Wednesday, 19 March 2014

You should NOT pay more to invest in Ethical Funds

Like many people I know, although I am primarily self interested (i.e. I'm trying to improve my life and financial well being), I am also concerned with how my actions impact those around me as well as the environment.  I think there are very few truly selfish or truly selfless people.  I think everyone falls somewhere between those two extremes.

Although we all try and make a difference, sometimes it is hard to see how "doing our little part" makes a difference when there are such big entities and companies out there who swamp any effort we may have to make a difference.  One of the ways that has become more popular in the last few years is the idea that money talks.  That if you (and a significant number of others) are concerned enough about society then you will direct your savings and investments towards those enterprises which are actually doing good and avoid those which are damaging society or our planet.

It is a fairly simple concept which is incredibly hard to implement for one single reason: We all have different ideas and tolerances for what is good and right. Having said that - if we find a company that we like and believe is doing good then this is where we should put our money.

The Ethical Funds management industry has grown around this concept

A whole industry has grown up around the concept that our investments should reflect our desire to make the world a better place.  The good funds generally provide
lots of information on what they consider to be ethical and good investments and how they go about it.  This allows investors to decide whether this fund meets their definition of what is ethical and good investing and to decide whether they want to invest in them.

There are other funds (and there are a fair few of these) which claim to invest only in those companies which advance society and provide no parameters around what they consider the advancement of society.  They don't provide information around what they consider to be good and bad which I believe is misleading and deceptive.

However, whether they provide the information or don't provide it there is one constant: Ethical Funds charge significantly more than regular managed funds

Ethical Funds should NOT be charging more than other managed funds

Many of us who want to improve society, the environment and the world have become used to the idea that we need to pay more to do this.  Most of the time it is true: it costs more to do things in a sustainable fashion.  However this is NOT true of the funds management industry.

It costs no more to run or operate an ethical or sustainable fund than it does to run a regular fund.  The parameters of investment change however there is no difference in either:

  1. The way the fund operates
  2. The skill or time required to research investments
Every fund that exist has parameters of things they are allowed to look at or invest in.  As a fund manager you then rank your investments and choose those which best fit your portfolio and risk / return profile.  Investing in only ethical companies does not add any expense or expertise to this process.  And yet these fund managers charge a significant premium for this service.

They are doing it because they can.  They can charge people extra for the service they are offering because people think that they need to pay this.  I understand the idea of paying more for a premium product but when your cost of inputs are the same and the investment outcomes are not any better I think it is a bit rich for these funds to charge more, effectively over-charge their clients and run an 'ethical' business.

Fee pressure is driving many investment funds to reduce the amount they charge in fees but the ethical funds management industry has been immune to this so far because we invest in them to try and do some good.  If you invest in ethical funds make sure you aren't getting ripped off - check the fees and avoid funds which charge too much - they aren't doing anything different or adding more value than other ethical funds.

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