Using an international database containing 103 German, UK and US ethical mutual funds the researchers Otten, Bauer and Koedijk reviewed and extended previous research on ethical mutual fund performance.
By applying a multi-factor Carhart (1997) model they solved the benchmark problem most prior ethical studies suffered from. After controlling for investment style, they find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period. Introducing time-variation in betas, however, leads to a significant under-performance of domestic US funds and a significant out-performance of UK ethical funds, relative to their conventional peers. Finally, they differentiated previous results by documenting a learning effect. After a period of strong under-performance, older ethical funds finally are catching up, while younger funds continue to under-perform both the index and conventional peers.
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