A South African perspective on the investment performance of ethical funds compared to conventional funds and investor behavior as regards ethical funds
Date
2016
Authors
Patel, Ebrahim
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Abstract
Ethical investing has become increasingly prevalent in recent years and mirrors a
rise in shareholder activism, consumer ethics and corporate social responsibility.
Shariah funds are a subset of ethical funds. The rise in popularity of ethical funds
has raised questions as to whether ethical funds perform better than conventional
funds, and whether ethical funds are riskier than conventional funds. A number of
studies have been carried out in different countries utilising the traditional
performance measures as well as factor models to determine the risk profile and
returns of ethical funds compared to conventional funds. These studies have shown
that the results are country specific and hence each country needs to be analysed
separately.
The aim of this study is to investigate ethical funds (incorporating Shariah funds) in
the South African context. The study examines the performance and risk profile of
ethical funds relative to conventional funds utilising traditional performance methods
as well as the CAPM model and Fama French 3-factor model. Furthermore, the
study determines the factors that influence investors to invest in ethical funds and to
examine their investment preferences when choosing between conventional funds
and ethical funds through a survey of Muslim investors. Finally, the study examines
the role of advertising in ethical fund investment and investigates whether the
marketing material of ethical funds is aligned to investor requirements by utilising
content analysis to compare the fact sheets of various mutual funds for the presence
of factors identified as important by investors.
The empirical results show that conventional funds outperformed ethical funds with a
greater variability of return over a truncated time period. Both ethical and
conventional funds were driven primarily by the market return with no clear style
bias. In fact, ethical funds had a stronger beta to the ALSI than to the JSE SRI index.
The qualitative analysis showed that the sampled investors perceived conventional
funds as offering better returns, but being more risky. The sampled investors were
willing to undertake financial sacrifice in order to invest according to their faith. The
most important source of information regarding investments was cited as
professional advice, followed by word of mouth and advice from family and friends.
Advertising came in behind these factors and was not an influential source of
information for the sampled investors. The factors most important to investors when
deciding to invest in a fund was the philosophy of the fund (i.e. it’s investment
strategy or ideology) followed by the risk profile of the fund and past returns of the
fund.
The content analysis showed that the factsheets of South African mutual funds were
aligned to the factors identified by the sample of investors as most important with
influencing their decision to invest. Moreover, conventional funds focused more on
returns than risk, with ethical funds focusing more on risk than return – thus funds
tended to emphasise their strong points most in their factsheets.
Description
A thesis submitted to the Faculty of Commerce Law
and Management, University of the Witwatersrand,
Johannesburg, in fulfilment of the Degree of Doctor of
Philosophy
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Citation
Patel, Ebrahim (2016) A South African perspective on the investment performance of ethical funds compared to conventional funds and investor behavior as regards ethical funds, University of the Witwatersrand, <http://wiredspace.wits.ac.za/handle/10539/21575>