Why being good doesn’t necessarily mean sacrificing returns
Thursday 18 Apr 2019 Author: Holly Black

Some investors believe that choosing an ethical fund means compromising your returns, but many have held up incredibly well during recent volatility compared to their non-ethical counterparts.

Analysis by AJ Bell reveals a number of ethical and sustainable funds have beaten their sector averages significantly over recent months. Proponents argue that investing ethically could be a good defensive strategy at times of uncertainty.


Justine Fearns, research manager at Chase de Vere, says: ‘In the challenging environment of the final quarter of 2018, most equity funds headed south, including those with an ethical bias. Some ethical funds fell further than their benchmark but others, with a strong quality bias or dividend focus, held up better.

Since January, equity funds have recovered, and ethical funds have been no exception; their quality growth bias has led to many of them performing well.

Ethical funds, some argue, may hold up particularly well during periods of volatility because of the way they choose their investments. Funds with an emphasis on sustainability are likely to have less exposure to certain cyclical sectors, such as mining, which may suffer more during a downturn.

Instead, sustainable funds tend to have a focus on long-term structural trends, which should continue to play out regardless of the economic environment. They may, for example, look for companies set to benefit from an ageing population or a growing use of renewable energy. Certainly, the figures appear to suggest that investors have been no worse off for holding an ethical fund during recent volatility.

The Stewart Investors Asia Pacific Sustainability (B0TY6V5) fund, for example, produced a return of 1.3% in the three months to 31 December. Meanwhile, the average Asia Pacific ex-Japan fund fell 6.7%. In the period from 1 October 2018 to 14 March 2019 the fund gained 2% while the average rival was down 1.1%.

The Trojan Ethical Income (BYMLFK3) fund dropped 5.3% in the final quarter of 2018, compared to an average loss of 10.9% among UK Equity Income funds. Between 1 October and 14 March it returned 2.1%, while the average fund in the sector was down 3.3%.


Hugh Ure, manager of the fund, says: ‘We are looking for sustainable companies with a long-term growth trajectory. Our screen excludes those typical “sin stock” areas such as tobacco, alcohol and gambling as well as fossil fuels.’

While many of those sectors are ones where investors have typically looked for reliable earnings and dividends – tobacco, in particular – Ure says regulators are starting to bite across these industries, which has hurt performance.

He adds: ‘In mining, for example, you see huge environmental costs, and incidents and disasters seem to plague the sector. These businesses are often highly cyclical and capital intensive too and it’s hard to have confidence over the long-term when those features are present.’

Top holdings in the fund include confectionary group Nestle, consumer goods firm Colgate Palmolive, and energy giant National Grid (NG.).

The Liontrust Sustainable Future Global Growth (3003006) fund has also produced a positive return since October 1, up 0.3% while the average Global fund is down 4.4%. In the final quarter of the year it fell 10.2% - significant, but still less than the sector average fall of 11.5%.

Simon Clements, co-manager of the fund, says: ‘We concentrate on areas we find attractive and think that if we pick good quality companies, managing ESG factors well, that are on the right side of big structural trends then it’s not surprising they will do well.’

He is particularly interested in themes such as innovation in healthcare, improving quality of life and the improving efficiency of resources and energy. Top holdings include Ecolab, which is involved in water, hygiene and energy technologies, healthcare giant Roche, and software company Autodesk.

Clements believes these sectors are, by their nature, quite defensive and he avoids more cyclical areas such as oil and mining.


For balance it is worth pointing out not all ethical funds have performed so strongly. The Standard Life UK Ethical (B6Y80X4) fund dropped 17.8% in the final quarter of the year compared to an average loss of 12.5% in the UK All Companies sector. Kames Global Sustainable Equity (0727451) dropped 16.1% in the final quarter compared to an average loss of 11.5% among other Global sector funds.

In the 266-strong UK All Companies sector none of the top five performing funds in the final quarter of 2018 were ethical. However, three of the top ten were, including Schroder Responsible Value UK Equity (BF783V3), Family Charities Ethical (0578262), and Royal London Sustainable Leader (B8HTH59). These were down 7.3%, 7.4% and 8.2% respectively over the period.

These three funds beat the sector average loss of 12.5% by some way as well as the FTSE All Share, which was down 10.25% over the period. Interestingly, just one of the worst 10 performing funds was an ethical fund. Fearns says: ‘Ethical funds have proved their investment worth and, if they meet an investor’s needs by avoiding certain sectors then all the better.’

Clements adds: ‘If you look at the performance of funds investing in this way over the past 10 years, it’s hard to come to the conclusion that you will be compromising your returns.’

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