The ethical meets the profitable

Funds with a moral approach are outperforming more conservative rivals. By Neil Baker

How do you feel about fascist dictators, pornographers and tobacco barons? Not the sort of people most of us would ask to dinner, but more acceptable to some if the money saved away in a pension or an investment fund helps to finance their activities.

An increasing number of people are deciding, however, that this is not acceptable after all. They are insisting that their money is invested in ways that fit closer with their personal morals.

Friends Provident launched the UK's first ethical investment fund in 1984 with a claim that investors who put their conscience before bottom- line gains would not necessarily have to accept a lower rate of return. Critics saw the move as a bid to cash in on a passing fad, but investors poured money into its Stewardship Trust fund.

Since then ethical investment has snowballed. Funds invested on an ethical basis increased 26 per cent last year, partly the result of investment returns, and there is now over pounds 1bn invested in ethical unit trust funds in the UK.

But the amount invested in ethical funds still only represents around 1 per cent of total unit trust investment. Some argue that there is still a general feeling among investors that they will have to accept lower returns because the people managing their funds have fewer investment options available.

But the figures speak for themselves. Over the last five years ethical funds have returned an average 67 per cent, compared with an average 68 per cent on regular UK growth funds.

Over the last 10 years, the Stewardship Fund, which accounts for over half of all the money invested in ethical unit trusts, has made a 179 per cent return, compared with the average 159 per cent on UK growth funds.

"People have got to realise that you do not have to necessarily suffer a lower performance," says Richard Hunter of the independent financial advisers Holden Meehan.

More money would go into ethical funds if investors were made aware that the alternative was available, adds Peter Webster, executive director of the Ethical Investment Research Service, which screens companies against investors' ethical criteria.

"There is a big gap between the number of people who say they are interested in ethical investment when they are asked and the number of people who are actually doing something about it," he says. "The problem is that many financial advisers do not ask clients whether they have any ethical concerns that might effect the suitability of some investments. We think they should."

With a traditional ethical investment your fund manager is banned from buying certain company shares.

The Friends Provident fund, for example, will not invest in companies whose activities are considered to degrade the environment.

That includes water pollution, any association with nuclear power, destruction of natural woodlands or manufacture of ozone-depleting chemicals. Companies which exploit animals, trade with oppressive regimes or operate in the arms business are also out.

These criteria can be extremely detailed - the ethical policy statement produced by the Jupiter Ecology Fund runs to 20 pages - and they vary. The Scottish Equitable Ethical Fund, for example, will not invest in companies that donate more than pounds 10,000 per annum to any political party, but it will invest in companies in the tobacco industry as long as the proceeds account for less than 10 per cent of their total business.

It is important that investors are aware of these policy differences, says EIRS, and invest in accordance with their own ethical principles, not someone else's.

Perhaps even more importantly, most ethical funds also have positive criteria which make them more likely to invest in a company. Friends Provident, for example, looks for companies which show community responsibility, a good product safety record and the right general approach to management of staff and their relationship with customers and the wider public.

The NPI Global Care Fund seeks out companies which offer products and services ranging from multimedia to vegetarian foods.

Most ethical funds offer monthly savings plans. According to Holden Meehan there are now 15 ethical funds which can be used in conjunction with a personal equity plan and 11 personal pension plans.

Ethical Tessas are available from the Co-Operative Bank and the Ecology and Triodos building societies.

EIRS offers an ethical screening service for investors with their own share portfolio. For a pounds 54 fee it will look at a portfolio of up to 20 UK equities and compare them to your stated ethical criteria. For a larger fee it will also monitor your portfolio and let you know of any changes that affect the ethical suitability of your investments. EIRS also produces a free list of independent financial advisers who specialise in ethical investment.

People without a share portfolio or any sort of investment can still put their finances on a more ethical footing, according to Mr Webster. A lot of people are involved in equity investment without realising it - through an insurance policy, for example, or maybe if they are in credit at the bank.

Holden Meehan free guide to ethical investment: 0171 404 6442. For a free list of 36 independent financial advisers across the UK specialising in ethical investment, call EIRS: 0171 735 1351.