The idea investors have to sacrifice returns for ethical considerations is a myth, according to Jewson Associates.
In a report on ethical (SRI) funds for Oxford University, the investment consultancy studied UK registered funds – particularly UK equity – over a ten year period to 2008.
The firm found there was no “permanent or inherent cost” in taking an ethical stance, but there was a small price to pay in terms of slightly higher volatility or risk.
It also found a close correlation between ethical funds and small and mid cap offerings in terms of performance and volatility.
“SRI funds have sometimes laboured under the misconception that investors sacrifice returns if they choose to invest in funds with an ethical or SRI policy, but our research suggests this is not the case over the long term,” Jewson Associates chief executive Edward Jewson says.
“What we have found, however, is that returns from ethical funds in the UK are to some extent correlated with the performance of small and mid cap stocks, and are therefore likely to be slightly more volatile.”
Ecclesiastical Investment Management SRI analyst, Ketan Patel, says the idea of having to ‘sacrifice returns’ has been around since the first screened fund was launched.
“In certain cycles there is no doubt screened funds can outperform,” he says.
“There definitely has been a shift. What we are now seeing it’s the new generation who are realising that you can make money and do good."
Patel agrees ethical and small/mid caps funds are closely correlated, because of the stocks they hold.
“It’s only natural that screened funds will be made up of the small and mid cap names,” he says.
“Large caps are mainly excluded; these are the names including as BP, Shell, aerospace and alcohol. So you can pretty much count out 40% of the FTSE 100 there.
“Like with everything it goes in cycles. In the small/mid cap bull market of 2003 to 2007 screened funds did very well. But as the markets took a turn toward large cap these types of funds will struggle."
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