Why it could be time to consider buying an ‘ethical’ fund

Linda J. Dodson

All investors should consider funds that meet “ethical” and “green” credentials, experts said, after British savers put more into such portfolios in the past four months than they did in the previous five years.

Those resisting funds where managers consider a company’s ethical, environmental or social stance before investing could end up losing out on returns if the flow of money continued in such a fashion.

British savers invested £1.2bn with “ethical” fund managers between April and July this year, according to the Calastone Fund Flow Index, a measure of where people put their cash.

In July, some £362m was invested – a monthly record for the portfolios, labelled ESG in City parlance.

In contrast, £240m was pulled from funds that do not consider such criteria last month as the weight of opinion shifted towards backing managers that filter out companies with poor ethical records.

Edward Glyn of Calastone said: “ESG funds are exploding in popularity.”

Myron Jobson of fund shop interactive investor, added: “It is clear ethical investing is here to stay. It is growing at an exponential rate and investors who do not embrace it risk being left behind.”

Amid the sharp rise in popularity for ESG funds, investors turned their back on managers that invested in British companies. Some £377m was taken out in July with close to £1.1bn withdrawn in the past two months.

However, much of the disdain for British stocks was directed at funds that invest with a “value” style – where managers buy companies where share prices are depressed versus the company’s true worth.

This type of investing works better when savers are willing to take more of a chance on companies and absorb more risk.

However, the report from Calstone noted that low interest rates were inflating the value of future profits which was boosting funds that focused on “growth” stocks. This is where the company is expected to keep improving sales and profits and the share price follows this upwards.

Mr Glyn said: “Growth stock funds have more of their value tied up in ‘the future’ so their share prices benefit when interest rates are low.” 

Value stocks benefit less as share prices depends more on companies turning things around. They also tend to be better for dividends but given the cuts to payouts, investors have sold out.

“This explains the outflows from British stock funds and helps explain an increased surge in withdrawals from income funds,” he said.

Investors added £3.1bn to funds that invest globally in the past four months. This includes demand for ethical funds, which tend to be global.

Would you consider investing in an ethical fund? Tell us in the comments section below.

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