The Independent: Where to invest and still have a clear conscience
29 May 2004
Doubts over the profitability of ethical investments are quashed by funds' returns
Ethical investing has blossomed since it was introduced to investors in the UK exactly 20 years ago next Tuesday.
The Isis Stewardship Growth Fund - the first ethical fund in Europe for retail investors - celebrates its 20th birthday on 1 June. When launched, it was treated with suspicion. Cynics nicknamed it the Brazil fund - because you had to be nuts to invest in it.
However, the performance figures have since shown a different story. Over the period 1 June 1984 to 1 May 2004, the fund has returned 682 per cent after charges and tax.
This compares favourably to the average UK growth fund over that period, which has delivered a slightly lesser return of 634 per cent, according to figures provided by Lipper Hindsight. Over the past year alone, units in the fund have risen by 36.03 per cent, compared to the sector average of 22.24 per cent.
Since being launched by Friends Provident in 1984, the range of Stewardship funds, now managed by Isis, has grown to a value of £1.4bn. This represents about a third of the £4.2bn invested in ethical funds across Europe, according to the Ethical Investment Research Service.
There is now a wide choice of ethical funds available to investors. Among groups offerings equity-based ethical funds are Jupiter, Standard Life Investments, Legal & General, Axa, Henderson, Insight, Old Mutual, Scottish Widows and Halifax. Aegon and Rathbones offer funds investing in ethical corporate bonds.
The growth in assets under management and uptake by fund providers shows that ethical investing has come a long way since 1984. However, the biggest stumbling block facing the further expansion of ethical investment is the continued widespread perception that green funds will deliver inferior performance compared to their mainstream peers because they are restricted from holding shares in certain companies.
Although ethical funds each use different criteria for determining the types of companies they can hold, most are unlikely to hold tobacco or weapons manufacturers. Many also do not hold sections of the big FTSE-100 stocks such as banks and oil companies, the latter of which have been performing extremely well recently, due to the record-high oil price.
Nevertheless, ethical fund managers and providers argue that there are several reasons why such restrictions do not handicap performance. Peter Michaelis, manager of the Norwich UK Ethical Fund, says socially responsible companies tend to be better quality businesses, which in turn should lead to a rising share price.
Mr Michaelis explains that an ethical fund manager will scrutinise the investment prospects of any company as stringently as their mainstream competitors. "However, an ethical manager would also delve further to determine the management's attitude toward social responsibility," he says.
Amanda Forsyth, manager of Standard Life Investments' UK Ethical Fund, agrees. "Companies that have taken the trouble to establish good employee relations and good environmental policies generally have proactive management and are therefore likely to outperform the broader market over time," she says.
Legislative change to protect the environment also paints a positive picture for many ethical companies. Just one example is the recycling targets imposed by the European Parliament on its members. "Companies that develop products that can help governments meet these targets are bound to enjoy strong demand," Ms Forsyth says.
But, partly because of the restrictions, the Isis Stewardship Fund has narrowly failed to match the performance of the FT All-share index since 1984, and has come 21st out of 56 funds in the UK All Companies sector.
Jason Hollands, head of communications at Isis Asset Management, says: "This compels an ethical fund manager to pick genuinely high-conviction stocks. It also gives such funds a strong small- to mid-cap flavour, which is the area of the market where more interesting and often ignored companies tend to be found.
"Inevitably therefore, an ethical fund is more likely to deliver significant differences in performance over the market average. Such funds clearly distinguish a good fund manager from a poor stock-picker as there is no question of sitting on the fence by hugging the index."
There is no set formula for how an ethical fund should operate and each uses different ways of determining the types of stocks that are suitable. These different processes are often described as positive or negative screening criteria. Other terms to describe the process uses by ethical fund manages are dark green and light green.
The Isis Stewardship Growth Fund can be described as a dark green fund, as it uses negative screening criteria. A separate Isis team researches and subsequently excludes certain companies that it does not deem suitable. The manager, Ted Scott, will choose the best from those considered appropriate. About 70 per cent of FTSE 100 stocks are excluded from being held in the Isis fund.
Standard Life UK Ethical uses a similar approach. Ms Forsyth says: "We exclude oil companies, and pharmaceuticals because most are involved in animal testing. We hold some banks, but overall about 50 per cent of the big FTSE 100 companies cannot be held."
Light-green funds tend to apply positive screening criteria, looking instead for certain features within a company, usually that they are contributing someway to the environment or socially.
The manager of the Jupiter Ecology fund, for example, applies positive selection criteria when choosing companies. Emma Howard Boyd, head of socially responsible investment at Jupiter, says a large proportion of companies in the fund seek to solve environmental problems.
"There are six key themes that we look for. These include renewable energy, water quality management, waste management and minimisation, transport, healthy living and beneficiaries of regulation," she says.
