Ethical funds outperform over short and long term periods
Analysis adds weight to the evidence that investing ethically or sustainably enhances returns rather th…
27th July 2020 11:50
by Kyle Caldwell from interactive investor
Analysis adds weight to the evidence that investing ethically or sustainably enhances returns rather than detracting from them.
Over the past couple of years there has been a notable increase in the number of investors looking to ensure their money is invested in a socially responsible fashion, with one of the key drivers being the shift in a previously deeply entrenched view that returns must be sacrificed in order to invest ethically or sustainably.
The latest research to add weight to the evidence that investing ethically or sustainably enhances returns rather than detracting from them is from Moneyfacts.
The firm examined the performance of ethical funds versus conventional non-ethical funds over a number of investment periods across the four Investment Association (IA) sectors that contain the most ethical funds (£ Corporate Bond, Global, Mixed Investment 40-85% Shares and UK All Companies).
The research found that ethical funds outperformed their conventional rivals in 19 out of the 25 scenarios analysed, across a range of investment periods.
| 1 yr | 3 yrs | 5 yrs | 10 yrs | 15 yrs | |
|---|---|---|---|---|---|
| All ethical funds | 4.3% | 18.4% | 41.4% | 134.4% | 202.4% |
| All non-ethical funds | -1.5% | 8.5% | 31.9% | 103.4% | 155.7% |
| IA sector performances | |||||
| Ethical £ Corporate Bond | 3.9% | 10% | 25.1% | 72.6% | 90.4% |
| Non-ethical £ Corporate Bond | 6.2% | 13.9% | 34.4% | 89.3% | 110.2% |
| Ethical Mixed Investment 40-85% | 8.4% | 32.9% | 61.3% | 187% | 248.1% |
| Non-ethical Mixed Investment 40-85% | -1.2% | 8% | 29.6% | 89.4% | 132.3% |
| Ethical Global | 14.9% | 50.8% | 80% | 193.6% | 239.6% |
| Non-ethical Global | 3% | 21.1% | 60.9% | 175.3% | 243.4% |
| Ethical UK All Companies | -8.2% | 3.9% | 21.6% | 121.8% | 205.6% |
| Non-ethical UK All Companies | -12.6% | -4.7% | 13.1% | 98.4% | 118% |
Source: Moneyfacts/Lipper Investment Management. % Growth as at 1 July 2020, total return, UK net, no initial charges.
The research shows ethical funds have proved particularly resilient during the coronavirus pandemic, with the average ethical fund producing growth of 4.3% over the last year, compared with an average loss of 1.5% from non-ethical funds. One factor at play is the fact that ethical funds have a lack of exposure to oil stocks, which plummeted due to the big drop in the oil price.
But it is over the longer term that the comparison between ethical and non-ethical funds becomes more meaningful. Over three years, the average ethical fund has produced growth of 18.4%, more than double the growth produced by the average non-ethical fund (8.5%), and they also hold the advantage over five years, with an average return of 41.4% compared with 31.9% from their conventional fund rivals.
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Over 10 and 15 years ethical funds have returned 134.4% and 202.4% respectively, higher than the comparative average non-ethical fund returns of 103.4% and 155.7%.
At present, funds classed as “responsible” by the Investment Association only have a 2.5% share of overall assets under management. However, the marketing teams of various fund management groups have latched on to the trend in an attempt to capitalise on anticipated increase in sales of environmental, social and governance (ESG)-focused investments.
Richard Eagling, head of pensions and investments at Moneyfacts, notes: “The momentum behind responsible investing has been steadily building for some time, but there is a sense that a raft of new initiatives, changing regulation and some truly impressive sustainable fund performances could prove a catalyst for further growth.
“The argument that investing responsibly must mean a trade-off between value and values or profits and principles has been increasingly debunked in recent years and the latest results of our ethical fund performance survey provide further clear evidence to refute it. Indeed, for any serious investor, sustainably minded or not, the strong performance of ethical funds is now impossible to ignore.”
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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