The high wages of sin
The FTSE4Good index of saintly stocks is consistently beaten by our Sindex. Heather Connon analyses the devil in the detail of both indices to see where the benefits are for your portfolio.
Our regular check of the Money Observer Sindex, which is made up of the kind of companies that fail to make the ethical grade, shows that, once again, sinning is far more profitable than being saintly. And it is not a flash in the pan either: the sinners have beaten the saints over one, three, five and 10 years.
Indeed, if you had invested £100 in the Sindex a decade ago you would now have more than £320, while the value of the saints would have fallen to £90. Over the past year the sinners would have earned you a handsome 38 per cent while the saints languished at just 17 per cent.
However, if you want to invest you will have to create a fund for yourself. The Sindex is made up of FTSE 100 companies that are excluded from the FTSE4Good index, while the saints are those that have earned their place in the index. It is not a widely used index, even in the ethical field, as fund managers prefer to set their own screens, often in consultation with investors or ethical lobby groups, and no retail products are believed to be associated with it. No one uses the Sindex either, although our statistics suggest it would be a much easier sell to those investors for whom performance is paramount.
And, as the statistics suggest, both would be a very crude tool. Only the most basic of tracking funds would slavishly buy all the saints in the FTSE4Good index; active fund managers will choose from a much wider universe. And, as our feature on ethical investment on page 24 shows, many ethical funds have done substantially better than those in the FTSE4Good.
Nor is our methodology that precise. We have simply sorted the current FTSE 100 into two groups and backdated their prices over the four periods. In fact, some of these companies would not have been in the Footsie for the whole period, while others that were in the index earlier have been taken over – such as Cadbury, Lloyds TSB and BAA.
Environmental companies, in particular, are more likely to be drawn from the ranks of small- and medium-sized companies as they pioneer their new technologies and, assuming their technology is proven, can grow more rapidly than the Footsie giants. That is reflected in the composition of many ethical funds, which generally have more small- and medium-sized companies than similar unscreened funds.
However, the index does demonstrate that for all the spending on green technologies, and growing public awareness of the need to consider our impact on the planet, old-fashioned industries can still produce spectacular returns. The best example of this is the mining sector. Even those ethical funds that do not use negative screening find it hard to justify investing in miners because of the pollution caused by their activities and, in some cases, concern about the treatment of their workers.
However, for the past five years at least, the miners have been the stars of the stock market and, apart from a few brief hiccups, their shares have risen dramatically. Xstrata, for example, is four times its level of five years ago.
Then there are the tobacco companies. Far from being a dying industry, British American Tobacco and Imperial Tobacco are trading at more than three times the level they were a decade ago.
Meanwhile, the saints have been hindered by the banks. While there has been a modest recovery over the past year, the shares of even the best performers, like HSBC, are below where they started a decade ago, while the likes of Royal Bank of Scotland and Lloyds Banking Group are a fraction of what they were worth then.
Drugs companies, utilities and general retailers such as AstraZeneca, United Utilities and Marks & Spencer, have also acted as a dampener on the performance of the saints index: their shares are roughly where they were a decade ago.
Other evidence of the performance of sin stocks is more equivocal. In the US there is a dedicated Vice Fund that invests specifically in alcohol, gaming, tobacco and defence. It has beaten the S&P 500 since its launch, returning almost 70 per cent compared with less than 50 per cent for the index. It is roughly in line with the index over five years, but lags it over one and three years, which perhaps reflects the lack of resources stocks in its portfolio.
The Vice Fund’s composition is in line with what you might expect to find in a sinners portfolio. But the FTSE4Good – our saints index – actually includes drinks companies such as Diageo and Whitbread.
Looking at other ethical indices, Ian Simm, chief executive of environmental specialist Impax, points out that the FTSE Environmental Opportunities All-Share index has produced a return of 36 per cent over the past year, compared with 33 per cent for the MSCI World index, and is even more substantially ahead over three and five years.
However, successful fund managers such as Neil Woodford, head of investment at Invesco Perpetual, err more on the side of the sinners. Tobacco stocks have been among his biggest holdings for years and he still holds a large stake in Royal Dutch Shell, although he recently sold out of BP on dividend concerns. He has shunned resources stocks, believing they are over-hyped.
Members of the Money Observer Sindex*
3i Group, Alliance Trust, Amec, Anglo American, Antofagasta, Associated British Foods, BAE Systems, British American Tobacco, Cairn Energy, Cobham, Eurasian Natural Resources, Fresnillo, G4S, ICAP, Imperial Tobacco, Inmarsat, Intertek, Kazakhmys, Morrison (Wm) Supermarkets, Petrofac, Randgold Resources, Rolls-Royce Group, Serco Group, Thomas Cook Group, Tullow Oil, Vedanta Resources, Xstrata.
* The FTSE 100 companies that are not members of the FTSE4Good index.