Tell me about... BT's Ethical Share Fund

Worried about industries that harm the environment? Concerned about the nuclear waste? Ethical investing can help you ensure your money is invested in line with your ethical views. But what about the returns?

At a glance

Recent returns suggest ethical investing does not necessarily come at the cost of lower investment returns - in fact many would argue that by investing in more sustainable industries your investment could do better over the long term.
BT's Ethical Share Fund was the best performing ethical fund over the past three years¹. It has returned an annual average of 28% over the past three years - higher than the broader Australian sharemarket² return of 25%pa over the same period³.

Good deeds rewarded?

Ethical investing is not new. However, over the past decade or so ethical investing has become increasingly popular and more ethical funds have come to the market to meet the demand.

For some time ethical investing was seen as the preserve of investors who were happy to forgo potentially higher returns in the cause of more ethical investing. However, some argue that investing in such a manner could benefit your wallet as well as society. They argue that businesses which save energy, don't pollute and focus on long-term sustainability may produce better long-term returns.

Different ways to invest 'responsibly'

There is a wide range of ways in which managers can approach ethical investing. Many investors choose between products based on whether they use a positive or negative screening process.

Negative screens - under this approach the manager will take a group of companies (such as those in the ASX S&P 300) and then 'screen out' companies which fail to meet a set of social criteria. These may be companies within industries such as armaments, alcohol or tobacco.

Positive screens - using this approach the manager actually searches the index for companies who are practicing socially or environmentally friendly activities and builds a portfolio of these stocks.

Some managers use a combination of both positive and negative screens, while others also try to influence organisational change within the businesses they invest in.

Whose ethics?

Choosing a fund is not as simple as just picking one of these broad approaches. The number of ethical funds has grown rapidly over the past few years, meaning that investors have a considerable amount of choice when it comes to investment style as well as type of screen.

That choice may come in handy. The bedrock of ethical investing is that it asks the investor - at least at some level - to make ethical choices. Because individuals' ethical positions will vary, what some regard as ethical investing may be beyond the pale for others.

The issue of uranium mining is a case in point. Some managers screen out companies that engage in uranium mining as they believe the risks involved in nuclear energy are too high and have concerns that commercial uranium could end up in nuclear weapons.

However BT's Ethical Share Fund can invest in the likes of BHP Billiton (the world's biggest resources company and a successful uranium miner). Based upon recommendations from our sustainability adviser, Monash Sustainability Enterprises, we changed our screening 18 months ago to allow investment in uranium mining. Nuclear energy is now seen by many people as one way of reducing the risks of global warming.

Which ethical fund is right for you?

Just like any other investment, it is vital to understand the product and ensure that it meets your investment objectives (the time period you want to invest over, the amount of risk you are willing to take, etc). While a certain fund may satisfy your ethical criteria, further research will help ensure that it does not end up eroding your capital. As always, it pays to seek advice.

Some basic questions which may help you find the appropriate fund include asking yourself what issues you believe are most important - and making sure the fund meets them. How does the manager screen their investment universe? How does the fund's risk profile sit within the rest of your portfolio?

BT's Ethical Share Fund

BT's Ethical Share Fund recently took home Ethical Fund of the Year at the Australian Sustainability Awards. This is the second time in three years that BT has won the award, which is run by Ethical Investor magazine.

The BT fund uses a variety of screens (a process which is outsourced to the Sustainable Investment Research Institute) to eliminate stocks that don't fit the criteria. We then apply the same investment process and philosophy to the remaining stocks as we do in our broader Australian shares portfolio.

The BT Ethical Share Fund avoids investing in industries such as armaments, alcohol or tobacco. The negative screening process excludes approximately 10% of the Australian sharemarket and removes big names such as Woolworths (due to gaming interests), Amcor, Caltex and CSR (due to environmental issues).

While they are not for everyone, BT is happy to offer an ethical investment option to investors. Our commitment to 'responsible investing' is also highlighted by the fact that BT has recently endorsed the United Nations Principles for Responsible Investment.

1. According to Morningstar research as at 30 November 2006
2. As measured by the S&P/ASX 300 accumulation index
3. Figures as at 30 November 2006

Interested in investing in an ethical fund? To find out more about BT's award-winning ethical funds contact your adviser, or call BT's Investor Relations Team on 1800 645 685.

All forecasts and estimates are based on one set of assumptions that may change. A small change in any one of the assumptions may lead to a large change in results. This article contains the current opinions of the author but not necessarily those of BT Financial Group or any of its associates or affiliates. The author's opinions are subject to change without notice and any kind of forecast, analysis or prediction contained in this economic commentary may be proven wrong. The information in this article, dated January 2007, is given in good faith and has been derived from sources believed to be accurate as at this date. It is general information only and should not be considered as a comprehensive statement on any matter and should not be relied on as such. This information does not account for your investment objectives, particular needs or financial situation. These should be considered before investing and we recommend you consult a financial planner. Except to the extent prohibited by statute, no company in the BT Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any way including by reason of negligence for errors or omissions.