DP3452 International Evidence on Ethical Mutual Fund Performance and Investment Style

Author(s): Bob Bauer , Kees Koedijk , Roger Otten

Publication Date: July 2002

Keyword(s): Ethical Mutual Funds , Investment Style

JEL(s): G12 , G20 , G23

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP3452.asp

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.