Ethical investment 'like Marmite': Interest is flatlining though funds are stuffed with mainstream names like BT and the Pru

By Tanya Jefferies for Thisismoney.co.uk

Published: 04:50 EST, 17 October 2015 | Updated: 04:50 EST, 17 October 2015

Interest in ethical investing has flatlined over the past decade and the sector has failed to attain mainstream status, industry data reveals.

Funds that stick to putting money in ethical companies attract just 1.2 per cent of the total assets poured into UK investments, and this figure has barely budged since 2005.

It's a Marmite 'love it or hate it' matter for many people even though the top holdings of ethical funds are often well-known businesses like BT, Next and the Pru, according to Jason Hollands of Tilney Bestinvest.

SEE THE TABLE BELOW FOR COMPANIES COMMONLY HELD IN  ETHICAL FUNDS

'The UK’s retail ethical investment industry has been around since 1984 but according to statistics from the Investment Association funds with "ethical" mandates total just £9.95billion of assets more than 30 years on,' he says.

Hollands points to the IA table below, which shows how the ethical fund sector has seen assets grow in line with the rest of the investment industry, but not break out of its niche to achieve more widespread popularity.

He explains: 'There’s a perception that ethical investing is aimed at a narrow section of the public who are ardent in their beliefs; is focused on niche areas and is light-weight when it comes to delivering returns, none of which is necessarily true.'

Hollands adds that many investors are relaxed about investing in stocks seen by some as 'unethical' if the investment case stacks up - citing the extraordinary growth of theWoodford Equity Income Fund run by star manager Neil Woodford. 

This has three tobacco giants in its top 10 holdings - Imperial Tobacco, British American Tobacco and Reynolds American.

But Hollands suggests that a cursory look at the top holdings of many leading ethical funds reveals that most are littered with well-known names - Legal & General, Vodafone, Lloyds Bank, GlaxoSmithKline and AstraZeneca, in addition to those mentioned above.

'These are brands that are instantly recognisable to many members of the investing public, who might currently assume that ethical funds are heavily focused on areas such as renewable energy.'

He finds the lack of cut-through for ethical investment over many years surprising, pointing out that sections of the public have proved willing to adjust their economic activity to reflect their values in other industries.

Also, ethical funds are enjoying a relatively favourable investment climate, adds Hollands. They typically have less money in commodity and oil and gas companies which have had a torrid time of late, while they are often skewed to mid-caps and smaller companies which have delivered much stronger performance than the FTSE 100 in recent years, he explains.

Adrian Lowcock of AXA Wealth says the IA figures show that although the ethical investment market hasn't grown its share of the wider industry, it has kept pace with its overall growth.

Regarding the reasons why it has remained small, he says: 'Investors are deterred by suggestions that ethical investing delivers a worse performance. This is not necessarily true. Yes, it will miss out on some sectors and if those do well it is a headwind to performance but not an absolute.

'For many their ethical concerns are addressed through other areas such as spending habits which can influence businesses. It doesn't feature in their investment decisions.'

Lowcock also notes that when you look beyond pure ethical funds, many companies now adopt 'ESG' - environmental, social and governance - policies which can give them a good reputation and be profitable, for example by keeping down energy bills.

But he adds: 'Ultimately the majority of investors are looking for the best home for their investments and don't use ethical as there are restrictions with where many of these funds will invest.'