How to keep your cash out of trouble

Clare Francis reports on the ethical funds that aim to mix profit with principles
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The Independent Online

The row over genetically modified crops and reprocessing of nuclear waste at Sellafield demonstrate our increasing awareness of the harm we inflict on our environment.

The row over genetically modified crops and reprocessing of nuclear waste at Sellafield demonstrate our increasing awareness of the harm we inflict on our environment.

This knowledge is encouraging a growing number of people to opt for ethical funds. These invest in companies with positive environmental policies, and avoid industries and countries whose activities are considered harmful.

Such sectors include tobacco, armaments, pollutants, child pornography and organo- phosphates, which are sprayed on crops.

There is likely to be a growth in the number of ethical investments from July, when new government regulations come into force making it compulsory for pension fund trustees to declare their position on ethical investments.

"Unethical" investments are likely to cause uproar; the news earlier this year that the Labour Party pension scheme invests in an animal research laboratory certainly did.

Even if you are ethically aware, it is still important for the majority of investors to get a good return on their money.

"The awareness of ethical funds is mushrooming," says David Vincent, principal of Sheffield-based independent financial adviser (IFA) Ethical Investments.

"There is a general acceptance that we should have more responsibility for the societies we live in, and there has been a move away from the traditional view that ethical funds are quirky and radical."

Ethical funds tend to be categorised by their shade of "green". Dark green funds, such as the Clerical Medical Evergreen Fund or Commercial Union's Evergreen Trust, tend to be much higher risk than lighter green funds. This relates to the strict criteria that have to be met for the company to pass the screening process. With dark green funds, whole sectors of the market are excluded which may have a direct effect on performance.

"Those who feel very strongly about certain areas and issues may well be willing to sacrifice performance gains because they feel that they have invested ethically," says Amanda Davidson, director of IFA Holden Meehan.

"However, light green funds tend to be less volatile and produce better returns owing to the fact that they include all sectors and opt for the best company within the remit."

Murray Johnstone's Ethical World Fund is a light green fund. Launched last June, it already has £13.4m in funds under management, consistently achieving top quartile performance.

All the companies in the portfolio are ethically screened to check their policy towards the environment, workplace issues, human rights, weapons manufacturing, product safety and impact. The last of these categories includes alcohol and tobacco products, pornography and gambling, animal welfare and community involvement.

Companies which won't pass the screening process are those which fail to comply with local environmental regulations or engage in child labour or deny basic human rights. The Murray Johnstone Fund has a global portfolio, although certain countries are excluded for political or human rights reasons, such as Indonesia, Malaysia and Burma. However, the fund has exposure to some of the big players in the stock market at the moment, such as Cisco Systems.

This illustrates that, contrary to widespread belief, an ethical fund does not necessarily deny you exposure to the best-performing shares. Those who want to invest in technology stocks can still do so, but these funds tend to have a wider portfolio, which reduces the volatility (both upside and downside) in comparison to a pure technology fund.

Other low- or medium-risk funds include Scottish Equitable Ethical Care Equity Trust, Henderson Ethical Fund, NPI Global Care Trust and Standard Life UK Ethical Fund.

For those seeking a stricter fund but not wanting to take too many chances with their money, medium-green funds include Scottish Life's Ethical Fund, Skandia Ethical Selection, Credit Suisse Fellowship Fund and the Equitable Ethical Trust.

Despite their increase in popularity, the amount of money invested in ethical funds still only accounts for 1 per cent of the market. However, the number of funds available is rising.

Holden Meehan's Ms Davidson predicts that it will become the norm for management houses to have an ethical fund.

But Lorna Hutchison, investment marketing manager at Scottish Life, says part of the reason why relatively few people invest in ethical funds is because financial advisers don't keep their clients informed.

"A lot of our mainstream IFAs have steered clear of the ethical market because they regard it as a minefield and don't even ask a client about their ethical views," she says.

Contacts: Ethical Investments, 0114-229 5959; Holden Meehan, 0207-692 1700; Scottish Life, 0131-456 7477.