Socially responsible investing is back

Ethical, socially responsible, sustainable…. call it what you like, however investing with a conscience has moved to centre stage since the Global Financial Crisis (GFC) as returns of the top responsible funds have outpaced the market.

Australia’s biggest socially responsible fund, Perpetual’s Wholesale Ethical Fund was the best performing Australian share fund of 2012, with a return of almost 40 per cent compared with an overall sharemarket return of 19.7 per cent.

This was no flash in the pan. As the table below shows, socially responsible share funds from Perpetual and Australian Ethical have outperformed the market for the past 10 years.

Top Performing Responsible Share Funds (as at Jan 31, 2013)

Name Start Fee %pa Net Assets $m Return 1yr %pa Return3yr %pa Return 5yr %pa Return 10yr %pa
Alphinity WS Socially Responsible Share 30/6/00 1.15 14.34 23.93 7.19 -0.77 6.83
AMP Capital Sustainable Share 21/2/01 0.72 214.54 20.19 5.07 0.21 9.70
Aust. Ethical Large Companies 1/9/97 2.33 69.90 21.17 1.93 -1.32 5.99
Aust. Ethical Smaller Companies 19/9/94 2.28 203.47 21.28 5.12 4.66 9.98
Perpetual Wholesale Ethical SRI 3/5/02 1.18 394.21 38.11 14.25 8.40 14.02
Ethical fund average 1.71 33.46 14.84 4.63 0.08 8.57
“Non-ethical” average 1.41 119.31 19.02 5.71 1.27 9.38
S&P/ASX200 Accumulation Index 19.57 6.71 1.49 9.76

Source: Morningstar

Not all socially responsible funds are market beaters. The table also shows that the average responsible fund returned 14.8 per cent in the year to January 31, behind the average for ‘non-ethical’ funds of 19.0 per cent.

The lesson here is that investors who want ethics and returns need to dig below the surface to see exactly what they are buying.

Research counts

Fund managers use quite different approaches to stock selection. Something called negative screening is used to weed out companies involved in anything related to armaments, tobacco, gambling, uranium, old growth logging, poor mining practices or questionable environment, social and governance (ESG) practices. If you are thinking socially responsible investing might just bet a passing fad, remember Australia’s Future Fund currently invests $82 billion dollars on behalf of the Australian Government (as of March 2013). That is a fair bit of investment clout in anyone’s books, including Gina Rinehart or James Packer! And guess what, the Future Fund decided in the last month to completely ban tobacco investments.

The bottom line is that when the community is against a certain product or service (…be it tobacco, old growth logging or whatever), shareholder returns in those areas can suffer. Look at the recent demise of Gunn’s, once Australia’s largest timber company. Gunn’s entered voluntary liquidation last year after a prolonged campaign by green groups against its proposed pulp mill project in Tasmania. While the company also faced external economic challenges, concerns about its environmental sustainability helped put the nail in the company’s coffin. Eventually it lost the support of its major shareholders, bankers and the wider community.

The future

One sure thing is that forecasting the future is as reliable as forecasting the weather…it’s tough! Investment dynamics are constantly changing and the leading minds are not always in agreement. At Monarch Institute, we can promise you one thing. Studying a investments with us via the Advanced Diploma of Paraplanning, you will be granted access to the leading investment minds who are involved in constantly updating our course materials. These individuals take into account the big investment changes, and also the more subtle changes occurring within the investment landscape. Dr John Shannon, Monarch Institute’s in-house Economist with over 25 years experience, has provided much of the data and information required for April’s blog.

We’re no longer accepting enrolments into the Diploma of Financial Planning. However, you can now enrol in our brand new, award-winning course that covers all RG146 knowledge areas, the Advanced Diploma of Paraplanning.

And before we sign off, it is important to disclaim everything we have just said….

Disclaimer: Past performance is not a guarantee of future performance. This is opinion commentary only, and this information does not constitute financial advice. Before investing you should always seek personal financial advice from a licensed financial planner.

For more information on studying with Monarch Institute contact one of our friendly course consultants on 1300 738 555.