Are investment managers investing ethically at a disadvantage?
Abstract
It is the fiduciary duty of the investment managers to maximize returns at a reasonable level of risk for their clients. The greater the number of investment opportunities, the more likely that the managers will achieve the objective of maximizing return and minimizing risk. Ethical investing involves screening out certain investments on moral grounds. Such practice would inevitably lead to the exclusions of some potentially profitable businesses and thus reduces the number of investment opportunities. The logical question one would ask is whether investment managers who follow ethical investing principle are at a disadvantage vis-à-vis other managers whose investment options are not restricted. This paper examines this issue by analyzing the performance of faith-based funds which adopt the toughest exclusionary screens. Our results show that their performances are not worse than their unrestricted counterparts. This implies that investment managers are not shortchanging their clients even though their investment choices are restricted by their ethical principles.