Is Ethical Money Financially Smart? The Impact of Non-Financial Investment Attributes

Abstract

Little is known about how the decisions of mutual fund investors are influenced by investment attributes unrelated to financial performance. Therefore, this paper studies the money-flows into and out of SRI funds around the world. Investors in socially responsible investment (SRI) funds may care more about social or ethical issues in their investment decisions than about fund performance. Consistent with investors deriving non-financial utility from investing in SRI funds, SRI money flows are less related to past fund returns. In particular, ethical money is less sensitive to past negative returns than conventional fund flows, especially when SRI funds predominantly employ sin/ethical SRI screens. Stock picking based on in-house SRI research increases the money-flows and higher inflows also arise for funds which are younger, smaller and charge lower fees. Membership of a large fund family attracts more flows and creates higher flow volatility due to the lower fees to reallocate money within the fund family. Finally, there is no evidence of a smart money-effect as the funds that receive more inflows will not subsequently outperform nor underperform their benchmarks and conventional funds.

Keywords: flows, ethical funds, socially responsible investing, investment screens, SRI

JEL Classification: G10, G11, G12