Cheaper ethical funds

Cheaper ethical investment funds and a better benchmark for measuring their performance could shortly be on the cards for UK investors.

River & Mercantile, a specialist investment manager, is looking to set up a stock market index of ethically screened shares and then sell funds that track the performance of that index.

The idea is established in the US but would be new to the UK. The move would also provide evidence as to whether investing by ethical criteria has a "cost" in terms of reduced performance.

R&M sees a potential market among charities - many of which screen the shares they invest in for involvement in unsavoury activities such as weapons manufacture or pornography - as well as among small savers. Index- tracking funds can be managed more cheaply than portfolios that try to beat the market - the existing method in ethical investment.

A specialist ethical benchmark would also provide investors with a measure to gauge the ability of ethical fund managers who try to beat the market but frequently do not. Index-funds are a way of reducing the risks of underperformance. Those without ethical restrictions have already proved popular in the UK. In the private investor market, for example, Richard Branson's Virgin Direct financial services company has been successful selling an index-tracking personal equity plan.

Jonathan Harbottle, marketing manager at R&M, said: "The aim is to offer the benefits of indexation without the drawbacks of investing in unethical stocks."

R&M says it plans to decide the constituents of its ethical index with Eiris, the Ethical Investment Research Service.

It is also talking to investment banks.