Brendan Burgess
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This is the text of an article in today's Irish Independent
WITH the launch of a new ethical investment fund, BRENDAN BURGESS looks at how it compares with the two already in the market
MOST investors usually only consider likely returns when they are choosing where to invest their savings. This is also true of pension funds and even the Government's National Pension Reserve. They too are happy to invest in tobacco, gambling and the arms industry, as they make a profit.
But if you want to invest your money to do some good, or at least, not to do any harm, what are your options? Well you could buy shares directly in companies which meet your ethical criteria.
For example, if your only criterion is to avoid tobacco companies, then it's easy for you to buy shares directly. Another investor may not have a problem with tobacco, but won't want to invest in a company which conducts experiments on animals.
It's difficult to get information on which companies behave ethically, but a useful starting point would be the FTSE4Good Index which lists hundreds of companies from around the world which meet three general criteria: a positive contribution to environmental sustainability, positive relationships with stakeholders and respect for human rights. Four Irish companies meet these flexible criteria: AIB, Bank of Ireland, Irish Life and Permanent and DCC.
Or you could choose to buy shares in companies and try to influence their management to be more ethical. For example, I have raised environmental issues at the CRH agm, and it would have been very helpful to have lots more CRH shareholders reflecting my views. Unfortunately, raising environmental concerns at agms puts you in the category.
What about the returns?
Some investors may shy away from ethical investment for fear that the managers of such companies are too sensitive and may back off tough decisions. However, there really is no clear evidence that they perform more poorly.
Some studies have shown that ethical funds under-perform, whereas others show that they out-perform non-ethical funds. Anyway, past performance says nothing about future performance, so it's unlikely that you will pay a significant price for investing ethically.
However, there are specialist funds which look for non ethical companies e.g. gambling, alcohol and tobacco and there is some evidence that these do well.
Ethical Investment Funds
If you don't want to buy shares directly, you can buy one of the three unit linked funds available in Ireland. Friends First Stewardship Fund has been on the go since 1988.
Its investment is "concentrated in companies in any market whose operations are considered to make a positive contribution to society or to be of long-term benefit to the community and seeking to avoid companies which on balance are felt to be harming the world, its people or its wildlife".
It specifically avoids companies which "cause excessive environmental damage or pollution; Cause unnecessary exploitation of animals; trade with or operate in oppressive regimes; exploit Third World countries; manufacture and sell weapons; produce tobacco or alcohol; sell ography; conduct offensive or misleading advertising." This policy allows it invest in companies such as Tesco, Microsoft, Vodafone and Statoil.
Hibernian's SRI Fund (Socially Responsible Investment) has a similar investment philosophy. They avoid companies which "contribute to social and environmental problems; are involved in armaments, nuclear power, gambling, tobacco and ography; are heavy polluters in the chemical and basic industrial sectors; contribute to climatic change, e.g. the automobile industry and extractive industries such as coal and oil; produce dangerous substances that cause cancer or other health problems; are involved in the exploitation of people."
Their investee companies include - Roche (pharmaceuticals), Unicredito (banking), Telecom Italia, Microsoft and Statoil again!
Dolmen Butler Briscoe's Green Effects Fund is ethically more proactive. It invests only in companies which are on the NAI - the Natural Stock Index. This is an index of around 25 shares which have very strong ethical principles.
The companies on the index have to produce products which are used to boost the environment or human welfare, such as solar power or s for the prevention of HIV/Aids.
Alternatively, they can be companies whose products are produced in a very ethical way e.g. The Body Shop or Severn Water. It specifically excludes investing in the following sectors: alcohol, military, ography, tobacco, nuclear or gambling.
Which is the most ethical? Hibernian and Friends First invest in companies which seek to do no damage, whereas Dolmen invests in companies which promote welfare. So the Dolmen fund will be 'more ethical'.
Friends First and Hibernian invests in Statoil. But if you drive a car or even if you take public transport or heat your home with oil, you should not be afraid to invest in oil companies.
Statoil is regarded by many as the oil company with the best environmental practices. It also invests in renewable energy. So investing in Statoil is fine, whatever about the other oil companies. Sadly, no Irish companies have managed to meet the ethical criteria of these funds.
Are these funds adequately diversified?
In general, it's a good idea to spread your investments around to reduce the risk. So is it safe to put all your money in an ethical fund? I think it is. Companies which behave ethically are probably safer as they are less likely to suffer from accounting and fraud problems such as those experienced by Enron.
They are also less likely to be exposed to big claims arising from dangerous products such as chemicals or tobacco. The Dolmen fund is invested in 25 different companies which are spread around the world - Europe, America and Japan, so it does appear to be adequately diversified.
Hibernian offers you a choice of three pure equity funds - A European Equity Fund, A Global Equity Fund and a high yield fund. You could also choose a Managed Fund which may invest up to 50pc in bonds and cash. There is even an ethical bond fund, which is a financially cautious approach to investing in 'ethical' companies.
