Ethical investing: You can help the world but any old green fund won't do

Principles and profits can mix as long as you choose the right manager, finds Julian Knight

Can you have it all? As National Ethical Investment Week starts, that's the question being asked by more and more consumers. Can their investment choices both bring them big returns and do the right thing by the planet and its people?

Looking at the raw statistics, ethical funds – which normally don't invest in arms, tobacco, mining or alcohol companies, as well as some drugs groups – have fared no worse than most non-ethical funds in the past couple of years. But they are hardly stand-out.

"There are plenty of decent-performing ethical funds," says Hugo Shaw from independent financial adviser (IFA) Bestinvest. But the very big hitters tend to be funds that pick from the whole universe of stocks."

However, Mark Hoskin, at IFA Holden & Partners contends that some ethical managers have performed better than others by being more selective. "Funds that simply buy what remains after taking out guns, mining and tobacco have been weighed down with telecoms and, in particular, banks. Managers who were more creative with the shares they could invest in, potentially avoiding banks, have done better," says Mr Hoskin. He cites the Standard Life ethical fund, Aegon's ethical corporate bond fund and F&C Stewardship as examples of investment vehicles that do their research and have avoided much of the credit crunch woe.

There are now more than 100 ethical funds available to UK investors and the sector is worth around £6bn. That seems a big number but it isn't in terms of the overall global investment market. "The universe of ethical funds is small. If people want to invest in the UK stock market through an ethical fund then they are well catered for, but outside these shores the choice is much more restricted," says Mr Shaw.

This can mean that, unless they put their principles on hold, investors will be denied the chance to put their money in a number of different economies – an approach that can spread risk as well as giving exposure to potentially high-growth areas.

"There are global funds such as Jupiter Ecology but you can't get access to specific sectors like Japan, the Far East or emerging markets. Ethical investing means research and there is precious little appetite to do this among overseas funds," says Mark Dampier from IFA Hargreaves Lansdown.

But that doesn't mean the big returns are out of reach. "Companies that deal with new technologies such as pollution controls and alternative energy are a massive growth area," says Mr Hoskin. "Funds that invest in these sectors should be on to a winner long-term."