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Ethical investing compatible with exceptional long-term returns

29 October 2020

Ethical investing is “perfectly compatible” with exceptional long-term returns, says AJ Bell, after research showed that UK ethical funds have outperformed their non-ethical counterparts over the past decade.

The investment specialist analysed funds with a 10-year performance record in the IA UK All Companies and IA Global sectors, accounting for around £190 billion of assets. It found that the average UK All Companies ethical fund outperformed the FTSE All Share by 40% over the last 10 years and the average non-ethical fund by 23%.

The top performing ethical fund over the 10-year period was Royal London Sustainable Leaders trust, which returned 196% compared to 64% from the FTSE All Share, while over half of UK ethical funds sit in the top quartile of performance for UK All Companies funds overall.

AJ Bell said the strong performance was a combination of luck as well as judgement, with responsible funds tending to invest less in blue chips, which have underperformed compared to smaller companies.

However, its analysis found that UK ethical funds lagged behind global ethical funds which provided a total return of 150.1% since 2010 compared to 103.8%. Both underperformed compared to the MSCI World Index, which itself has been driven upwards by a strong US market.

Laith Khalaf, financial analyst, AJ Bell, said: “UK ethical funds have done particularly well compared to the market. As ever the devil is in the detail and some funds have let the side down, in particular some of the older UK tracker funds where returns have been eroded by high charges.

“On average global ethical funds have done even better in the last ten years than their UK counterparts. But they have fallen behind the MSCI World Index which has been driven relentlessly upwards by the remarkable performance of the US stock market.

On the one hand then, global ethical investors might feel short-changed, but the delivery of high absolute returns while meeting an ethical investment policy should quell any major concerns. The global sector is also heterogenous in its make-up and some ethical funds are pursuing specific investment themes like clean water and urbanisation, which make comparison with the index and the sector less meaningful.”

Looking forward, AJ Bell says ethical funds are on track to achieve a record breaking year in terms of retail fund sales, following a bumper 2019.

According to Investment Association data, £3,959 million has been invested so far this year compared to £3,208 million last year. Currently, less than 3% of all Investment Association retail assets sit in ethical funds which AJ Bell said leaves “plenty of scope for further growth.”

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