New Research Findings on Ethical Funds
The conference was organised by Aston and Durham Business Schools on 28 September-1 October, 2012 in Birmingham, and the selected papers presented at the conference will be published in the special issue of JEBO on Islamic Finance.
The authors use non-parametric frontier methodologies to show that different portfolio restrictions, expenses and value added by managers can drive different performance patterns in each type of funds, namely socially responsible mutual funds and Islamic mutual funds. They report that over the period between March 2001 and 2011, the average efficiency of socially responsible funds is slightly higher than that of Islamic funds. Although this result is robust across the state-of-the-art methods considered to measure mutual fund performance, further testing indicates that the differences are, in general, not statistically significant. When they are significant, it only happens for some particular quantiles of the distribution of efficiencies. When geographical focus is considered, their research shows that on average, investing in the West yields higher returns, and lower in the MENA region including the GCC. However disparities within the Middle East are higher, revealing the existence of both potential opportunities and dangers of investing in the region. In addition, results also vary greatly according to each particular quantile, indicating that some of the funds focusing on this region perform particularly well.
Addressing the differences between socially responsible and Islamic mutual funds, when selecting investments for their portfolio (asset allocation), socially responsible mutual funds can freely choose between debt-bearing and profit-bearing investments as long as the stocks chosen strictly adhere to social, moral or environmental beliefs. This requires companies to undertake a careful screening process in order to maintain stocks that coincide with the fund’s beliefs. On the opposite side, Islamic mutual funds undergo a more rigorous screening process in an attempt to select portfolios that meet both qualitative and quantitative criteria set by Sharia guidelines. The filtration process, hence, excludes companies whose natures of business are banned under Shariah such as alcohol or companies that conduct biotechnology for human cloning. Islamic mutual funds also exclude investments in fixed income instruments such as corporate bonds, certificates of deposits, preferred stocks, warrants, and some derivatives (e.g. options).
*Abdelsalam, O., Fethi, M.D., Matallin, J.C., Tortosa-Ausina, E. “On the comparative performance of socially responsible and Islamic mutual funds”, Working Paper.