Ethical investing is an investment strategy that involves selecting stocks, funds and other investments based on your personal values and ethical considerations. Besides profiting from their investments, ethical investors look to use their money in ways that will create positive change in the world.
Interest in this kind of investing has grown in recent years. One of the main drivers is a shift in the widely held belief that investing ethically requires sacrificing returns.
However, in the last year, research has shown that ethical funds have fallen behind non-ethical funds performance-wise. So what does this mean for ethical investors? Is there any cause for alarm?
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Ethical vs non-ethical investing: what does research show?
According to a new study by Moneyfacts, non-ethical funds have outperformed their ethical rivals in the past year.
Stats show that ethical funds returned an average of 3.97% in the last 12 months. Non-ethical funds returned 6.06%.
It’s the first time that ethical funds have trailed their non-ethical rivals in a while. Indeed, the former has come out on top in the previous two Moneyfacts reports.
In a report released in July 2020, for example, the average ethical fund was found to have returned 4.3% over the previous year, compared with an average 1.5% loss from non-ethical funds.
And in another report released in July 2021, ethical funds were found to have returned 19.87% on average over the previous 12 months, compared to the non-ethical fund return of 17.89%.
A temporary blip or an indication of the future?
Rachel Springall, finance expert at Moneyfacts, suggests that this could just be a temporary blip. She says ethical funds have outperformed non-ethical competitors over every other time scale.
She explains, “In fact, over three-, five-, 10- and 15-year periods, ethical funds outperformed by a significant margin. This lends weight to the argument, backed by a number of studies, that sustainable companies perform better.”
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How should ethical investors proceed?
While the overall performance of ethical funds last year was lower than that of non-ethical funds, there is one piece of positive news for ethical investors. Out of 26 ethical sectors, 19 made a positive return last year, compared with 18 non-ethical sectors. And while last year’s performance might be disappointing, Springall says investors should find comfort in the previous resilience of ethical funds.
Going forward, the outlook for the market looks increasingly uncertain. Any investors who might be concerned about their investments are well within their rights.
But no matter how concerned you might be, seek professional advice before you make any drastic moves, such as exiting a particular fund sector. As Springall explains, “A jumpy, premature move may result in missing out on potential recovery. Good advice is essential to any investor to get some peace of mind, particularly at a time when the markets are volatile.”
Final word
If you are an ethical investor, don’t let last year’s subdued performance of ethical funds deter you from your goals or cause you to panic. There’s a good chance that it’s only a temporary setback.
Of course, don’t forget that all investing, ethical or not, is risky. There are no guarantees of positive returns, and you could get back less than you put in. To mitigate the risk of loss, ensure your portfolio is well diversified. That means spreading your money across different investment assets, sectors and geographical regions.
Finally, if you are investing ethically, why not do it in a tax-efficient way? One of the best ways to do this is via a top-rated stocks and shares ISA. Any investment growth or income earned within a stocks and shares ISA is tax-free.
By investing through this tax-wrapper, you will not only be contributing positively to the future of the world, but you’ll also be adding value to your own future by keeping more of your returns.
Please note that tax treatment depends on the individual circumstances of each individual and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The post Ethical funds ‘underperformed’ last year: here’s why investors shouldn’t be alarmed appeared first on The Motley Fool UK.
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