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Green piece

Chris Salih says ethical funds have become the latest attraction but asks if investors are willing to go green and give up the opportunity to make cash.

Despite having a presence in the market for a number of years, it appears that the latest global drive to “go green” has finally pushed ethical funds into the limelight.

An ethical fund has topped the UK all companies over 12 months for the first time in the shape of the CIS sustainable leaders fund and fund managers have been circling the latest attraction and launching new vehicles to attract investors.

Those who did not think investing in environmentally friendly stocks has become all the rage need look no further than Marks & Spencer, which has posters in its stores promoting its ethical fund.

But is awareness of global warming and dwindling fossil fuels enough for people to sacrifice the opportunity to make cash? Societe Generale executive director Sisou Duyninh says the growth of ethical investing is a natural progression in the market and predicts it will continue to grow thanks to three factors – the price of oil, politics and technological advancements.

He says: “Despite fluctuations in the oil price in the long term, it will only go up. As a resource, it is becoming more and more scarce while growth in emerging economies such as China means demand will continue to rise drastically.”

Duyninh refers to President Bush’s state of the union address in January, where he said the need to move to alternative energy is second only to the war on terror while awareness of climate change has grown thanks to unprecedented carbon dioxide emissions.

Duyninh says advances in technology mean that alternative sources are not as expensive as they once were. He says: “Soon, people will have to search for oil almost exclusively in the ocean. Meanwhile, technology is rapidly improving, making wind and solar energy a more realistic substitute. It is a logical transformation.”

According to a survey carried out for F&C Investments, there is considerable public demand for green investments. Of the 2,193 people surveyed, 87 per cent said they felt companies should be taking social, environmental and ethical issues seriously. Forty-eight per cent said they would be interested in investing ethically and a third said they would be prepared to do so even if it meant a slightly lower return. Only 17 per cent ruled it out.

But many investors are still concerned that ethical investing not only limits their choice but also exposes them to higher risk.

F&C fund manager Ted Scott, who runs the Stewardship income fund, says that added risk is nothing more than a myth.

He says: “Over 20 years ago, when the first ethical funds were being launched onto the UK marketplace, many people thought their ethical screening process meant investors would have to sacrifice returns and take on more risk because of the funds’ natural bias towards small and medium-sized companies. Some investors labelled the stewardship funds the Brazil funds because you would have to be nuts to invest in them.”

But Scott says public attitudes towards ethical investing is changing as strong medium and long-term performance numbers prove that ethical funds can match and even beat their unconstrained competitors.

Many are excited by the growth in ethical funds but with new vehicles appearing everywhere, one problem they face is that they are still correlated to what the rest of the market is doing. A case in point is their performance in 2005, which lagged behind the rest of the market thanks to an inability to own the metal and mining stocks that led the market rally.

BestInvest head of communications Justin Modray says: “While people do have climate concerns, most companies will always value their wallet over their conscience. Over the longer term, being constrained will always cause concerns as there will be times when fund managers miss an upturn in the market.”

Modray says he doubts whether there will ever be a fund management group with a retail range dictated by the ideals of socially responsible investing. As for IFAs, he says they will always be fairly pessimistic towards ethical investing, looking at what they could lose as opposed to what they can gain. “What good are they when tobacco and mining sectors or on the up?” he says.

Fidelity head of multi-manager Simon Ellis says: “We look at ethical funds in the same way as any other funds. If it has good alpha, we will consider it. The question they face is whether there is enough alpha and if the vehicles will produce consistently. At the moment, we have none on our short list.”

Ellis says the real battle that ethical funds face is consistency, particularly as they battle it out against the large caps.


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