Many studies have shown that Asset Allocation is the most important driver of long term returns. It is more important to pick your asset classes i.e. equity, bond, property than it is to pick your fund manager. Equally even if you choose a fund which excludes 50% of the stock market a fund manager is still quite capable of providing market returns over the long term. It is not true to say that avoiding any one sector will mean returns will be worse. At Holden & Partners our research suggests that over the long term ethical exclusions have minimal impact. There are numerous examples of when exclusions have helped performance eg (i) avoiding banks in 2007 (ii) avoiding BP in 2008 to name an obvious few.
2). Moral Stance
Are you someone who cares about the environment or social issues, simply investing in the markets encourage highly damaging practices which are all about short term financial return. Do you want to be part of testing on animals, or selling tobacco to vulnerable people in emerging markets (remember we have banned advertising of tobacco in the UK for ethical reasons). People are passionate about their politics, but it is money which makes the world go round. Why will you invest in anything, but when it comes to politics you have strong a social conscience?
This is all about the long term future of a business. Managers who look at sustainability issues seriously take into account business risks which many fund managers will miss. The fund manager has a wider perspective on risk, which should serve to improve performance in the long term. The world faces long term resource issues as a result of a greater number of people wanting a western style lifestyle, sustainability fund managers are much more conscious of the business risks this brings to companies and their supply chains.
4). Engagement with Corporates
Being responsible shareholders has been a big issue in the press when it comes to Directors pay recently. For too long shareholders have let the Directors of companies do what they want. Few investors realise that while they may abhor the way companies behave, they encourage this by not investing with fund managers who actually take owning shares seriously and engage with Directors on areas they deem unacceptable. One of the biggest criticisms which can be levelled at investors who simply buy tracker funds is that they are absolving themselves from any responsibility on how companies behave. Trackers may be low on cost, but it lets Directors do whatever they like. There is an alternative way and a balance to be struck in a portfolio.
5). Feel Good
Most of all having a bit of ethical in your investment portfolio should make you feel good, whether it is simply knowing that you are helping the ‘green’ economy to grow, or that you are in a small way helping others with the way you invest.
While it has the same feel good factor as giving to charity, investing ethically is not giving your money away, or giving up long term returns. Investing in an ethical way is simply recognising there are elements of capitalism you do not want to be part of and you should feel good about that.