Performance of Ethical Mutual Funds-Sacrifice or premium: Empirical Evidence in the UK and Malaysia

2015 dissertation for MSc Finance and Risk. Selected by academic staff as a good example of a masters level dissertation. Ethical funds have got attention to investors due to the nature of investment and selection of stocks. Over the time growth of ethical funds or SRI funds has been increasing. Considering the evolution of ethical funds, this study has been undertaken to compare the performance among the ethical funds, conventional funds, simulated portfolio and Market Portfolio in the UK and Malaysia. The main objective of the study was to identify the performance of ethical mutual funds over conventional funds, simulated portfolio and local market portfolio and how the performances of ethical funds differ. The study has been conducted collecting regarding nine conventional funds in the UK, nine ethical funds in UK, Listed stocks of FTSE100, FTSE100 index performance, nine conventional funds in Malaysia, nine ethical funds in Malaysia, Listed stocks of FTSE Bursa KLCI and performance of FTSE Bursa KLCI. Data has been collected from Bloomberg and analyzed through Monte Carlo simulation and Sharp ratio. Overall analysis of the study concludes that the performance of ethical funds is higher than the market portfolio (FTSE100 index) performance but lower than the simulated portfolio in the UK. However, the performance of ethical funds and conventional funds in the UK is almost similar. This is due to similar types of investment allocation and fees related to investment. In UK investors may not only consider the return from funds for investment but also social issues can be considered to select the funds of own choice. As there is no difference between the performances of ethical funds and conventional funds so people might be interested in ethical funds to make them socially more responsible. On the other hand in Malaysia, ethical funds are performing poorly than conventional funds, simulated portfolio and local market portfolio (FTSE Bursa KLCI: IND). This indicates that ethical funds are sacrificing performance compared to conventional funds and other portfolios. The author found that all the mutual funds in Malaysia are associated with Shariah-based investment. For this reason, investors are selecting ethical funds with less return. Here investors are considering Halal or Haram issues rather than return to take investment decision. Researcher also found that various fees associated with ethical funds are higher than from the conventional funds. Moreover, the ethical funds of Malaysia are poorly performing compared to the ethical funds of the UK. The author in this study found that the various fees associated with the funds management is higher is Malaysia than the UK, information asymmetry for the investors of Malaysia as Malaysian market in developing. Besides these, asset allocation decision also causes the difference of performance. Lastly, the Malaysian investors focus on economic growth than the ethical issue as still they are in developing stage. Whereas, the investors of the UK giving emphasis on ethical issues to invest as their economy is already developed