The ever-opportunistic marketing team at Virgin Money have come up with a great new idea: the Virgin Climate Change Fund.
You want to invest in ways that help the planet, don’t you? Well, thanks to Virgin Money, now you can with as little as £50 per month. But as usual with Virgin, there’s far more spin than substance and you will also pay high and unfair charges.
According to Virgin Money boss Richard Branson, consumers are looking for environmentally friendly ways of investing their money. I know why he says this - there have been many consumer surveys that have said the same.
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‘Ethical investing’ sounds good but…
But when you check the research behind the consumer surveys, all it shows is that when people are asked if they’d like to invest in a more environmentally friendly way, people say they would. But in fact most of them don’t, just as they don’t recycle, offset their carbon, get rid of their car or do any of the things that might impact on the environment.
It’s human nature. If someone stopped you on the street and asked if you’d like to invest in ways that helped the planet, you’d probably say yes. It costs you nothing, especially if (as is true of many of the people surveyed) you don’t have any money to invest anyway.
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… it is incredibly risky
But suppose you actually did want to invest in ways that save the planet. What would you do? You would invest in a raft of new technologies, like fuel cells, solar power, wind power, biodegradable plastics, electric cars and so on.
All very risky. So risky in fact that the Virgin fund invests just 10% of your money in this, the kind of stuff that really could save the planet (assuming it needs saving).
The rest of the money in the Virgin Climate Change Fund is invested in the usual range of big companies listed on the European stock markets, after applying what Virgin’s investment partners GLG call a ‘green filter’ that is supposed to identify companies that are trying to be more environmentally conscious.
This usually means companies that are sufficiently sensitive to public opinion to dress up their activities in a green way. This allows the fund to buy shares in businesses like Xstrata (mining) and BG (gas production) on the basis that they are slightly greener than other companies in the same sectors. This assumes that these companies will perform better than their rivals, for which there is some, but not very compelling, evidence.
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The Virgin Climate Change fund is not genuinely green
So a genuinely green fund, this isn’t. Nor is it really about climate change in any meaningful sense, since the basic assumption is that things go on just as before but doing things a little differently.
In fact, if you take the climate change predictions seriously, this is rubbish: everything will have to change very radically indeed and many of the businesses in which this fund invests will vanish altogether.
The Virgin managers are assuming that the planet doesn’t really need saving anyway because just a few little changes such as those made by the ever-so-environmentally-friendly British Gas (tell that to its customers!) will do the job. So, as with many other Virgin products, this is really a slick marketing pitch wrapped around an indifferent product.
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Virgin’s high charges hammer investors’ returns
But in fact it is worse than that because Virgin has adopted a charging method which is against investors’ interests and gives it far too much in the way of fees for doing very little.
The fund has an annual charge of 1.75%, which is towards the top of the range of charges by similar funds. But on top of this the fund also has a performance fee and the managers take 20% of any gains above an annual rate equal to the Bank of England base rate, currently 5.5%.
So if the fund makes a return of, say, 15% over a year, then 1.75% is deducted as the management fee, leaving 13.25%. If base rate is 5.5%, then 13.25% - 5.5% = 7.75%, of which Virgin takes 20% or 1.55%. So in total, the managers will have taken 3.3% or 22% of the return earned by the fund.
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Very few UK authorised funds have such performance charges, which are normally a feature of high-risk offshore hedge funds. GLG and Virgin are doing nothing more than most other active managers in the UK do when selecting shares. So they don’t deserve any reward above the 1.75% annual fee.
But if they did, then base rate is the wrong measure. Since the fund invests in shares, the performance fee should only be paid if the investment managers make a return greater than an average of the European stock markets. There are several indices that measure this performance.
Add the 1.75% annual fee to the performance fee and Virgin and its partners will earn good profits out of managing this fund even if investors get a lower return than they would get from investing in many other funds. The dice are so heavily loaded in Virgin’s favour that I would say the charges are verging on extortionate.
Save the planet yourself
But if you really want to you can save the planet without Virgin, and at far lower cost. Just do what the fund does. Put most of your money into an actively managed fund that doesn’t set any environmental standards and use about a tenth of your cash to buy shares in a few high-risk ‘green technology’ businesses.
There are plenty of these listed on London’s Alternative Investment Market, such as Plantic (biodegradable plastic), ITM (fuel cells) and Solar Integrated Technology (photovoltaics). If one of them comes up trumps, you could be rich as well as saving the planet - though possibly not as rich as Sir Richard.
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Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
