Ethical investing is not a new concept – it’s been around since the 1980s - so are investors starting to prioritise a company’s ethical credentials before making an investment? Asks Mark Tomlinson of King and Shaxson.
Research by the Investment Management Association would suggest not. Net retail sales of ethical funds were £62m in January 2015 compared to UK Equity Income net retail sales of £280m. Ethical funds under management reached £10bn at the end of January - this represents a 1.2% share of industry funds under management, and this market share has remained level for 10 years. However when we take a closer look at the high street we can easily find examples of companies who are actively promoting their socially responsible stance to trading. Recently we have seen support for UK farmers to be fairly remunerated for their produce, which has led to many supermarkets changing their policies. This in part was driven by the consumer and their conscience.
When consumers are provided with choice it seems they are willing to make the decision to shop with their conscience. I would suggest that more would be happy to do the same with their savings and investment portfolios if they are provided with the necessary information to make an informed choice.
While ethical investing is not a new concept – as with each client – each ethical or socially responsible fund is different and each fund will have their own definition as to what ‘ethical’ is. They will apply their own unique criteria regarding screening, positive, negative and best of class, thus adding to the complexity of selecting the right fund(s) for each client.
Once the portfolio has been designed the client will then need to be fully aware that their individual portfolio will react differently from the main indices – for example a dark green fund will have significantly different investment return to that of the FTSE. The reasons are obvious to professional adviser as they know and understand that oil related companies relate to approximately 14% of the FTSE and miners and other commodities near to 10%. Both these sectors have added significant volatility over the last six months – sectors we have avoided based upon investment principles – and I am pleased to say that our portfolios have avoided the subsequent investment drag. Again this provides evidence ethical doesn’t equal poor performance or increased investment risk.
Despite the restrictions placed on what can be invested in, as an active ethical investment manager we still believe there are positive returns to be made. Within our model portfolios we currently invest in the Kames Ethical Equity fund run by Audrey Ryan. The investment objective of this fund is to be first quartile over a rolling 36-month period. Just because this fund is ethical doesn’t mean that performance is compromised, quite the contrary. If we look at the top ten holdings within this fund you discover they are mainstream well-known, well run companies: Vodafone, Lloyds Banking, ITV, Prudential, Severn Trent and Aviva to highlight a few. First and foremost these companies pass robust investment analysis; they then achieve the necessary ethical criteria.
As with most events in life we need to challenge perceptions, ethical doesn’t mean principles are replaced by performance, they now can come hand in hand.
Please remember that the value of investments and the income arising from them may fall as well as rise and is not guaranteed. You may not get back the amount invested, especially in the early years. The comments above may not apply to all portfolios as other considerations may have applied when considering this investment for your portfolio.