Is Ethical Money Financially Smart?

Little is known about how investors select socially responsible investment (SRI) funds.Investors in SRI funds may care more about social or ethical issues in their investment decisions than about fund performance.This paper studies the money-flows into and out of the SRI funds around the world.We find that ethical money chases past returns.In contrast to conventional funds' investors, SRI investors care less about the funds' riskiness and fees.Funds characterized by shareholder activism and by in-house SRI research attract more stable investors. Membership of a large SRI fund family creates higher flow volatility due to the lower fees to reallocate money within the fund family.SRI funds receiving most of the money-inflows perform worse in the future, which is consistent with theories of decreasing returns to scale in the mutual fund industry.Finally, funds employing a higher number of SRI screens to model their investment universe receive larger money-inflows and perform better in the future than focused funds.

[1]  Peter Tufano,et al.  Costly Search and Mutual Fund Flows , 1998 .

[2]  Lu Zheng,et al.  Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows , 2003 .

[3]  Ashish Tiwari,et al.  Does Stock Return Momentum Explain the 'Smart Money' Effect? , 2004 .

[4]  Lu Zheng.  Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability , 1999 .

[5]  Vikram Nanda,et al.  Family Values and the Star Phenomenon , 2003 .

[6]  D. Beal,et al.  'Putting Your Money Where Your Mouth Is' A Profile of Ethical Investors , 1998 .

[7]  William N. Goetzmann,et al.  Day Trading International Mutual Funds: Evidence and Policy Solutions , 2000 .

[8]  M. Statman,et al.  Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds , 1993 .

[9]  L. Renneboog,et al.  Socially Responsible Investments : Methodology, Risk and Performance , 2007 .

[10]  William N. Goetzmann,et al.  COGNITIVE DISSONANCE AND MUTUAL FUND INVESTORS , 1997 .

[11]  John Matatko,et al.  The Investment Performance of UK “Ethical” Unit Trusts , 1992 .

[12]  William N. Goetzmann,et al.  Offshore Hedge Funds: Survival and Performance 1989-1995 , 1997 .

[13]  Joanna S. Wu,et al.  Truth in mutual fund advertising: Evidence on future performance and fund flows , 2000 .

[14]  Glenn Ellison,et al.  Risk Taking by Mutual Funds as a Response to Incentives , 1995, Journal of Political Economy.

[15]  M. Massa.  How do family strategies affect fund performance? When performance-maximization is not the only game in town , 2003 .

[16]  C. D. Sinclair,et al.  Evaluating the Performance of Ethical and Non-Ethical Funds: A Matched Pair Analysis , 2005 .

[17]  Martin J. Gruber,et al.  Another puzzle: the growth in actively managed mutual funds , 1996, Annals of Operations Research.

[18]  V. Agarwal,et al.  Role of Managerial Incentives, Flexibility, and Ability: Evidence from Performance and Money Flows in Hedge Funds , 2005 .

[19]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[20]  Nicolas P. B. Bollen,et al.  Mutual Fund Attributes and Investor Behavior , 2007, Journal of Financial and Quantitative Analysis.

[21]  J. ter Horst,et al.  Socially Responsible Investments: Methodology, Risk Exposure and Performance , 2007 .

[22]  A. Khorana,et al.  Conflicts of Interest and Competition in the Mutual Fund Industry , 2004 .

[23]  Paula A. Tkac,et al.  The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds Versus Pension Funds , 2000 .

[24]  John Matatko,et al.  Ethical Unit Trust Financial Performance: Small Company Effects and Fund Size Effects , 1997 .

[25]  Andrea Frazzini,et al.  Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns , 2005 .

[26]  Roger M. Edelen.  Investor flows and the assessed performance of open-end mutual funds , 1999 .

[27]  Rob Bauer,et al.  Ethical Investing in Australia; Is there a Financial Penalty? , 2004 .

[28]  Michael Schröder,et al.  The performance of socially responsible investments: Investment funds and indices , 2004 .

[29]  Rob Bauer,et al.  International Evidence on Ethical Mutual Fund Performance and Investment Style , 2002 .

[30]  René M. Stulz,et al.  Working Paper Series the Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds versus Pension Funds the Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds versus Pension Funds , 2022 .

[31]  Jacquelyn E. Humphrey,et al.  Socially Responsible Investment Funds: Investor Reaction to Current and Past Returns , 2008 .

[32]  Frank T. Magiera,et al.  The Performance of Socially Responsible Investments: Investment Funds and Indices , 2005 .

[33]  Christopher C. Geczy,et al.  Investing in Socially Responsible Mutual Funds , 2005, The Review of Asset Pricing Studies.