Naughty or nice?

I often wonder what drives people to invest ethically. Is it a conscious decision, or is it out of some kind of guilt? But more importantly, is it the right choice?

The ethical and socially responsible investing (SRI) fund space has gathered impetus in recent years with a number of launches. There are now greater choices, with 52 funds now available, having increased from 42 a decade earlier.*

Last year, Eiris, “the non-profit sustainable investment research firm”, revealed that investment in British green and ethical retail funds had reached £11.3 billion, with investor numbers increasing to more than 750,000.

The ethos behind the fund is that the ’industries of sin’ thrive “regardless of the economy as a whole”

However, might we be seeing a slow down in the appetite for ethical funds? During 2011, the Investment Management Association (IMA) reported £201 million in net retail sales for ethical funds, a £96m decrease on 2010. Outflows of £32m reported during the fourth quarter of the year – for the first time since the second quarter of 2009. Indeed, ethical funds under management fell by £200m, or 3%, to £6.7 billion over the course of the year from £6.9 billion in 2010.

The sector has suffered somewhat with news that both Henderson and Aviva have scrapped their SRI teams, but there is also welcome news that Vanguard is adding to its range with SRI products. Of course, news that the the National Employment Savings Trust (Nest) is offering an ethical option may see investment in the sector increase once the scheme comes into practice.

But what about performance?

I thought it’d be interesting to look at the US-domiciled Vice fund managed by Gerry Sullivan, a different product altogether. (FundTalk continues below)

It aims for long-term growth capital through investment in a concentrated portfolio of international stocks made up of gambling, defence, tobacco and alcohol companies.

The ethos behind the fund is that the ’industries of sin’ thrive “regardless of the economy as a whole”.

The Vice fund outperformed its S&P 500 index benchmark last year, it also performed better than some of its globally-focused British ethical counterparts.

What the chart shows: Total return, rebased in to GBP (N.B. The funds – Aberdeen Ethical World, Halifax Ethical, Skandia Ethical, St James’s Place Ethical – have been included for comparison purposes only as global ethical funds – the opposite of the Vice fund)

I’m no critic of ethical funds or SRI – I think the aims are laudable and that there are a number of good fund managers in the space. But it seems unlikely the sector will become a key component of investor portfolios for a while. Eiris research shows that just 38% of Britons with a financial product or service were interested in green or ethical financial products.

There is some reason to the Vice fund, particularly in times of volatility, investors may be more comforted by the fact that in times of economic turmoil, people continue to drink, smoke, gamble and governments continue to look for better ways to protect themselves.

*According to the IMA