Money Management 17/08 – Taking a gamble on ethical investments

News that Australia’s funds management industry has taken a shine to ethical investment has raised a few eyebrows around the industry.

Almost all the major players in the funds management industry are at least considering launching an ethical fund in the next 12 months. At no other time in the past few years has their been so much interest in a single product.

Some are billing ethical funds as the next killer product. However, a question mark hangs over whether ethical funds can grab the imagination of the investing public.

There is certainly nothing new about ethical funds. Smaller, niche players and a few medium sized institutions have been using ethical screens on investment funds for the past decade. Most players have remained relatively small, however some have produced strong inflows in recent years.

The managers that have produced the strongest growth, such as Hunter Hall, have also been at the top of the performance tables. This point raises the fundamental issue fund managers are grappling with at the moment: how much tolerance will investors have if ethical investments suffer a slump in returns. Some commentators have suggested that ethical investments may not be able to replicate their current good form in a bear market. And the big money can be very fickle when it comes to moving their money.

Then there is the issue of the definition of ethical. Without going into the esoteric questions of moral philosophy, it is clear that what is ethical for one person is often unethical for another. Fund managers will need the backing of a legitimate and transparent screening process that can be backed up to the hilt. Any gaps in the process could open up a public relations nightmare.

On the positive side, Australian investors have demonstrated a penchant for sector funds over the past few months, particularly in the technology sector.

The move towards choice of fund in superannuation will provide further impetus for investors looking for funds that have a theme they can understand.

Ethical funds will certainly have emotional appeal to the wider investing public.

But it is a big gamble. Most fund managers are not interested in a fund if it does not bring in $50 million within its first few years to pay for fixed back office and customer service costs a launch demands.

No major league fund manager has yet made the pre-emptive strike to unleash one of the killers on to the market. But when the time comes, it will be watched with much interest from all players in the market.