Performance Evaluation of Swedish Ethical and Non-Ethical Funds

Abstract: In this thesis we investigate whether there is a difference in performance between Swedish ethical and non-ethical funds. We use the Portfolio Change Measure of Performance developed by Grinblatt and Titman (1993) which is based on fund holdings and Jensen’s alpha obtained from the CAPM on an index level and on a fund level. This is done to see if our results differ if we weigh the funds according to value or if we weigh them equally. We conclude that there is a difference in the performance of ethical and non-ethical funds and that non-ethical funds outperform ethical funds on both levels. However, when we run cross-sectional regressions of the performance measures on several fund characteristics we conclude that the difference in performance between ethical and non-ethical funds partly is due to the fact that ethical funds are smaller. In line with this, we also conclude that ethical funds would benefit from becoming larger by an inflow of capital. Further we conclude that non-ethical funds are riskier on average and benefit in terms of higher performance from having a larger exposure toward idiosyncratic and systematic risk. Hence we conclude that the difference in performance between the two types of funds is not solely due to the fact that ethical funds invest in assets their fund managers deem to be ethical.