As the number of ethical funds has continued to grow over the years, professional investors have become more familiar with these strategies and have begun to consider them alongside core holdings.
Willis Owen’s head of personal investing Adrian Lowcock said ethical investing is no longer a “trade-off between returns and principles”, with some benchmarks outperforming their non-ethical counterparts.
“Whilst the uptake of specific ethical funds remains low, the overall sector has evolved significantly over the past 30 years,” he said. “Investors no longer have to avoid certain types of companies or accept a lower rate of return because of their morals."
However, Hargreaves Lansdown senior analyst Laith Khalaf said there are different ideas about what constitutes an ethical company.
“Investors selecting ethical funds need to consider both the pedigree of the fund manager running their money and the ethical criteria used,” he said.
“The composition of the FTSE 4 Good UK index demonstrates this can be a highly subjective area; constituents like Royal Dutch Shell, BHP Billiton and Paddy Power Betfair may not meet everyone’s definition of what an ethical company is, or does.”
With Good Money Week underway – which aims to promote sustainable and ethical investment, pension, saving and banking options – FE Trustnet takes a closer look at the experts’ top ethical fund picks below.
Chelsea Financial Services managing director Darius McDermott’s first choice is the £147.4m EdenTree Amity UK fund, which focuses on small- and mid-sized companies that aim to make a positive contribution to society and the environment through sustainable and socially responsible practices.
“EdenTree is a pioneer of responsible investing and offers even the most discerning client a justifiable investment opportunity,” said McDermott. “The EdenTree Amity UK fund has been run by Sue Round, one of the country’s longest-serving ethical managers, for more than three decades.”
Performance of fund vs sector & benchmark since inception
Source: FE Analytics
The fund has delivered a total return of 656.88 per cent since launch in 1988, compared with an 858.97 per cent gain for its FTSE All Share index benchmark and 707.62 per cent from the average IA UK All Companies peer.
The next fund highlighted by McDermott is a fixed income fund, Rathbone Ethical Bond, a five FE Crown-rated strategy overseen by Bryn Jones and Noelle Cazalis.
He said: “Rathbone Ethical Bond invests in quality investment grade bonds. It has a high income target and ethical exclusions are simple: no mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco.
“All the underlying holdings must also have at least one positive environmental, social or corporate governance quality.”
Over five years, the £1.2bn fund has delivered a 32.99 per cent total return compared with a 23.63 per cent gain for the average IA Sterling Corporate Bond fund and a 28.01 per cent rise for the IBOXX UK Sterling Non-Gilts All Maturities index. It has a yield of 4.3 per cent.
Lastly, McDermott said he is also backing Standard Life Investments UK Ethical, managed by Lesley Duncan, highlighting her ‘no compromises’ approach to ethical screening.
It invests in between 50 and 100 holdings (currently it stands at 76), which the manager will aim to hold for three to five years. 
The fund has risen by 276 per cent since Duncan joined in June 2004 compared with 204.37 per cent for the average IA UK All Companies peer.
Khalaf’s (pictured) first choice is the £607m Kames Ethical Equity fund managed by Audrey Ryan, “one of the best”.
“She’s a passionate ethical investor who uses a strict approach, excluding certain areas completely,” the senior fund analyst said.
“The fund can’t invest in 69 per cent of the UK’s largest companies, because they operate in areas like oil & gas, tobacco and munitions, which leads the manager further down the [market] cap scale.
“This is a higher risk approach but one which comes with higher rewards for successful active investors.”
Performance of fund vs sector & benchmark under manager
Source: FE Analytics
Under Ryan – since January 1999 – the fund has delivered a 328.98 per cent total return compared with a 202.07 per cent rise for the average IA UK All Companies peer. However, it has lagged the average IA UK Smaller Companies fund – its benchmark – which has risen by 708.74 per cent over the same period.
Khalaf’s second and final choice is the £7.9bn Stewart Investors Asia Pacific Leaders fund, co-managed by FE Alpha Manager David Gait and Sashi Reddy.
The senior analyst said the team behind the fund takes a “less restrictive approach” and can “technically” invest in any sector but only invests in businesses making a positive contribution to the countries in which they are based.
“This fund invests in companies based across Asia – from India to Taiwan and Singapore to the Philippines,” he explained. “So, it combines exposure to some of the fastest-growing regions of the world with a focus on companies that put environmental, social and governance issues at the heart of what they do.”
Khalaf added: “The team have built an exceptional track record and take a conservative approach in a dynamic but risky area of the investment world.”
Over the past three years, the fund has delivered a total return of 50.85 per cent compared with a gain of 64.65 per cent from the MSCI AC Asia Pacific ex Japan index benchmark.
Lowcock’s first choice is Kames Ethical Cautious Managed – a balanced fund overseen by Audrey Ryan and FE Alpha Manager Iain Buckle which invests in UK shares and bonds.
He said that while the £552m fund follows the same ethical criteria for stock selection as Ryan’s other portfolios, it avoids gilts unlike many of its peers.
“The fund tends to have a bias towards mid and smaller companies as well as favouring cyclical stocks,” Lowcock said. “The team focus on a combination of stock selection and wider economic analysis to generate ideas and construct a portfolio of investments.”
The fund currently holds 53.2 per cent of its portfolio in equities – close to the maximum permissible 60 per cent allocation – and 38.1 per cent in bonds. A further 8.7 per cent is held in cash.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in March 2007, the fund has delivered a total return of 87.13 per cent compared with a 55.56 per cent return for the average IA Mixed Investment 20-60% Shares peer. 
Like Hargreaves Lansdown’s Khalaf, Lowcock has also chosen a Stewart Investors fund – the Stewart Investors Worldwide Sustainability vehicle.
The £601.4m four FE Crown-rated fund is co-managed by David Gait and Nick Edgerton and has more of a global remit than its sister product.
“The fund invests in global equities and would be suitable as a core investment or for someone seeking to build a sustainably focused portfolio,” said Lowcock (pictured). “There is a preference for high-calibre management in franchise companies backed by healthy balance sheets. The price they pay for a business is important, but a company’s quality aspects are the priority.”
The fund has delivered a total return of 119.21 per cent since launch in November 2012, compared with a 121.04 per cent gain for its MSCI AC World benchmark and a 105.78 per cent return for the average IA Global peer.