How ethical funds let you invest with your conscience


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It really is possible to profit on your investments while helping the planet.

There are 42 green retail and wholesale managed funds on offer, as well as many offered by superannuation funds. They are called ethical, sustainable or socially responsible funds.

But before you jump on board, you need to choose them carefully and understand the manager's investment screening policy.

ethical funds

Many of the green funds exclude companies that are involved with tobacco, alcohol, gambling and weapons.

Quite a few have gone a step further, adding corporate governance screens to ensure that the companies invest in companies with sound workplace standards and environmental credentials.

Some funds management groups, such as the "dark green" Australian Ethical, seek out and invest in solar, geothermal and wind power companies, as well as recycling and bicycle companies.

But while these funds are doing good things, what are the returns like? It's a wildly mixed bag of results.

There are some with first-rate returns while others aren't so great. The standout performer is Hunter Hall's flagship fund, the ethically screened Hunter Hall Value Growth Trust.

It is the No. 1 performing managed fund over 15 years in Australia, returning a compound annual return of 15.1%, according to Morningstar.

The fund invests in global services, manufacturing and distribution businesses.

Overall the returns from the ethical and non-ethical funds have been broadly similar over longer-term time periods, Morningstar's communications manager, Phillip Gray, says.

Over the three years to March 31, 2011, the average return from the ethical options was 0.7%pa, while the average return from the mainstream funds was 0.56%pa.

Over a five-year period, the average return from the ethical options was 2.46%pa, and the average return from the mainstream options was 2.3%pa.

Expect to pay a premium for investing in ethical funds, largely because of the additional costs of screening companies.

Morningstar found that the current average ongoing fee for ethical funds is 1.67%pa, while the average for mainstream non-ethical funds is 1.53%pa. These averages are over retail and wholesale funds.

While there are lots of ethical funds, most local funds are pretty small in asset size.

The average size for ethical funds is $47.6 million, compared with $139 million for the others.

Thirty-three out of 42 ethical funds had less than $50 million in assets and 27 funds had less than $10 million.

Money invested in local ethical funds is concentrated in a small number of funds.

The eight largest - AMP Capital Sustainable Share, two Australian Ethical funds, two BT funds, Hunter Hall Australian Value, Perpetual Wholesale Ethical SRI and Vanguard Sustainability Leaders Australian Shares - account for $1.79 billion in assets of a total $1.99 billion invested. Hunter Hall VGT is excluded as it invests in global shares.

How to pick a green fund

Morningstar's communications manager, Phillip Gray, recommends you:

  • Read the fund's product disclosure statement very carefully, particularly the section on how the fund manager chooses stocks.
  • Check the management expense ratio.
  • Is there a performance fee and what hurdle is it based on?
  • Look at other product materials and website articles that the fund manager produces, which often talk about "stock stories" or the companies that the fund invests in, and why. The stories are important because Australian fund managers are not required to disclose on a regular basis their underlying portfolio stockholdings. Some funds have a best of sector approach. You might get a shock to see some green companies holding mining companies and other groups you didn't expect to find.
  • Check out the size of the fund's assets. Are the assets less than $10 million?

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.