The ethical funds outperforming their in-house peers

Four out of six ethical funds produced superiors returns compared to their in-house non-ethical funds during the recent market downturn

Four out of six ethical funds produced superiors returns compared to their in-house non-ethical funds during the recent market downturn, according to research from interactive investor (ii)

The platform compared returns from funds with an explicit environmental, social and corporate governance focus with their in-house equivalents since the start of the year, and found wide although returns are all in negative territory there is significant performance divergence.

For example, the Sarasin Responsible Global Equity Fund, run by Jeremy Thomas, has posted a loss of 14.9% since the start of the year to 24 March, while its ESG counterpart the Sarasin Thematic Global Equity Fund, also managed by Thomas, posted a loss of 19.2%, according to data from Morningstar supplied by ii.

Furthermore, when the performance period is extended to one, three and five years, the Responsible Global Equity mandate has outperformed again.

ii highlighted ESG funds from Rathbone, Stewart Investors, Unicorn, 7IM and Kames that also beat their in-house stablemates in terms of performance.

Fund YTD 1 Year 3 Years 5 Years 10 Years
Rathbone Ethical Bond I Acc -7.94 -1.10 2.47 3.51 6.99
Rathbone Strategic Bond Instl Acc -7.69 -4.08 0.28 2.27
Sarasin Responsible Global Equity I Acc -14.85 -0.20 5.09 6.93
Sarasin Thematic Global Equity A Acc -19.18 -6.72 1.82 4.24 5.83
Stewart Investors AsiaPac Sust B Acc GBP -14.55 -12.64 1.14 4.77 9.87
Stewart Investors AsiaPac Ldrs B Acc GBP -14.27 -12.11 -0.69 3.22 7.42
Unicorn UK Ethical Income B Acc -37.33 -29.40 -7.56
Unicorn UK Income B Inc -38.79 -28.43 -8.01 -2.56 8.29
7IM Sustainable Balance A Acc -11.36 -5.24 -0.24 1.30 3.83
7IM Balanced C Acc -13.44 -10.05 -2.88 -0.60 3.08
Kames Ethical Corporate Bond GBP A Acc -4.74 -0.14 1.06 2.15 4.88
Kames Sterling Corporate Bond GBP B Acc -6.04 -0.47 1.64 2.50 5.60

Source: Morningstar Direct as at 24 March 2020. Total (%) returns in GBP.

Teodor Dilov, fund analyst at ii, commented: “It would be a stretch to say that ethical funds have been resilient to the sharp downturns in global markets owing to the coronavirus, but our data shows that they have fared better. The most likely reason for this is because of what the ethical funds aren’t holding or holding very little of – namely oil and energy stocks.

“The energy sector has taken a battering in recent history with the Saudi-Russian standoff and the collapse of the OPEC plus talks earlier in the year, while the unprecedented state-enforced quarantines across the globe to combat the coronavirus outbreak has stymied economic activity and transport which has seen demand for oil plummet in an already oversupplied market.

“Analysis of explicitly ethical funds compared to close in-house siblings over the long term shows that the outperformance of the former is no fluke and adds to a growing body of evidences that you do not have to sacrifice returns to invest ethically.”

ESG Clarity contacted the groups in the table for comment.

Greg Mullins, head of sales at Rathbones, said: Over the long-term, ESG and ethical funds can perform well. However, investors risk comparing apples with pears. These funds are not mirror funds and play different roles within portfolios. 

“For example, the Rathbone Ethical Bond Fund is purely UK corporate-focused. On the other hand, the Rathbone Strategic Bond Fund invests in emerging markets and high yield, both of which have suffered going into the covid-19 period. Furthermore, that fund is also managed with a much lower duration and the Ethical fund has longer duration assets, which have performed well over the last year. Essentially, it boils down to investors knowing what they’re buying and crucially why they are buying it.” 

Stewart Investors declined to comment.

Jerry Thomas, head of global equities at Sarasin & Partners, commented: “As long-term investors we think it is right to consider performance over the long term and we are pleased that both the Sarasin Responsible Global Equity and the Sarasin Thematic Global Equity funds have comfortably outperformed their benchmark and peer groups over three years.

“Stewardship is embedded into our investment process, with every stock we hold in all of our strategies analysed from an ESG perspective. Over the recent few weeks, while both funds have performed well relative to the market, the divergence between the two has been more marked. Global Thematic was exposed to a group of stocks more heavily impacted by coronavirus, such as aircraft and aerospace manufacturers Airbus and United Technologies and the hotel chain Marriott. Both funds benefited from exposure to consumer non-cyclical stocks like Colgate and Costco. It is important to note that we don’t own oil stocks in either fund, which has been of great benefit. Ethical restrictions can lead to subtly different portfolios, and in a highly volatile period this is exacerbated.”


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...