The Charges
Despite the fact that Friends First avoids investing in companies which "conduct misleading advertising", their product brochures are very complex. My initial reading of them was that they were reasonable value, but on investigation, I found all sorts of charges under different names, a practice which, in my opinion, is itself misleading.
On the lump sum investment, the annual management charge is 1.125pc, but there is also something called a 'plan management charge' of 0.4pc, which brings the total charge to a relatively high 1.525pc!
I had also overlooked the 'allocation rate' of 97.5pc on investments of less than €12,000. This is effectively a 2.5pc initial charge, but how many punters would understand this?
The regular savings option has a 5pc bid/offer spread and annual charges of 1.125pc. That seemed reasonable until I discovered a 'nil allocation period' of six months. This means that your entire contributions for the first six months are swallowed up in charges.
Different people have different ethical standards, but one of my ethical standards is to avoid investing in the products of any company which does not have simple and clear investment charges. So I would not recommend the Friends First fund until they simplify and reduce their charges.
The Dolmen fund is much better value and much simpler than Friends First. Dolmen charges 2pc up front and 0.75pc a year thereafter. The minimum investment is €5,000. If you are investing in this product, go directly to Dolmens. If you go through an insurance broker, they have the option of increasing the initial charge to 4pc.
There is no initial charge with Hibernian, where however the annual management charge is higher at 1pc. They also have early exit penalties, if you cash your investment within five years.
If you are investing in this fund, do so through an only broker such as such as www.ferga.com or www.myadviser.ie. which may set up the product on a nil-commission basis.
If they do this, Hibernian will invest 103.5pc of your lump sum for you. This probably makes Hibernian the best value for lump-sum investments, depending on how much the -only broker charges you.
Do not go through an ordinary insurance broker as they can up the annual charge to 1.5pc a year which would make the Hibernian product very bad value.
Dolmen don't do a regular savings plan so Hibernian is the only option for those wishing to save upwards of €50 per month.
The annual management charge is 1pc a year and there is a policy charge of €1.50 per month. There are no initial charges, but there are early exit charges. Again, if you buy this product, go through an -only broker. Unfortunately, you cannot do a PRSA or SSIA through either of these two funds.
Brendan Burgess is the founder of askaboutmoney.com, the Irish consumer finance website, where you can get further information on ethical investing.
Click here for a tabulated summary of the charges on lump sum and regular savings.
WITH the launch of a new ethical investment fund, BRENDAN BURGESS looks at how it compares with the two already in the market
MOST investors usually only consider likely returns when they are choosing where to invest their savings. This is also true of pension funds and even the Government's National Pension Reserve. They too are happy to invest in tobacco, gambling and the arms industry, as they make a profit.
But if you want to invest your money to do some good, or at least, not to do any harm, what are your options? Well you could buy shares directly in companies which meet your ethical criteria.
For example, if your only criterion is to avoid tobacco companies, then it's easy for you to buy shares directly. Another investor may not have a problem with tobacco, but won't want to invest in a company which conducts experiments on animals.
It's difficult to get information on which companies behave ethically, but a useful starting point would be the FTSE4Good Index which lists hundreds of companies from around the world which meet three general criteria: a positive contribution to environmental sustainability, positive relationships with stakeholders and respect for human rights. Four Irish companies meet these flexible criteria: AIB, Bank of Ireland, Irish Life and Permanent and DCC.
Or you could choose to buy shares in companies and try to influence their management to be more ethical. For example, I have raised environmental issues at the CRH agm, and it would have been very helpful to have lots more CRH shareholders reflecting my views. Unfortunately, raising environmental concerns at agms puts you in the category.
What about the returns?
Some investors may shy away from ethical investment for fear that the managers of such companies are too sensitive and may back off tough decisions. However, there really is no clear evidence that they perform more poorly.
Some studies have shown that ethical funds under-perform, whereas others show that they out-perform non-ethical funds. Anyway, past performance says nothing about future performance, so it's unlikely that you will pay a significant price for investing ethically.
However, there are specialist funds which look for non ethical companies e.g. gambling, alcohol and tobacco and there is some evidence that these do well.
Ethical Investment Funds
If you don't want to buy shares directly, you can buy one of the three unit linked funds available in Ireland. Friends First Stewardship Fund has been on the go since 1988.
Its investment is "concentrated in companies in any market whose operations are considered to make a positive contribution to society or to be of long-term benefit to the community and seeking to avoid companies which on balance are felt to be harming the world, its people or its wildlife".
It specifically avoids companies which "cause excessive environmental damage or pollution; Cause unnecessary exploitation of animals; trade with or operate in oppressive regimes; exploit Third World countries; manufacture and sell weapons; produce tobacco or alcohol; sell ography; conduct offensive or misleading advertising." This policy allows it invest in companies such as Tesco, Microsoft, Vodafone and Statoil.
