Performance of Australia's Ethical Funds

Abstract

Australia's three major public ethical investment funds achieved mixed financial success in the seven years to 30 June 1998, though on average the funds underperformed relative to the market. For the four-year and five-year holding periods to 30 June 1995 and 1996 respectively, the average holding-period returns for the three funds were less than the risk-free rate. This is strong evidence of investors incurring a financial discount for investing ethically and, with respect to the ethical investor's utility function, it is evidence of the marginal utility increasing as the ethical attributes of assets increase.

Ethical requirement and financial interest: a literature review on socially responsible investing

“…With this simple strategy, they earn an abnormally high return of 8.5 % per year. These findings correspond well with the explanation by Tippet (2001) that excluding firms where management behavior is considered unethical should lead to significant outperformance, because firms with unnecessary costs are avoided. Shank et al (2005) compare 11 firms that are well known for their SR behavior with selected SRI mutual funds and a conventional benchmark.…”

“…Kahn et al (1997) compare the performance of a tobacco-free S&P 500 portfolio with the complete S&P 500 portfolio and find underperformance for the tobaccofree portfolio between 1986 and 1996. In his study, Tippet (2001) shows significant underperformance of the three major Australian ethical mutual funds between 1991 and 1998 compared to their benchmarks. He holds higher transaction costs and management fees responsible for this underperformance.…”

“…Cowton (1998) argues that it seems likely that SRI fund returns are smaller than those of the various mainstream funds, because mainstream investors could build the same portfolio as SR investors, but not vice versa. Michelson et al (2004) as well as Tippet (2001) refer to the lower returns of SRI funds as an ''ethical penalty.'' Although the reasoning above is consistent with classical portfolio theory, only six studies find empirical support for the hypothesis for lower than expected returns of SRI portfolios compared to conventional funds.…”

“…The same reasoning has been used before by David Diltz (1995), who finds different performance results, depending on the type of screen he uses on a predefined portfolio. The influence of different screening methods is also held responsible by Tippet (2001), for the different findings in the academic literature regarding the relationship between ethical investments and financial returns: if the screening approach is based simply on a company's product (e.g., alcohol or tobacco), it is likely that profitable companies are excluded from the portfolios and that underperformance is reported. On the other hand, if the screening is based on management's ethical behavior (i.e., if independence of auditors or management remuneration are considered), excluding firms behaving unethically in this understanding will most likely exclude companies from the portfolios that bear additional costs and therefore most likely show outperformance compared to their conventional benchmarks.…”

Investigation of Socially Responsible Investment Markets (SRI) Using Dynamic Conditional Correlation (DCC) Method: Implications for Diversification

“…In the Australian context, there are relatively few studies such as those of (Bauer et al, 2006;Tippet, 2001;Cummings, 2000) which show that the performance of SRI is not significantly different with conventional investments while other studies (Jones et al, 2008) found SRI to be underperforming in the Australian context. None of these studies, however, have focused on the linkages or spill-over between SRI markets.…”