Anna Bowes, an independent financial adviser at Chase de Vere in Bath, says it is important to understand the screening criteria when choosing a fund. "It is likely that if you are investing in an ethical fund it is because you have strong views. However, the important differences between dark green and light green can be confusing, so be sure to understand the types of companies your manager will include," she says.
Among dark-green funds she recommends those in the Isis Stewardship range and Standard Life UK Ethical. Among light green, Ms Bowes recommends the Morley Sustainable Future UK Growth Fund.
To mark the 20th anniversary of the Isis Stewardship Growth Fund, Isis has pledged to donate half of the net initial fee (up to 5 per cent of your investment) on investments into its three Stewardship funds - Growth, Income and International to Fairtrade Foundation, a registered charity that guarantees a better deal to producers from developing countries.
Fairtrade provides producers with a stable price that covers their production costs and a premium that enables them to reinvest in their business or develop social and environmental projects to benefit the wider community. The offer runs from 1 June to 30 August.
For those wanting a managed portfolio of ethical investment funds, the Artemis Multi-Manager Ethical Fund offers a fund of what the manager considers to be the UK's best green funds.
'I didn't want to invest in the arms industry'
David Smith and his wife Christine have been investors in the Isis Stewardship Growth Fund almost since it began in 1984. A senior lecturer in mathematics at Exeter University, David describes his ethical leanings as a natural extension of his Christian beliefs.
Mr Smith, 53, says: "I didn't want my savings to be invested in the arms industry or anywhere else where it might be used to cause harm. I was also reluctant to see my money supporting other less worthwhile industries, such as pornography or gambling."
He is happy about the performance of the fund. "I don't pretend to follow the unit-trust industry closely and it is not that important to me that I make every last penny from my savings.
"However, if the performance of the fund really took a dive, I would look elsewhere to achieve a return. Fortunately, this has not been a concern because the fund has served me well in performance terms."
Mr Smith, who is a keen cyclist around Exeter, also invests in the Jupiter Ecology Fund. He makes some lump sum investments and has used his Pep and Isa tax-free allowances to make the most of these investments.
FUND MANAGERS FAVOURITES
* Ted Scott, manager of the Isis Stewardship Growth Fund, points to Capita Group, an outsourcing company best known for managing the congestion charge in London. It also holds a number of other contracts such as TV licensing for the BBC. "Capita has won a number of new contracts this year, which has led to a rise in profit expectations. It was demoted from the FTSE 100, but we expect it will be reincluded at the next review at the start of June," he says.
It may be surprising to see Cairn Energy in the Isis Stewardship Growth portfolio, given that most ethical companies exclude oil stocks. But Mr Scott said the fact that oil is an essential part of the economy must be taken into account. Often the rationale behind excluding oil companies is down to where they extract oil. "We exclude Shell because it extracts oil in Nigeria, which has violated human rights," he says.
Cairn Energy is expected to continue benefiting on the back of new oil finds, the most recent being in Rajasthan, said Mr Scott, who has been involved in managing the Isis Stewardship Fund since launch 20 years ago and became lead manager in 2000.
He also holds the small company Development Securities, a specialist property developer that has been redeveloping the Paddington area in London. The second stage of this development is due to start this year. The stock meets ethical criteria due to the regeneration aspect, in that it has developed Paddington into a much cleaner area.
* Amanda Forsyth, manager of the Standard Life UK Ethical Fund, holds a number of newly listed companies in her portfolio, which she says are at the forefront of environmental technology. Symphony Plastics makes biodegradable plastic, which is successfully used in supermarket shopping bags. The company is enjoying strong demand from Irish supermarkets in particular, which receive tax incentives for using the environmentally friendly bags.
Another is Virotec, which has developed a product based on red mud to treat contaminated water. This is particularly useful in regenerating mining sites, but the product also has more far reaching demand, Ms Forsyth says.
She has also recently purchased a stake in Solar Integrated Technologies, which creates solar energy screens in roller panels. These are having increasing industrial use, powering factories during the week and contributing to the energy grid when factories are not operating.
"Bus companies are among the typical companies you will find in ethical funds. We have held Go Ahead for a long time. It has been very successful, and has continued to benefit from stronger demand since the introduction of the congestion charge," she says.
* Emma Howard Boyd is head of socially responsible investment at Jupiter, whose portfolio of shares includes the American company Whole Foods Markets. This retailer of organic food is benefiting from a growing consumer trend towards eating these foods as the unfavourable publicity about fast food and general awareness about the health dangers of clinical obesity increases.
Ms Howard Boyd also points to Gamesa, the Spanish wind turbine manufacturer that is already benefiting from the European Union's requirement for its members to ensure increased use of renewable energy and to reduce their dependency on traditional fossil fuels such as natural gas, coil and oil. This will also be a major trend.