The investment performance, attributes, and investment behavior of ethical equity mutual funds in the US: an empirical investigation

Abstract

This paper examines the investment performance of US ethical equity mutual funds relative to the market and their traditional counterparts using a survivorship-bias-free database. We detect selectivity and market timing performance of fund managers using two models. First, we use Treynor and Mazuy's (Harv Bus Rev 44:131-136, 1966) model to determine these performances from a quadratic regression of fund returns on market returns. Second, we use a comprehensive and integrated model derived by Bhattacharya and Pfleiderer (A note on performance evaluation. Technical Report 714, Stanford, California, Stanford University, Graduate School of Business, 1983) and Lee and Rahman (J Bus 63:261-278, 1990) to simultaneously capture stock selection and market timing skill of fund managers. This model extracts timing skill from the relationship between managers' forecast and realized market return. In addition, the R 2 approach developed by Amihud and Goyenko (Rev Financ Stud 26:667-694, 2013) for evaluating selectivity is also used in this paper. Our empirical results indicate that ethical funds perform no worse than their traditional counterparts, although ethical and traditional funds do not outperform the market. We find some evidence of superior security selection and/or market timing skill among a very small number of ethical and traditional funds. It appears that matching traditional funds have slightly more abnormal (superior as well as inferior) performance than ethical funds in our sample.

The Investment Performance of Ethical Equity Funds in Malaysia

“…Moreover, Islamic funds perform no worse than their conventional counterparts in the market timing measure, although Islamic and conventional funds as a group do not outperform the market, which is consistent with literature on mutual fund performance (see Rahman et al 2017). These findings have crucial implications not only for fund managers' investment decisions, but also for sensitive shariah-compliant investors and risk-seeking investors of Islamic equity funds in their investment portfolio preference.…”

“…Since the Bhattacharya-Pfleiderer model is econometrically and methodologically superior to the Treynor-Mazuy model and is robust in measuring investment performance of managed portfolios, this means that empirical results from the Bhattacharya-Pfleiderer model indicate that Islamic funds match the performance of conventional funds in the timing measure. This finding is consistent with those of Hamilton et al (1993), Mallin et al (1995), Bauer et al (2005Bauer et al ( , 2007, and Rahman et al (2017).…”

“…This study employs a methodology like that proposed by Rahman et al (2017). The unconditional risk-adjusted performance measures assume a stationary risk level in a managed portfolio and ignore the manager's market timing skill, for example, an ability to move into and out of segments of the market to minimize the overall portfolio risk composition.…”

“…Several analyses (Ahmed 2007;Hayat and Kraeussl 2011;Mansor and Bhatti 2011;Mansor et al 2015) considered fund managers' market timing skill by utilizing the simple market timing model of Treynor and Mazuy (1966), and one study (Low 2012) employed the less sophisticated timing model of Henriksson and Merton (1981). Recently, Rahman et al (2017), (Aarif et al 2020 andAzmi et al (2020) compared the investment performance of ethical equity mutual funds and their traditional counterparts in the US, finding that the former perform no worse than the latter, and there is some evidence of superior security selection and/or market timing skills only among a few of them. Meanwhile, Cujean (2016) found that social interactions among fund managers lead to significant high performance.…”

Is corporate social responsibility sufficient enough to explain the investment by socially responsible funds?

“…Many prior studies attempt to determine the performance of SRI funds. Mallin et al (1995), Goldreyer and Diltz (1999), Statman (2000), Geczy et al (2005), Schroder (2007), Chung et al (2012), Rahman et al (2016) do not find a statistically significant difference between SRI and non-SRI Fund (Index) performance. Similarly, Nelling and Webb (2009) show that CSR practices in firms do not influence financial performance; hence, SRI funds holding the shares of these firms in their portfolios may not outperform the conventional funds.…”