The Financial Performance of European Ethical Funds 1996~1998

This paper investigates the financial performance of 40 ‘ethical’ funds for a recent time period, 1996-1998, using weekly data. Funds from 7 European countries are analysed using traditional performance measures such as the Jensen, Sharpe and Treynor measures. The results suggest that very few ethical funds managed to significantly outperform a global benchmark after adjusting for risk. However none of them significantly underperformed the global benchmark portfolio either. This study thus confirms some previous results which suggest that investors need not sacrifice risk-adjusted returns by investing in ethical funds. In addition the market timing ability of the funds is examined by employing the timing model developed by Treynor and Mazuy. The results from this model suggest that none of the funds had positive market timing ability, but some funds exhibited significantly negative market timing; this confirms the results from many previous studies. Finally, cross sectional regression analysis was employed to explain the Jensen performance measures. This analysis suggest that there may be a significantly positive relationship between fund size and the Jensen alpha.