Ethical managed funds fail to outperform regular funds

Just one-third of ethical managed investment funds have outperformed their non-ethical peers over the past 12 months as macroeconomic forces have seen areas typically shunned by ethical investors – such as energy – perform well.

However, the longer-term picture is better for ethical investors with specialist funds, at least for those that invest in Australian shares and those that invest in global shares, which are on even footing with more traditional funds.

Over the past five years to September 30, 2022, the typical sustainable Australian shares fund – either managed or exchange-traded fund (ETF) – produced an average annual compound return of 5.9 per cent compared to 6.02 per cent for the broader category of Australian share funds.

Ethical investors should not expect to do better than regular investors, figures from researcher Morningstar show Credit:Gabriele Charotte

Sustainable international share funds produced an average annual compound return of 6.87 per cent compared to 7 per cent for the broad category of global share funds listed on the Morningstar database.

This is a comparison of typical returns of the two groups – ethical and regular. There will be individual sustainable funds that outperform regular funds and vice versa.

Higher inflation and interest rates and the war in Ukraine have made the past 12 months a dismal one for investors, with almost all asset classes producing negative returns. Australian share prices are down more than 10 per cent for the 12 months to September 30, 2022 with significant differences in returns between sharemarket sectors.

While the energy sector of the Australian Stock Exchange is up about 18 per cent over the 12 months to September 30, the technology sector is down about 40 per cent. Sustainable funds typically shun the energy sector and favour tech.

Healthcare, another sector favoured by ethical funds, was down more than 10 per cent over the same period.

Erica Hall, Morningstar ESG analyst and lead author of the report, says the results show those who invest sustainably over the long term can invest in a way that aligns with their values, but not give up investment returns.

Morningstar’s report shows the Australian-listed fund manager Australian Ethical Investment is the largest specialist sustainable manager in Australia and New Zealand by funds under management, with a market share of 15 per cent.

Vanguard Investments Australia is next with a market share of 12 per cent, followed by Dimensional Australia with 11 per cent and BetaShares, the ETF-only provider, with 10 per cent.

Nearly all Australasian-domiciled funds that Morningstar has on its database employ some form of exclusion from investment in controversial areas.

A high number of funds exclude tobacco and “controversial” weapons – companies that derive a significant portion of revenue from nuclear weapons, land mines and cluster munitions.

Gambling, adult entertainment, and alcohol are among the next largest group of exclusions.

Investors have a limited choice of funds that exclude animal testing, fur or leather products, palm oil, or pesticides, the report says.

Morningstar’s Hall says while super funds are now required to regularly disclose most of their portfolio holdings, Australia remains out-of-step with much of the world in not requiring managed funds to disclose their portfolios; though many disclose voluntarily.

“Investors need disclosure of portfolio holdings if they are to make informed decisions about how they invest,” Hall says.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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