Giving ethical funds the green light


Figures from Lipper suggest ethical equity funds under-deliver against their sectors.

Figures from Lipper suggest ethical equity funds under-deliver against their sectors.

Sales of equity mutual funds that positively and negatively screen for holdings has continued pretty much consistently over the past decade despite the credit crunch, financial crisis and global recession, figures from Lipper show.

The implication is that, while investors in mutual funds are destined to repeat the mistakes of stampeding in and out of sectors according to the latest fashion, those with a focus on ethical investing remain consistent in their approach.

However, Lipper's figures also show that for certain equity sectors at least, ethical funds have underperformed against peers over the long term (see equity charts, pages 15 and 16).

The response from those engaged in ethical investments is robust, as is the championing of alternatives (see boxes, pages 15 and 16).

RCM, the global asset management business of Allianz Global Investors, said in a recent Sustainability White Paper that applying environmental, social, governance (ESG) factors to a portfolio did not have a negative impact on performance.

In its abstract, the paper stated: "The perception that corporate efforts to become more sustainable reduce the value of companies and of investors' portfolios is entrenched, but is based on largely unfounded assumptions and only thin academic evidence.

It is imperative to challenge this perception empirically, because it is holding back the evolution of the nascent sustainability sector and of the wider corporate sector."

screened products

The paper relied mainly on data from MSCI ESG Research for the period December 2005 to September 2010, and concluded that investors could have added 1.6% a year by allocating to portfolios investing in companies with above average ESG ratings.

Jason Hollands is director head of corporate affairs at F&C Asset ­Management, which has run its ­Stewardship range of ethical funds since the mid-1980s.

He says that, generally speaking, more traditionally screened products will exhibit bigger deviations from their relevant index, resulting in ­significant under- and overperformance from their benchmark indices during specific periods.

One reason for the deviation is that the screening often results in the exclusion of multi-nationals, on the basis that a subsidiary may be engaged in activities that do not meet the criteria.

With large caps screened out, there is a remaining bias towards small-and medium-sized firms.

These tend to perform worse in challenging ­markets, Hollands says.

Plus, with defensive stocks such as tobacco companies screened out the portfolio may deviate still further from the index.

In contrast, such portfolios may outperform in rising markets. ­Hollands stresses that these are ­generalisations because of the nature of ethical investing, which covers a range of products with varying degrees of strictness and screening criteria.



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