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
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