Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence of Islamic and Socially Responsible Funds

We analyse the performance persistence and survivorship bias of Islamic and Socially Responsible Investment (SRI) funds. The remarkable growth of these two types of ethical funds over the last two decades raises the question of how non-financial attributes influence performance and performance persistence. We propose a refined version of the procedures used in the literature based on a cross-sectional test to control for significance of the recursive portfolios according to past performance. This procedure allows us to correctly identify whether this abnormal performance is due to a dynamic investment strategy based on past performance, or whether it is obtained by simply investing in a particular set of mutual funds. The analysis shows that Islamic funds were particularly resilient during the 2007–2008 financial crisis. Regarding persistence, its significance varies depending on the time horizon (yearly/half-yearly), survivorship, or tail of the distribution. According to the type of fund we find that, in the case of Islamic funds, persistence only exists for the best funds. However, for SRI funds, evidence is weaker and persistence only exists for the worst funds.