Hibernian's SRI Fund (Socially Responsible Investment) has a similar investment philosophy. They avoid companies which "contribute to social and environmental problems; are involved in armaments, nuclear power, gambling, tobacco and ography; are heavy polluters in the chemical and basic industrial sectors; contribute to climatic change, e.g. the automobile industry and extractive industries such as coal and oil; produce dangerous substances that cause cancer or other health problems; are involved in the exploitation of people."
Their investee companies include - Roche (pharmaceuticals), Unicredito (banking), Telecom Italia, Microsoft and Statoil again!
Dolmen Butler Briscoe's Green Effects Fund is ethically more proactive. It invests only in companies which are on the NAI - the Natural Stock Index. This is an index of around 25 shares which have very strong ethical principles.
The companies on the index have to produce products which are used to boost the environment or human welfare, such as solar power or s for the prevention of HIV/Aids.
Alternatively, they can be companies whose products are produced in a very ethical way e.g. The Body Shop or Severn Water. It specifically excludes investing in the following sectors: alcohol, military, ography, tobacco, nuclear or gambling.
Which is the most ethical? Hibernian and Friends First invest in companies which seek to do no damage, whereas Dolmen invests in companies which promote welfare. So the Dolmen fund will be 'more ethical'.
Friends First and Hibernian invests in Statoil. But if you drive a car or even if you take public transport or heat your home with oil, you should not be afraid to invest in oil companies.
Statoil is regarded by many as the oil company with the best environmental practices. It also invests in renewable energy. So investing in Statoil is fine, whatever about the other oil companies. Sadly, no Irish companies have managed to meet the ethical criteria of these funds.
Are these funds adequately diversified?
In general, it's a good idea to spread your investments around to reduce the risk. So is it safe to put all your money in an ethical fund? I think it is. Companies which behave ethically are probably safer as they are less likely to suffer from accounting and fraud problems such as those experienced by Enron.
They are also less likely to be exposed to big claims arising from dangerous products such as chemicals or tobacco. The Dolmen fund is invested in 25 different companies which are spread around the world - Europe, America and Japan, so it does appear to be adequately diversified.
Hibernian offers you a choice of three pure equity funds - A European Equity Fund, A Global Equity Fund and a high yield fund. You could also choose a Managed Fund which may invest up to 50pc in bonds and cash. There is even an ethical bond fund, which is a financially cautious approach to investing in 'ethical' companies.
The Charges
Despite the fact that Friends First avoids investing in companies which "conduct misleading advertising", their product brochures are very complex. My initial reading of them was that they were reasonable value, but on investigation, I found all sorts of charges under different names, a practice which, in my opinion, is itself misleading.
On the lump sum investment, the annual management charge is 1.125pc, but there is also something called a 'plan management charge' of 0.4pc, which brings the total charge to a relatively high 1.525pc!
I had also overlooked the 'allocation rate' of 97.5pc on investments of less than €12,000. This is effectively a 2.5pc initial charge, but how many punters would understand this?
The regular savings option has a 5pc bid/offer spread and annual charges of 1.125pc. That seemed reasonable until I discovered a 'nil allocation period' of six months. This means that your entire contributions for the first six months are swallowed up in charges.
Different people have different ethical standards, but one of my ethical standards is to avoid investing in the products of any company which does not have simple and clear investment charges. So I would not recommend the Friends First fund until they simplify and reduce their charges.
The Dolmen fund is much better value and much simpler than Friends First. Dolmen charges 2pc up front and 0.75pc a year thereafter. The minimum investment is €5,000. If you are investing in this product, go directly to Dolmens. If you go through an insurance broker, they have the option of increasing the initial charge to 4pc.
There is no initial charge with Hibernian, where however the annual management charge is higher at 1pc. They also have early exit penalties, if you cash your investment within five years.
If you are investing in this fund, do so through an only broker such as such as www.ferga.com or www.myadviser.ie. which may set up the product on a nil-commission basis.
If they do this, Hibernian will invest 103.5pc of your lump sum for you. This probably makes Hibernian the best value for lump-sum investments, depending on how much the -only broker charges you.
Do not go through an ordinary insurance broker as they can up the annual charge to 1.5pc a year which would make the Hibernian product very bad value.
Dolmen don't do a regular savings plan so Hibernian is the only option for those wishing to save upwards of €50 per month.
The annual management charge is 1pc a year and there is a policy charge of €1.50 per month. There are no initial charges, but there are early exit charges. Again, if you buy this product, go through an -only broker. Unfortunately, you cannot do a PRSA or SSIA through either of these two funds.
Brendan Burgess is the founder of askaboutmoney.com, the Irish consumer finance website, where you can get further information on ethical investing.
Click here for a tabulated summary of the charges on lump sum and regular savings.