.
Data run to Last Month End (31/08/2018)
Topic: Sector analysis


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