Working Paper: CEPR ID: DP3452
Authors: Rob Bauer; Kees Koedijk; Roger Otten
Abstract: Using an international database containing 103 German, UK and US ethical mutual funds, we review and extend previous research on ethical mutual fund performance. By applying a multi-factor Carhart (1997) model we solve the benchmark problem most prior ethical studies suffered from. After controlling for investment style, we find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period. Introducing time variation in betas however leads to a significant under-performance of domestic US funds and a significant out-performance of UK ethical funds, relative to their conventional peers. Finally, we differentiate previous results by documenting a learning effect. After a period of strong under-performance, older ethical funds finally are catching up, while younger funds continue to under-perform both the index and conventional peers.
Keywords: ethical mutual funds; investment style
JEL Codes: G12; G20; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ethical funds in Germany and the US (M14) | underperformance relative to conventional counterparts (D29) |
| UK ethical funds (G23) | slight outperformance (P17) |
| ethical indices (A13) | worse performance than standard indices (C43) |
| ethical funds (A13) | growth bias (O40) |
| older ethical funds (G23) | catching up to conventional funds (G23) |
| younger ethical funds (G23) | lag behind (Y60) |