Ethical Screening and Financial Performance: The Case of Islamic Equity Funds
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Whether ethical screening affects portfolio performance is an important question that is yet to be settled in the literature. This paper aims to shed further light on this question by examining the performance of a large global sample of Islamic equity funds (IEFs) from 1984 to 2010. We find that IEFs underperform conventional funds by an average of 40 basis points per month, consistent with the underperformance hypothesis. In line with popular media claims that Islamic funds are a safer investment, IEFs outperformed conventional funds during the recent banking crisis. However, we find no such outperformance for other crises or high volatility periods. Based on fund holdings-based data, we provide evidence of a negative curvilinear relation between fund performance and ethical screening intensity, consistent with a return trade-off to being more ethical.
KeywordsEthical investments Ethical screening Fund performance Islamic equity funds
Brazil, Russia, India and China
Conventional equity fund
Islamic equity fund
Gulf Cooperation Council and Middle East North Africa
Shariah Advisory Board
Socially responsible investment
JEL ClassificationA13 G11 G12 G23 G34 Z12
The authors are grateful for the comments and suggestions from an anonymous referee, Jonathan Bader, Philip Brown, Lorenzo Casavecchia, Stephen Cox, Robert Durand, Robert Faff, Gerry Gallery, Zairihan Abdul Halim, John Howe, Karen Hunt-Ahmed, Radhika Lahiri, Brahim Saadouni, Terry Walter, and participants at the 2011 Midwest Finance Association Conference in Chicago the 2011 Finance and Corporate Governance Conference (FCCG) in Melbourne and seminars at Queensland University of Technology. Travel grants from the Midwest Finance Association and FCGC, and financial support from Queensland University of Technology and Institut Teknologi Bandung are greatly appreciated.
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