Ethical funds do well but may falter in the long term

The UK-based Ethical Investment Research Service software allows fund managers to monitor the performance of 2,700 firms, writes Laura Slattery.

Once viewed as a passing fad for investors with a conscience, ethical investment activity in the Republic received a boost this week as the UK-based Ethical Investment Research Service (EIRIS) announced it had sold its software to two companies operating here: Setanta Asset Management and L&P Financial Trustees.

The ethical portfolio manager software allows fund managers and advisers to monitor the ethical performance of up to 2,700 companies and screen out those with less than satisfactory records on social, ethical, environmental and corporate governance issues.

Although the criteria for ethical portfolios varies from fund to fund, almost all will exclude companies involved in activities such as nuclear energy, military equipment, tobacco and pornography.

However, it's not all about sinking cash into wind-farming and organic food.

Ethical and socially responsible investment (SRI) funds frequently include financial services and telecommunications companies, which produce comparatively low levels of industrial waste.

Mr Paul McCarville, director of Setanta Asset Management, said thorough screening of all the global, diverse companies in Setanta's portfolios would be difficult without the EIRIS software, while Mr Ian Halstead of L&P Financial Trustees said it planned to use the software to help its charity clients formulate and refine their investment policies.

EIRIS, which has been analysing corporate behaviour for more than 20 years and provides the data for the ethical FTSE4Good index, now has six clients in the Republic.

These include AIB Investment Managers, which provides investment management services to charities, and F&C Ireland, the asset managers for Friends First, one of two life assurance companies to market ethical or SRI funds to individual investors.

Sceptics argue that the screening criteria used in ethical or SRI funds undermine the funds' ability to generate the best returns for investors.

Compared to the company's other life funds, returns on Friends First's ethical Stewardship Fund are the highest for the year-to-date at 8.4 per cent, but the fund is less impressive over longer periods.

Hibernian Investment Manager's SRI managed fund, introduced two years ago, has a year-to-date return of 4.7 per cent to the end of February, compared to 4.2 per cent for its balanced managed fund, but again falls behind when the one-year figures are considered.

However, its SRI European Equity fund has one-year performance of 33.6 per cent, compared to a return of 22.4 per cent on its euro managed fund.

Dolmen Securities' Green Effects Fund has a year-to-date return of 6.11 per cent to the end of February and returned over 10 per cent in 2003.

Dolmen recently introduced a website - www.greeneffects.ie - for the fund, which it claims has the most stringent criteria for selecting stocks of any ethical fund on the Irish market.

Meanwhile, 75 companies were added to the FTSE4Good index series last month.

But some 29 companies were deleted for failing to meet tighter environmental and human rights criteria introduced by the FTSE4Good committee last year.