The extraordinary cost of ethical funds
Posted by: Brian Dennehy
[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:
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There is no single ethical fund sector.
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In total, there are 138 ethical funds spread across 22 fund sectors (Table 1)…
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…but 21 of those are unclassified or moneymarket funds. We exclude these.
To filter further we exclude funds:
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Less than £50m in size and
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Without a 10 year track record.
This gives a total of 70 funds. 44% of these ethical funds sit in just two sectors:
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UK All Companies (14 funds, Table 3)
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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:
In the Global sector there are 17 ethical funds:
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:
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UK All Companies funds:
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£227,150
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“feel good cost”
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Global Growth funds:
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£215,320
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“feel good cost”
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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
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In the UK All Companies sector the Dynamic Portfolio returned 201%...
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…74% better than the sector average.
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The best ethical fund was up 17% more than the Dynamic Portfolio (218%)…
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…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
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In the Global sector the Dynamic Portfolio substantially outperformed, returning 322%....
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…that’s 156% better than the sector average.
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The best ethical fund returned 235%...
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…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
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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.
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Large profits enable greater personal contributions to good causes.
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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)
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Sector (A-Z)
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Total funds
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Asia Pacific Excluding Japan
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1
|
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Europe Excluding UK
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5
|
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Europe Including UK
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5
|
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European Smaller Companies
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1
|
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Flexible Investment
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2
|
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Global
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36
|
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Global Bonds
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2
|
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Global Emerging Markets
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8
|
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Global Equity Income
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1
|
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Mixed Investment 0-35% Shares
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1
|
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Mixed Investment 20-60% Shares
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5
|
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Mixed Investment 40-85% Shares
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5
|
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North America
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2
|
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Short Term Money Market
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1
|
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Specialist
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13
|
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Sterling Corporate Bond
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9
|
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Sterling Strategic Bond
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2
|
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Targeted Absolute Return
|
2
|
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UK All Companies
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14
|
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UK Direct Property
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1
|
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UK Equity Income
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2
|
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Unclassified
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20
|
|
|
|
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Total
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138
|
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Table 2: Feel-good cost |
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UK All Companies sector
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10 yr perf. %
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10 yr return £
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Top ethical fund
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Royal London Sustainable Leaders Trust
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218.6
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£318,600
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Top unfettered fund
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Slater Growth
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445.8
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£545,750
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Feel Good Cost
|
|
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-£227,150
|
|
|
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Global sector
|
|
10 yr perf. %
|
10 yr return £
|
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Top ethical fund
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BMO Responsible Global Equity
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235.1
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£335,050
|
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Top unfettered fund
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Baillie Gifford Global Discovery
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450.4
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£550,370
|
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Feel Good Cost
|
|
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-£215,320
|
|
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Table 3: Ethical funds for UK All (sorted on 10 years)
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Name
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Fund Size(m)
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10 yr perf. %
|
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Royal London Sustainable Leaders Trust
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783.6
|
218.6
|
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Kames Ethical Equity
|
543.0
|
148.3
|
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Liontrust UK Ethical
|
493.4
|
197.4
|
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Liontrust Sustainable Future UK Growth
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463.4
|
193.8
|
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BMO Responsible UK Equity
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434.9
|
175.6
|
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Montanaro UK Income
|
410.0
|
216.5
|
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ASI UK Ethical Equity
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312.3
|
186.0
|
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L&G Ethical Trust
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279.7
|
143.4
|
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Family Charities Ethical
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221.9
|
85.2
|
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Premier Ethical
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157.2
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174.6
|
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Royal London UK FTSE4Good Tracker Trust
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142.5
|
99.2
|
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EdenTree Amity UK
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127.8
|
153.9
|
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Schroder Responsible Value UK Equity
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56.4
|
123.2
|
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Jupiter Responsible Income
|
51.3
|
113.3
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Table 4: Ethical funds for Global (sorted on 10 years)
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Name
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Fund Size(m)
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10 yr perf. %
|
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BMO Responsible Global Equity
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594.8
|
235.1
|
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Janus Henderson Global Sustainable Equity
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952.5
|
230.2
|
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Liontrust Sustainable Future Global Growth
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435.6
|
207.8
|
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AB SICAV I Sustainable Global Thematic Portfolio
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633.9
|
187.6
|
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M&G Global Select
|
609.7
|
183.7
|
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Schroder ISF Global Equity Yield
|
357.5
|
177.6
|
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BMO Sustainable Opportunities Global Equity
|
56.8
|
167.5
|
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Schroder ISF Global Equity Alpha
|
990.2
|
166.8
|
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Candriam SRI Equity World
|
366.0
|
161.0
|
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Quilter Investors Ethical Equity
|
129.0
|
150.2
|
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Halifax Ethical
|
178.7
|
150.2
|
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Jupiter Ecology
|
522.5
|
140.0
|
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JPM Global Equity
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229.5
|
131.2
|
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EdenTree Amity International
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216.2
|
127.0
|
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ASI Global Ethical Equity
|
142.1
|
117.6
|
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FP WHEB Sustainability
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355.8
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113.0
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Pictet Clean Energy
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463.2
|
73.6
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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)