Invest with a clear conscience

By THIS IS MONEY
Updated: 19:00 EST, 21 February 2000

Ethical funds are becoming a boom area as investors discover that they can have a clear conscience and benefit from excellent returns. Leading fund managers such as Legal & General, Murray Johnstone and Norwich Union have responded with new funds that do not invest in tobacco companies or arms manufacturers.

During the past year, ethical funds outstripped their common benchmark, the FTSE All-Share index, by an average of nine percentage points and experts see no reason why such performances cannot continue.

In the past 12 months, more than half the 44 ethical and 'green' unit trusts - those using companies that are environmentally aware - generated returns greater than the 13% gain in the All-Share index. Some individual funds returned more than 50%, with Framlington Health unit trust leading the way with an impressive 60%.

There are a number of reasons for this strong performance. Many benefited from a general pick-up in small companies' share prices as well as the boom in information technology companies. Most ethical funds are heavily invested in these sectors. Another factor is that some ethical funds have toned down their company vetting processes, giving them greater flexibility. For many trusts, it is now acceptable, for example, to invest in an oil company as long as it is doing some good for the environment.

Amanda Davidson of London-based financial adviser Holden Meehan says many unit trust managers are adopting such a stance. She says: 'Ethical investment funds, such as those run by Standard Life and Norwich Union, are determined to get representation in all the key company sectors to ensure their returns are not out of kilter with mainstream indices. So, for example, some ethical funds may not hold Shell, but they would buy BP because the company seems to be doing something positive for the environment. Investors like this change.'

Company involvement in tobacco, the military, human rights abuses or Third World exploitation are still key concerns for ethical investors. Genetic meddling with humans and food is a growing worry. Money is pouring into ethical funds. In January 1998, ethical unit trusts had £1.7 billion under management. Two years on, the figure is £2.6 billion, spurred by a combination of stock market growth, an influx of investors and fund launches.

On human rights abuses, the strictest ethical funds are Framlington Health and Clerical Medical Evergreen. Those with tough criteria against arms companies include Scottish Equitable Ethical. For a tough line on tobacco companies, look to Jupiter Ecology and Equitable Life Ethical.