Ethical funds might have just stolen a march on the rest of the industry, overtaking their non-ethical competitors in the popularity stakes, according to the Share Centre.
“In this particular case”, says John Ditchfield, of Barchester Green, “the sell off hit commodities and energy stocks especially hard and ethical funds are often underweight in these are i.e. they will hold less mining and oil investments.”
The FT suggests the shift was because ethical funds often have a UK focus, which would have shielded them from most of the recent volatility.
But generally speaking, evidence suggests that ethical funds in the UK actually tend to be more volatile than average, because of their exposure to mid-sized companies.
There was some evidence of a flight to ethical alternatives in the aftermath of the financial crisis of 2008. At the time, this was attributed to the appeal of greater corporate governance among ethical funds and a perception that this helped to protect them from market gyrations.
Ditchfield has another suggestion: “It’s interesting to note that ethical funds may at certain times perform in a way which is different to the broader market which suggests they are an effective diversifier for client portfolios i.e. they help clients manage risk by giving them something different within their portfolios.”
So rather than it being a flight from volatility, it could be a flight to greater diversity, with investors taking a cautious view to shield themselves from the en masse highs and lows of the rest of the market.
These three funds in particular have outperformed the FTSE All Share over summer, with L&G Ethical the top performer, followed by Jupiter Ecology.
Below is the cumulative performance of the three funds over 5 years, compared to the FTSE All Share and the FTSE Eurotop 300 Oil & Gas.
The Axa Ethical and the L&G Ethical funds appear to have weathered the last year of oil price volatility rather better than the FTSE All Share. See the table below, from Hargreaves Lansdown.
|Investment||3 months||6 months||1 year||3 years||5 years|
|Jupiter Ecology I Acc||-8.63%||-5.38%||-1.3%||32.44%||44.2%|
|FTSE All Share||-8.33%||-4.64%||-3.06%||24.44%||41.92%|
|AXA Ethical Distribution Z Acc||-2.82%||1.79%||7.64%||29.6%||48%|
|FTSE Eurotop 300 Oil & Gas||-15.42%||-10.66%||-27.92%||-18.4%||-1.97%|
|L&G Ethical I Acc||-6.03%||-0.07%||7.18%||48.21%||70.56%|
It is important to note that not all ethical funds exclude oil and gas. Indeed, it is difficult to exclude the sector completely.
Jupiter Ecology is 4.3 per cent invested in oil and gas according to this fact sheet, Axa Ethical Distribution does not hold any oil and gas and is a very UK-focused fund, while 4.88 per cent of L&G Ethical is invested in BHP Biliton, the multinational mining and petroleum giant.
But generally speaking, with ethical funds typically lighter than average in oil and gas, there is reason to hope they would fare better in times of oil price stress.
Our money’s on the tortoise.