THE SUNDAY TIMES (UK): Why the saints may beat the sinners: “Enthusiasts claim that, now more than ever, you do not have to compromise your principles in order to make a profit. But with oil prices hitting $60 a barrel, young people swilling alcopops like there’s no tomorrow and online gambling growing fast, can you afford to avoid sin stocks?”: “Oil prices are likely to stay high and this bodes well for the cashflow of companies such as Shell and BP. This, in turn, should create strong returns for investors.”: Sunday 3 July 2005
Alcohol, gambling and oil have proved lucrative, but green energy may be the next big thing.
By Jessica Bown
THE highly successful public launch of shares in Party Gaming, the controversial internet-poker operator, has highlighted the contrasting fortunes of the stock market’s saints and sinners — the goody-goody companies and those that make or trade in the likes of alcohol, tobacco, oil, arms or soft porn.
While Party Gaming was being prepared for its debut last month, ethical investing came of age as the first ethical fund, Friends Provident Stewardship Growth — now F&C Stewardship Growth — celebrated its 21st anniversary. Since its launch, it has turned £100 into £909, while the FTSE All-Share has turned £100 into only £400.
Julia Dreblow of Friends Provident said: “Ours was originally a Quaker company that avoided investing in ‘sin’ stocks. However, in the late 1970s we decided to take a more mainstream approach. Launching an ethical fund seemed a good way to appease those customers upset by the change.”
The fund was initially viewed with suspicion. Amanda Davidson of John Scott & Partners, an adviser, said: “When it was first launched in June 1984, the Stewardship scheme was known as the Brazil fund because people thought you would have to be nuts to invest in it.”
Since then, however, ethical investing has burgeoned and the F&C Stewardship fund is now worth more than £600m.
Enthusiasts claim that, now more than ever, you do not have to compromise your principles in order to make a profit.
But with oil prices hitting $60 a barrel, young people swilling alcopops like there’s no tomorrow and online gambling growing fast, can you afford to avoid sin stocks?
Become a sinner
Managers of funds that invest in sin stocks claim that being able to invest in a wider range of firms and sectors enables them to produce superior returns.
James Ridgewell, manager of the New Star Special Situations fund, said: “Basically, the more stocks you have to choose from, the more opportunities there are. Returns on funds that have restrictions on the stocks they can hold are likely to be lower as a result.”
But perhaps the most compelling argument for taking a non- ethical investment strategy at the moment is the oil price, which is at an all-time high.
Anthony Nutt, manager of the Jupiter Income Trust, said: “Oil prices are likely to stay high and this bodes well for the cashflow of companies such as Shell and BP. This, in turn, should create strong returns for investors.”
Fans of sin stocks also point out that the current slowdown in consumer spending could make tobacco and drinks companies a good bet.
Gerard Lane at Norwich Union said: “These stocks have recession-proof qualities and are generally insensitive to economic growth, slow or otherwise. People drink to celebrate and drink to console themselves. So, as Britain and America move into a period of more moderate growth, such firms are likely to prove good investments. Sin stocks also generally pay relatively high dividends, which are important for investors. Over the 100 years up to 1999, investors who reinvested dividends would have got about 90% higher returns than those who did not.”
Investing in sin stocks carries risks, however, often due to legislation — real or threatened.
Party Gaming investors are themselves betting on the company not being banished from its most lucrative territory — the US — where online gambling is currently illegal.
Become a saint
Being an ethical investor does not necessarily stop you investing in at least mildly sinful stocks, if your religious or moral principles permit. Some “light green” funds take a best-of-sector approach and use their influence to encourage sinful companies to behave better. For example, a number of large pharmaceutical companies recently agreed to provide cheap HIV drugs to poor countries after pressure from shareholders.
Dreblow said: “A lot of people are interested in ethical investing because they feel uncomfortable about backing companies involved in industries they do not support. However, others are happy knowing that they are investing only in the oil company doing the most to develop renewable energy technology, for example.”
Fewer limitations do not necessarily mean higher returns.
Statistics prove that ethical funds can, in fact, do very well. The F&C Stewardship Life and Pension funds have both been in the top 25% of performers over one, three, five and ten years, while Morley’s ethical European fund has returned 20.2% over the past 12 months.
Davidson said: “Returns from darker-green funds will generally be more volatile, but not necessarily lower than those from funds with more lenient criteria. Dark-green fund managers must often ignore whole sectors, such as armaments, meaning that they will miss out if those sectors have a good run. Having said that, apart from in extreme circumstances, I don’t think there is a correlation between how restrictive a fund is and how well it performs.”
There are also good arguments for investing in ethical stocks now. Climate change is one of the issues topping the agenda at the G8 summit and government targets, such as cutting CO2 emissions by 60% by 2050, are forcing companies to take their environmental impact more seriously — good news for investors in renewableenergy companies.
Emma Howard-Boyd, head of socially responsible investing at Jupiter said: “Business leaders are increasingly acknowledging the need to act to reduce their emissions and to slow climate change. This should boost funds such as Jupiter Ecology because renewableenergy companies make up 25% of its portfolio.”
But the increasing importance of being seen to be green can also add to ethical funds’ costs because managers have to invest in sorting the truly ethical companies from those whose halos slip once you look behind the green veneer.
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