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New ratings agency

INVESTORS wanting to assess the growing range of ethical investment funds now have the assistance of a specialist ratings agency.

Corporate Monitor, set up by former ASSIRT executive Michael Walsh, is currently assessing all Australian ethical investment funds and assigning star ratings.

This initiative coincides with the public launch of new ethical funds by several investment managers, including Equity Trustees, ING and IOOF.

In addition, BT and Rothschild have rebadged and restructured long-running charitable trusts so they can be marketed as ethical funds to a wider audience.

Fourteen groups now offer ethical funds (see table), nearly double the number just 12 months ago. The money invested in ethical funds has also grown rapidly to $1,041 million, from $685 million a year ago, according to Corporate Monitor.

These numbers are expected to grow further, judging by a survey by the Investment and Financial Services Association. Its annual key industry statistics survey indicates that up to 45 per cent of investment managers will introduce a new “socially responsible investment” product within 12 months.

The Corporate Monitor ratings, published monthly in Ethical Investor magazine, are based on an assessment of each manager’s ethical and investment performance.

The highest ratings to date have been awarded to Hunter Hall’s Value Growth Trust and Rothschild’s Ethical Conservative Trust (four out of a possible five stars).

The Value Growth Trust invests in international and Australian equities and has achieved outstanding returns of 23.0 per cent per annum over the past seven years.

The Rothschild fund is a repackaged version of its Charities Wholesale Trust, a diversified fund that has returned 9.1 per cent per annum over seven years.

Corporate Monitor does not judge the type of ethical policy (or the investment style) used by each manager. Instead, it assesses whether a fund is clear about what it will deliver and whether it is ‘true to label’ in its implementation.

Mr Walsh said the Value Growth Trust’s rating would have been even higher if Hunter Hall had a more rigorous ethical screening process.

In contrast, the rating of Westpac’s Australian Eco Share Fund (3.5 stars) was boosted by the clarity and rigour of its environment-only screen.

The opaque nature of many ethical screens is amply illustrated by the treatment of companies involved in uranium mining.

This issue came to a head earlier this year when BHP acquired Billiton, which owns a small uranium mine.

Mr Walsh said seven ethical funds which screen uranium mining held BHP shares. Of these, only Equity Trustees sold its BHP shares.

Why wouldn’t the others sell? Several managers, such as BT, only screen activities that account for a substantial share (eg 10 per cent) of total revenue.

And BNP Paribas only screens uranium used in the manufacture of nuclear weapons.

This shows that investors need to research this area carefully, rather then rely on the list of screens that feature in the marketing brochures.

One manager with ‘hard green’ policies is Australian Ethical, which completely avoids mining companies. It also excludes Australia’s four major banks, in contrast to virtually every other ethical fund in the country.

Australian Ethical’s Equities Trust (not yet rated by Corporate Monitor) has returned 14.4 per cent per annum over the past five years, indicating that some investment managers can combine strict ethical screening with good long investment returns, albeit with a higher level of volatility.

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