Lay to rest a myth that good ethics carry a performance-penalty
Intention: I want to discover whether ‘ethical’ investors have to pay for their principles.
Background: Since beginning IFA work in ’89 I’ve often heard and read commentators disparage ‘ethical’ funds as inferior performers, and wondered if they had a bias against what are now called ESG principles; standing for Environment, Social Responsibility & Governance. In April 2019 I inherited some capital, which has enabled me to test the critics’ view.
1. I opened an account at AJ Bell, and I pay the standard charges. I have neither sought nor received project-support from AJ Bell.
2. For my experiment I chose a dozen index-tracking Exchange Traded Funds (ETF), each with global compass; all with thematic focus, and all in my opinion ESG. Other qualities I deem essential are diversification and minimum overlap. I bought the ETF in equal amounts, and have twice rebalanced. I have made one replacement.
3. My choices are: Clean Energy, Cyber Security, Water, Healthcare, World ESG, Emerging Markets ESG, Innovative Technology, Gender Equality, Diversity & Inclusion, Green Bonds, Blockchain Technology and Infrastructure. The TER (a measure of annual charges) is 0.46%. Within the dozen ETF are a total of 2,455 companies, of which the single largest holding is presently 1.0% (Microsoft), because it appears in four of the ETF.
4. I chose to compare the performance against two pairs of indices. As far as I know, none of them promote especially ethical principles:
a. MSCI World and FTSE All Share because they are well-known, and in common usage, b. Belonging to a 300+ strong association of banks, fund managers and financial advisers; benchmarks designed for association-wide convenience and consistency: their Global Growth and Conservative options.
5. The charts and tables are produced by AJ Bell. My portfolio is drawn post-charges. The benchmarks have no charges.
Results: The tables and charts (below) show the Dexterity portfolio presently ahead of all four benchmarks, and widening the gap. PIMFA’s Global Growth index is closest, and FTSE All Share is furthest behind. That’s as I would expect, because PIMFA surely gives attention to improve its indices’ performance.
Dexterity portfolio (red) compared with MSCI World (grey) and FTSE All-Share (black)
Dexterity portfolio (red) compared with Global Growth (grey) and Conservative (black)
Conclusion: Retail investors do not have to pay for ethical principles. In fact, they can quite easily reap extra benefit from them.