William Kay: Investors who want green portfolios are facing a moral maze

The prospect of war is so appalling it makes many people reconsider how far their moral standpoint should influence their personal interest in such matters as protecting and enhancing their savings. As Tom Tickell explains on page one, this is leading investors to the attractions of ethical funds to build a "hands-clean" portfolio.

One of the largely unreported features of the pressure on Iraq is that, in private, a growing proportion of fund managers, stockbrokers and independent financial advisers (IFAs) are aching for President George Bush to set his war machine rolling, and see a prolonged United Nations inspection process as little more than a recipe for keeping the bear market well fed with its favourite diet: uncertainty.

I harbour the utmost respect for those who do not wish to receive dividend cheques soaked in blood, but when you take your savings into the moral maze it is easy to blunder into blind alleys. The starting point is that all companies listed on major stock exchanges such as London are engaged in legal activities, which elevates them above the lowest rungs of the ladder of acceptable behaviour. Second, armaments, tobacco, pharmaceuticals and banking are among this country's biggest employers, after the National Health Service, BT and call centres. If you believe no one should own shares in such businesses, as opposed to making your token gesture, you may be condemning thousands of innocent people to redundancy.

As it is, cigarette-makers inhabit a twilight zone where they are not breaking the law but cannot advertise their products in much of the media. And if arms manufacturers are to be starved of private finance the Government might feel obliged to nationalise them, in which case we will all have a stake in their success whether we like it or not. In these shifting sands, the widely marketed green investment funds offer only a rough and ready, off-the-peg answer that may or may not be strict enough for individual taste. It is also possible to invest in funds which conform to certain sets of religious principles such as Judaism or Islam. But perhaps the best solution if you feel really strongly about the moral dimension is to ask a broker or adviser to build a tailor-made portfolio which meets your precise requirements. It is worth doing plenty of homework on the internet and through other reference sources to ensure you do not unwittingly end up supporting businesses that engage in the sort of trade you find unpalatable.

* If it were not for the excellent performance records of Frank Manduca and the UBS smaller companies team, it would be easy to dismiss their new fund launch as suicidal at this stage of the stock market.

Small-company shares are notoriously volatile in even the most benign conditions. When war is looming, terrorism threatening, the UK economy teetering and the pound sliding you can expect that sector of the market to bounce around like a cork in a mid-Atlantic gale.

And IFAs around the country have been telling Mr Manduca what a tough time they are going to have persuading their clients to pile into the new fund. (OK, put your hankies away; save your tears for more deserving causes.) Small companies are hardly the best area for anyone's first foray into equities, and existing shareholders are not keen to sell other assets because that will rub in the extent of likely losses. This should not matter if you have a better opportunity, but it can be too much reality for some.

This leaves, broadly, only experienced investors who have new money to invest, and the poor level of business so far in this Isa seasons suggests many are looking anywhere but the stock market. Understandably, Mr Manduca is not lifting his hopes for the UBS UK Smaller Companies Fund beyond raising the odd few million. But it is worth bearing in mind that small firms, those in this case worth between £1m and £650m, can be the first out of the blocks when the market swings. Mr Manduca says directors' share-buying has picked up and the more nimble may go for modest takeover deals that bolt on to existing operations. But investor returns will have to overcome a 4 per cent initial charge and an annual 1.5 per cent manager's take.

Mr Manduca, one of a distinguished and talented set of City brothers, is among the pro-war faction I refer to above, who believe that until the bullets fly share prices are mired. While he has put money into the fund himself, I would wait until the desert sands have settled before following his example.

w.kay@independent.co.uk

The writer is personal finance editor of 'The Independent'