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The extraordinary cost of ethical funds

Posted by: Brian Dennehy
Membership level: Free
 
[You can also download a PDF copy of this blog here.]
 
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.
  • In total, there are 138 ethical funds spread across 22 fund sectors (Table 1)…
  • …but 21 of those are unclassified or moneymarket funds. We exclude these.

To filter further we exclude funds:

  • Less than £50m in size and
  • Without a 10 year track record.

This gives a total of 70 funds.  44% of these ethical funds sit in just two sectors:

  • UK All Companies (14 funds, Table 3)
  • Global (17 funds, Table 4)
We will focus on these two sectors, as these are two popular sectors and this is where the bulk of ethical funds reside.
 
The popular UK All Companies sector has 14 ethical funds:
  • This is 18% of the ethical funds available to investors.
  • There are 34 funds in the top 20% of performers in the last 10 years – only 6 are ethical.
  • Best ethical: Royal London Sustainable Leaders Trust (up 218%).
  • Best unconstrained: Slater Growth (up 445%).
  • That's 227% extra.
In the Global sector there are 17 ethical funds:
  • This is 22% of the ethical funds available to investors.
  • There are 30 funds in the top 20% of Global performers in the last 10 years – none are ethical - not one.
  • Best ethical: BMO Responsible Global Equity (up 235%).
  • Best unconstrained: Baillie Gifford Global Discovery (up 450%).
  • That's 215% extra.
We created the Feel-Good Cost to illustrate the cost to investors of buying ethical funds over their unconstrained alternatives (Table 2).
 
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:
£227,150
“feel good cost”
Global Growth funds:
£215,320
“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 over the last 10 years?
 
UK All Companies 
  • In the UK All Companies sector the Dynamic Portfolio returned 201%...
  • …74% better than the sector average.
  • The best ethical fund was up 17% more than the Dynamic Portfolio (218%)…
  • …but that would only have been achieved by throwing a dart at a board to pick the best of the 14 ethical funds available.
Global
  • In the Global sector the Dynamic Portfolio substantially outperformed, returning 322%....
  • …that’s 156% better than the sector average.
  • The best ethical fund returned 235%...
  • …87% less than the Dynamic Portfolio.
If you had followed a process backed by decades of research 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?
 
[You can also download a PDF copy of this blog here.]
 
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: Ethical funds in different sectors (A-Z)

Sector (A-Z)
Total funds
Asia Pacific Excluding Japan
1
Europe Excluding UK
5
Europe Including UK
5
European Smaller Companies
1
Flexible Investment
2
Global
36
Global Bonds
2
Global Emerging Markets
8
Global Equity Income
1
Mixed Investment 0-35% Shares
1
Mixed Investment 20-60% Shares
5
Mixed Investment 40-85% Shares
5
North America
2
Short Term Money Market
1
Specialist
13
Sterling Corporate Bond
9
Sterling Strategic Bond
2
Targeted Absolute Return
2
UK All Companies
14
UK Direct Property
1
UK Equity Income
2
Unclassified
20
   
Total
138

 

Table 2: Feel-good cost
UK All Companies sector
 
10 yr perf. %
10 yr return £
Top ethical fund
Royal London Sustainable Leaders Trust
218.6
£318,600
Top unfettered fund
Slater Growth
445.8
£545,750
Feel Good Cost
   
-£227,150
 
Global sector
 
10 yr perf. %
10 yr return £
Top ethical fund
BMO Responsible Global Equity
235.1
£335,050
Top unfettered fund
Baillie Gifford Global Discovery
450.4
£550,370
Feel Good Cost
   
-£215,320
 

 

Table 3: Ethical funds for UK All (sorted on 10 years)

Name
Fund Size(m)
10 yr perf. %
Royal London Sustainable Leaders Trust
783.6
218.6
Kames Ethical Equity
543.0
148.3
Liontrust UK Ethical
493.4
197.4
Liontrust Sustainable Future UK Growth
463.4
193.8
BMO Responsible UK Equity
434.9
175.6
Montanaro UK Income
410.0
216.5
ASI UK Ethical Equity
312.3
186.0
L&G Ethical Trust
279.7
143.4
Family Charities Ethical
221.9
85.2
Premier Ethical
157.2
174.6
Royal London UK FTSE4Good Tracker Trust
142.5
99.2
EdenTree Amity UK
127.8
153.9
Schroder Responsible Value UK Equity
56.4
123.2
Jupiter Responsible Income
51.3
113.3
 
 
Table 4: Ethical funds for Global (sorted on 10 years)
Name
Fund Size(m)
10 yr perf. %
BMO Responsible Global Equity
594.8
235.1
Janus Henderson Global Sustainable Equity
952.5
230.2
Liontrust Sustainable Future Global Growth
435.6
207.8
AB SICAV I Sustainable Global Thematic Portfolio
633.9
187.6
M&G Global Select
609.7
183.7
Schroder ISF Global Equity Yield
357.5
177.6
BMO Sustainable Opportunities Global Equity
56.8
167.5
Schroder ISF Global Equity Alpha
990.2
166.8
Candriam SRI Equity World
366.0
161.0
Quilter Investors Ethical Equity
129.0
150.2
Halifax Ethical
178.7
150.2
Jupiter Ecology
522.5
140.0
JPM Global Equity
229.5
131.2
EdenTree Amity International
216.2
127.0
ASI Global Ethical Equity
142.1
117.6
FP WHEB Sustainability
355.8
113.0
Pictet Clean Energy
463.2
73.6
 
 
Data source:
Universe: Investment Association, >£50m fund size. Note that some funds are not available to all investors on all platforms
Feel-good cost: Assumes £100,000 invested 10 years ago.
Data run to Last Month End (31/08/2019)
Topic: Investment research


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