The Performance of Ethical Unit Trusts: Choosing an Appropriate Benchmark

Abstract

In recent years a growing emphasis has been given to the moral dimension of financial investment. This has been evidenced by the growth in 'socially responsible' managed funds. This paper addresses the question of the appropriate benchmark against which to measure the performance of ethical trusts. In a previous paper (Luther et al. (1992)) the authors show that 'ethical' unit trusts in the UK have investment portfolios concentrated in low market capitalisation companies. This paper examines the characteristics of the returns realised by 'ethical' trusts, using a comprehensive unit trust price database. In particular, empirical results show that over the period studied 'ethical' trusts: i) had returns which were, in general, at least as highly correlated with a small-company index as with a comprehensive market index; ii) are more appropriately evaluated, in terms of financial performance, by reference to a model which recognises that their returns are influenced both by general market movements and by factors specific to smaller companies; iii) points out that because of high correlation between indices, estimation of separate small company and market sensitivities is unstable.