A South African perspective on the investment performance of ethical funds compared to conventional funds and investor behavior as regards ethical funds

Patel, Ebrahim
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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.
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
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>