Ethical Performance
inside intelligence for responsible business



July 1999

Measuring the financial performance of the rapidly growing number of ethical funds against benchmarks appropriate to their investment sector will soon become a practical reality, writes editorial fund analyst Shiv Taneja

A Standard & Poor's Micropal study shows that ethical funds now span five investment sectors – with UK Equity Growth (nine funds) and International Equity Growth (10 funds) the two biggest investment sectors. The other sectors are UK Growth & Income, UK Equity Income and International Equity & Bond.

In terms of performance measurement, the traditional method has been to measure the performance of all ethical and ecological funds against each other irrespective of their investment mandate. When the number of funds was small, this was a practical way of measuring performance, but if funds of this type continue to be launched at the present rate, we may soon reach the point where there are enough of them within each Standard & Poor’s Micropal’s General Sector to measure financial performance on a like-for-like basis.

Of course, investors may still want to know which is the UK’s best performing ethical and ecological unit trust, but equally it is important to see how these funds have done against their peers – and this performance needs to be measured against an appropriate benchmark. After all, we measure all other unit trusts on a like-for-like basis. Ethical funds ought to be treated no differently. This method of measurement will become more meaningful as the number of funds in each investment sector increases.

In the UK Equity Growth sector, the best performing ethical fund over the year to 3 May is the Lloyds TSB Environmental Investor Fund with a 9.26 per cent return, significantly higher than the average return of minus 1.3 per cent for the nine ethical funds in the UK Equity Growth sector. Standard & Poor's Micropal’s analysis also shows that the Lloyds fund held its own against the universe of all UK Equity Growth funds with a one year track record: it was ranked 15th out of 149 funds in the sector, supporting claims of managers of such funds that ethical unit trusts often do better than general funds. However ethical funds as a group have tended to underperform their peers.

One of the main reasons for this relative underperformance, at least over the last few years, is that the stock selection criteria used by ethical fund managers have often excluded large cap stocks in favour of smaller companies. While this has ensured that the ethical policy objective of the fund has remained intact, it hasn’t always been for maximum financial benefit. But presumably that isn’t the point.


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