Why 'moral' investing is a broad church
Sam Dunn asks how much profit you will sacrifice on the altar of an ethical stance
Sunday 25 April 2004
Belief in God is good for your wealth as well as your soul. So says the Ave Maria fund, a US investment firm whose morally conservative stance for its savers is to shun any company that it says breaks the Catholic Church's core teachings.
Its views are resolutely right wing. It screens out publicly listed US companies that offer work benefits to non-married partners (whether same or opposite sex), support the contraception industry or have commercial links to abortion or pornography.
This stance has served it well so far, says Ave Maria investment manager Bob Schwartz. "People coming to our funds are looking for the moral high ground, to have their faith and investments on the same level. In the past three years, our fund has risen by 35 per cent, compared with a 5 per cent fall in the S&P 500 [a US stock market index]."
The fund has some 2,500 investors - not just Catholics. Two of its top stocks this January were Harley-Davidson, the Hells Angels' favourite motorcycle-maker, and oil giant Exxon-Mobil. It has blacklisted more than 400 companies, including Sears Roebuck, the department store, after it began offering staff partner benefits to unmarried employees last year.
Plenty of other funds are taking a moral stance - or not, as the case may be. At one end of the spectrum are those that back "green" companies engaged in protecting the environment, and at the other are those that invest in "sin" sectors such as tobacco, alcohol and gambling.
One successful "vice" fund was launched in the US in 2002 and prompted Willis Owen, a UK investment management company, to announce plans for a similar venture last year.
Although its launch has been postponed, spokeswoman Kerry Nelson says shares in such a fund will always be in demand "regardless of any economic climate" because of the products' addictive nature. For example, tobacco stocks such as BAT and Imperial have long boosted investment funds thanks to robust performance throughout stock market volatility.
This highlights a dilemma for ethical investors: do your beliefs mean you have to sacrifice performance?
"Green" ethical funds in the UK - those avoiding companies that harm the environment or damage people's health - have been dogged by accusations of weak performance. As in all sectors, you will find funds that "shoot the lights out" and others that crawl along the floor, but there is a particular price to pay for avoiding financially successful stocks on moral grounds, says Meera Patel, a senior analyst at independent financial adviser (IFA) Hargreaves Lansdown.
"Ethical investors have to be prepared for performance that isn't going to match investing across the whole of the market," she warns. "You limit yourself because 'being green' does sieve out potentially good-performing companies. Being green and ecologically minded can be more costly for you."
The performance of ethical funds in the UK is "uninspiring" she says, with one exception; Isis Stewardship.
Overall, though, figures from S&P reveal that ethical and ecological funds have not been woeful underachievers. Over the three years ending 19 April 2004, the average sector fund shrank by 17.3 per cent compared with a smaller 13.3 per cent slump in the UK All Companies index and 17.1 per cent in the Far East excluding Japan.
Over the past year, the average ethical fund is up 18.3 per cent, against 37 per cent for the Far East ex Japan and 22.9 per cent in the UK All Companies index.
Scott McAusland, a spokesman for the Ethical Investment Research Service (Eiris), says: "We are happy there are funds that can provide decent returns, although during the last couple of years, for example, military stocks have done really well and most ethical funds won't touch them. But [performance] is not the main reason for people to [buy into these funds]; they do so for their principles."
With some £4.2bn currently under management in ethical UK funds - the highest level since early 2001 - Eiris says moral investing is growing in popularity. Its view is echoed by Amanda Davidson, a partner at IFA Charcol Holden Meehan: "If your principles are important to you, you should invest in just ethical funds. There is enough choice out there."
Alternatively, she says, "if you are not that bothered, just go for the 'all out' [performance] funds and give the cheque to charity."
Ms Davidson concedes that the limited range of companies means "you may miss out on some performance", but she stresses that it can work both ways. For example, your returns might have rocketed if an ethical fund manager had been an early investor in wind power companies, which have benefited from the Government's commitment to clean energy.
If you are interested in getting some ethical, or even "unethical", investments into your portfolio, the websites listed below are a good place to start. Alternatively, contact an IFA, who will be able to explain the difference between the funds available. These range from "dark green" - investing in companies that actively pursue environmentally friendly policies - to "light green" - businesses that simply avoid damaging the environment.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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