Time to do the right thing?

Still uncertain what to do with your stocks and shares ISA allowance as the tax year gallops to a close? You could do worse than to put your money where your principles are, if the past year's results are anything to go by.

The Ethical Investment Research Service (EIRIS) reports £2.8 bn held in ethical funds as of the beginning of 2000, compared to £2.6 bn in September 1999, and growing at twice the speed of unit and investment trusts as a whole.

The growing band of ethical unit trust ISAs has shown considerably more to write home about than the UK All Companies sector, and shows average one-year returns almost on a par with the currently very bouncy Smaller Companies sector. According to Lipper data for the year to 1 March 2000, a £1000 investment in an ethical unit trust would have grown to an average £1310, against a lacklustre £1088 from UK All Companies and £1330 from UK Smaller Companies.

However, the uplift in growth is concentrated among relatively few of the 27 funds listed in Lipper's ethical fund table. Take out the top seven or eight, which includes such 12-month returns as Framlington Health's stellar 175 per cent, 91 per cent from the Equitable Ethical, and 67 per cent from CCS Ethical and Sovereign Ethical and you're left with a cluster of less glitzy results.

There is a strong correlation between smaller company funds and ethically acceptable funds, according to Amanda Forsythe of Standard Life's UK Ethical oeic. The screening criteria of most ethical funds precludes investment in huge multinationals with environ-mental mismanagement or human rights issues. Similarly, the tobacco, arms or nuclear connections are likely to be concentrated amongfirms with huge resources.

"Small companies, by contrast - and many of the current rapid growth areas are made up largely of small and medium sized enterprises - tend to have good staff-management relations, with equal opportunities taken for granted," she says. "They are also less likely to be making a detrimental impact on the environment." However, Standard Life's fund has only around 10 per cent of its assets in technology stocks, which may account for a one-year return of just 7 per cent.

Peter Camp, who manages the Sovereign Ethical fund, says takeovers have resulted in handsome boosts to share value. "Orange took over seven small companies which we had holdings in last year," he said. "There's also a large amount of venture capital looking for a home and being ploughed into smaller enterprises."

The Sovereign unit trust holds over a third of its assets in so-called New Economy stocks, including telecoms, media and IT opportunities - none of which usually bring ethical difficulties.

Global potential has been exploited by the Equitable Ethical unit trust - not available as an ISA - which has tapped into the Japanese economic recovery, as well as European wind systems, Canadian and British fuel cell projects and US healthcare. Fund manager James Grieve says: "It has a major focus on energy saving techniques and production efficiency, which has allowed us to embrace a broad sweep of new technologies."

The most spectacular returns have come from Framlington's Health fund, which focuses on developments in drug research, medical equipment and health services. Many are very small enterprises, which reflects the ethical principles of the fund and the greater growth found at the micro end of the spectrum, says Lesley Hanken.

But although this fund meets almost all of EIRIS's avoidance and support criteria for investment, it is not promoted as such for the simple reason that "the American authorities insist all drugs are tested on animals before marketing".

Specialist funds tend to be relatively volatile - in Framlington's case its three-year performance figures at 148 per cent, while hardly to be sniffed at, are well below those for the last 12 months alone. Other, more general ethical funds are less high-risk propositions.

The current economic climate and the longer-term prospects for the New Economy are making it easier for ethical investors. Things should improve further as new funds join the ranks. Norwich Union has only three-month returns to boast but its value has grown by 28 per cent over that time. But you need to bear in mind that ethical criteria vary considerably from fund to fund. More information on the ethical stances of the various funds on the market is available from EIRIS on 0207 840 5700.