Lindsell Train GE & Fundsmith

aroominyork wrote: »

From 2014 until this summer I was with an IFA who had six model portfolios. Although the ethical & environmental one was not the highest risk on paper, it usually outperformed the highest risk portfolio. The IFA said it was probably because the e&e was skewed towards mid caps which had a strong few years. Although I have not looked at FS's ethical holding something similar might have been happening.

Good to see the IFA give a sensible independently reasoned comment -there are often quite "normal" explanations for outperformance of a strategy over a period of time. Meanwhile you might find that people who are promoting those sort of funds will tell you it's all about superior stock picking and capturing key market themes etc.

Over short timescales, ethical/environmental funds can give good returns due to industry mix.

For example, oil and gas giants such as BP and Shell have both had modest share price declines since June 2014. They got hit by falling oil price and so all the share price growth of the last two years is just getting them back to where they were. Those two companies alone are 15% of the FTSE 100.

Similarly, financial services and banking groups make up another 15-20% of the FTSE and probably aren't famed for being the most ethical or environmentally sound businesses in the world. Banks like Lloyds, RBS, Barclays, HSBC, Standard Chartered are all lower in value than they were in mid 2014.

So, while FTSE100 has done about 29% total return in three years to the end of last month, a fund which called itself the "no banks or oilminers fund" would have had a marvelous "market beating" three years - as those two industry sectors had a hiccup and were dragging down the index while the other sectors put together generated comfortably over 30% to drag up the average to that 29% figure.

There are other "vice" industries such as tobacco where something like British American Tobacco is a £150 billion cash cow which pumps out dividends - but not a huge engine of growth. An investment at 60p in June 2014 would be worth 64p, plus reinvested dividends today ; the high level of dividends would mean a comfortably better return than cash, but it's not exactly a company that doubles in value every few years.

So for a variety of reasons, a fund developed to meet someone's moral, ethical or environmental criteria may do quite a bit better than a generalist one over a short (albeit multi year) timescale.

Longer term though, only playing with a restricted pool of assets from which to choose, may be negative for performance potential.

ColdIron wrote: »

It's possible that ethical companies also have good corporate governance

True, but there are plenty of companies with good governance which operate in sectors that don't happen to be super environmentally friendly or which might indulge in some activities that don't make the "ethical" cut. No doubt there are some very well governed oil companies, bookmakers and arms manufacturers.

Whereas if you invested in £4bn sporting goods retailer Sports Direct a couple of years ago (because retailing isn't a vice industry or environmentally too harmful), you wouldn't get much corporate governance for your money - you'd be buying into a culture of nepotism, lack of independent oversight and so on and by the time the stories about the sweatshop conditions run through parliament you realise you only have a £2bn company left instead of a £4bn one...

Personally, I don't bother with "ethical" funds as finding two people with the same ethics is hard enough, let alone sourcing an entire fund's worth of investments to match my own personal beliefs.

However, from time to time you will see "the environment" or "ethical investing" as hot topics or trends, where a rush to deploy capital into such projects or companies through funds increases the overall demand for share of those businesses, and the share prices run up as a self fulfilling prophecy, until it runs out of steam and the valuation multiples fall back to "normal" levels with some pain for those who were just jumping on the bandwagon without looking at fundamentals.