Performance and Performance Persistence of "Ethical" Unit Trusts in the UK

Abstract

Using UK style portfolios that are free of any survivorship bias we examine performance, and persistence in the performance, of UK “ethical” or SRI funds, and compare them to a control group of non-SRI funds. In addition, given evidence that many UK funds which claim to be international in nature may exhibit home bias in their portfolio allocations, we propose a new measure for performance of international funds that allows for this and show that such recognition has important implications for the conclusions drawn on performance. We show that SRI funds have less exposure to HML, but greater exposure to SMB and momentum factors, and that neither SRI nor non-SRI funds exhibit significant under performance on a risk/style adjusted basis, despite comparatively poor absolute performance. We also show that performance appears to be time-varying, and that conclusions on performance itself are influenced by whether a static or time varying model is employed. We then examine persistence in fund performance and find evidence that supports persistence. In addition, we find there are differences in performance persistence between ethical and non-ethical funds, but conclusions on the degree of persistence and the direction of persistence appear to depend on the performance metric chosen. However, it is always the case that past winner “ethical” funds outperform “loser” ethical funds at 12 month horizons, such that there is evidence that “ethical” investors can enhance investment performance by investing in past “winners” and avoiding past “losers”