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13 June 2009
Business Scotsman: Investors keep ethical values
Source: www.business.scotsman.com
Published Date:
13 June 2009
By Jeff Salway
A QUARTER of a century ago this month, the first ethical fund for private investors in the UK was launched.
The Friends Provident Stewardship fund range avoids companies operating in areas such as tobacco and gambling and selected stocks using a process that "screened" stocks on the basis of environmental and human rights issues.
It struggled at first,
lagging the FTSE and failing to part investors with their money. But fast forward 25 years, and what is now called the F&C Stewardship fund is worth £450 million. And, according to the Ethical Investment Research Service, approximately £6.8 billion was invested in 81 UK green and ethical retail funds as at the end of 2008.
Karina Litvack, head of governance and sustainable investment at F&C, said: "It is easy to forget how far-sighted the archi-tects of Stewardship were back in 1984. Many observers were sceptical and no-one could have predicted that this fund was going to end up being such a big influence on investors' behaviour in the years to follow."
But those seeking investments reflecting their principles still have obstacles to overcome.
Julian Parrott, partner in Edinburgh-based IFA Ethical Futures, pointed to a wide variance in screening policies and asset allocation within a sector that now encompasses UK equity, equity income, global growth, corporate bond, balanced managed and specialist funds.
Ethical funds also possess an inherent volatility and, as the credit crunch tightened its grip, many advisers believed they would suffer disproportionately. This is partly because of their adherence to strict ethical criteria, which can reduce freedom and flexibility, and a natural weighting towards small and medium sized companies, typically more volatile than blue chips.
Consequently, it was predicted investors would turn their backs on the sector and focus on performance at the expense of their ethical preferences.
But those fears have not yet been realised, according to Parrott, who said ethical investors tended to be "stickier" and took a longer-term view. "There is no evidence of clients scaling back on ethical standards in hope of a higher return and neither would this necessarily benefit them, as data suggests that the deeper green funds have fared better over longer terms."
There remains a widely-held perception that ethical investors are paying for their principles, however. Performance figures suggest there may be some truth in this, but judging the long-term performance of ethical funds is tricky, with only 17 offering a track record of five years or more. Over the past 12 months, the average ethical fund is down 24 per cent, according to data from by Morningstar, marginally inferior to the FTSE 100 and UK All Companies averages.
But looking at short-term performance alone is misleading. Over 24 to 36 months, most ethically screened funds have outperformed the average fund in the UK and global growth sectors. "This reflects to a certain extent the positive environment for smaller company shares at the beginning of this period and the impetus derived from the Stern report in 2006, and the increase in market interest from mainstream investors about green technologies," said Parrott.
Limited exposure to banks meant many ethical funds initially held up well in the credit crunch, although some, including the Stewardship, had more exposure to banks than investors may have liked.
Many also underperformed due to a lack of exposure to "defensive" stocks such as tobacco, alcohol and supermarkets, said Adrian Lowcock, senior investment adviser at Bestinvest. "With things like defence, tobacco and pharmaceuticals excluded, you end up with more cyclical exposure, which will do better in a market rebound but suffer heavily in a downturn," he explained.
Similarly, high exposure to stocks at the lower end of the market capitalisation scale has had an effect. "As the crisis turned into a full-scale global recession, the ethical funds more exposed to smaller companies have been affected due to market sentiment about the ability of smaller companies to survive difficult trading conditions," said Parrott.
However, he says some ethical funds are especially well-positioned to flourish. "The Obama and UK green stimulus will certainly boost opportunities for green investors while, in the wake of the financial crisis, corporate governance is increasingly important and I expect to see ethical funds, which have a good track record on voting, taking a strong lead in this area," he said.
So, what of the original fund, the Stewardship? In the 25 years since its launch, it has returned a less than devilish 666 per cent, leaving it in the lower reaches of its sector. But Trevor Matthews, chief executive at Friends Provident, argued that investors taking ethics into consideration still enjoyed returns that rewarded their preferences.
"We are seeing this trend continue into people's investing habits, with over half prepared to accept a lower return on their investments if it means investing in companies that are socially responsible," he said. "People are investing with care and realising you don't have to compromise your principles to make a profit."
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Sustainable Investment Research Platform
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