Ethical Investing in Australia: Is There a Financial Penalty?

Abstract

This study provides new evidence on the performance and investment style of retail ethical funds in Australia. By applying a conditional multi-factor Carhart (1997) model, we solve the benchmark problem most prior ethical studies suffered from. After controlling for investment style, time-variation in betas, bond exposure and home bias, we observe no evidence of significant differences in risk-adjusted returns between ethical and conventional funds during the 1992-2003 period. This result however is sensitive to the chosen time period. During 1992-1996, domestic ethical funds under-perform their conventional counterparts significantly. During 1996-2003, the ethical funds match the performance of conventional funds more closely. This suggests there is a learning effect for the relatively young ethical investment industry.

Keywords: Mutual funds, performance evaluation, style analysis, ethical investments

JEL Classification: G12, G20, G23