Ethical investors struggling in volatile markets
The latest survey by Investment Life & Pensions Moneyfacts has revealed that ethical investors looking to profit from their principles have been amongst those hardest hit by the volatile stock market conditions of the past 12 months.
The survey examined the performance of ethical funds, conventional non-ethical funds, index trackers and the FTSE 100 over a number of investment periods (see table below). It found that despite enjoying strong investment returns in recent years, the average ethical fund is now lagging behind the performance posted by traditional funds over a one, five and 10 year period.
Ethical funds versus non-ethical unit trusts (percentage growth)
|
1 year |
3 years |
5 years |
10 years |
Ethical Funds |
-9.19% |
16.03% |
47.69% |
48.60% |
Non-Ethical Funds |
-5.75% |
15.69% |
50.08% |
90.43% |
Index-trackers |
-8.56% |
15.45% |
54.62% |
44.13% |
FTSE 100 |
-10.58% |
6.41% |
35.46% |
7.38% |
Source: Lipper Hindsight. % Growth as at 1 September 2008, total return, UK net, no initial charges
Although the ongoing market volatility has created a difficult environment for most investments, ethical funds have suffered particularly badly. The average ethical fund has fallen 9.1% over the last year compared with a much smaller drop of 5.7% for the average non-ethical fund. This represents a remarkable turnaround on the situation just 12 months ago, when the average ethical fund (13%) had outperformed the average non-ethical fund (9.7%) by 3.3% over a one year period.
Only seven of the 57 ethical funds surveyed recorded positive growth over the last 12 months, with the best performance posted by Henderson Industries of the Future (3.2%). Most of the top performing ethical funds over one year are located within the IMA Global Growth sector.
On the other hand funds with a predominantly UK focus have fared far less favourably, including some of the most popular ethical/SRI funds. For instance, F&C Stewardship Growth, Prudential Ethical Trust and Scottish Widows Environmental Investor have all fallen by 20% over the last year, AXA Ethical is down 24% whilst Old Mutual Ethical has plummeted 25%. However, none of these come close to matching the disappointing performance endured by Sovereign Ethical, which has posted losses of 33%.
Richard Eagling, Editor of Investment Life & Pensions Moneyfacts, said: “Missing out on the strong performance of sectors such as mining and oil and gas is not the only reason behind the poor recent returns posted by ethical funds. The fact that ethical funds tend to have a stronger bias towards smaller and medium sized companies has also had a significant impact, whilst the downturn in the banking sector has further impeded performance, since many ethical and SRI funds have been overweight in financials.”
Ethical funds may be lagging over the short term but over the longer term there is still evidence to suggest that investors can profit from their principles. Significantly, over three years, ethical funds (16%) have actually outperformed non-ethical funds (15.6%). They have also surpassed the returns on offer from both the FTSE 100 (6.4%) and index trackers (15.4%). Although after five years ethical funds trail their conventional counterparts, the gap is less than 3%.
As Richard Eagling confirmed: “In many respects the last 12 months have been a testing time for ethical funds. Falling markets have seen their performance falter more than their mainstream rivals, although given that they have less opportunity to invest in defensive stocks such as oil and tobacco, this should come as little surprise. The latest ethical returns may be slightly disappointing but there are still plenty of reasons to remain confident that these represent no more than a temporary blip.”
Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.
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