The myth that non ethical funds outperform ethical has been highlighted by new research from finance academics at Henley Business School (Adamsson & Hoepner, 2015). Published in September the research shows that the reason for the perceived outperformance of sin stocks is because sin portfolios have more smaller companies. The award winning research highlights that ‘statistically sin stocks do not outperform’. The research shows that the sin stock outperformance vs. the benchmark index is because they overinvest in small- capitalisation stocks and under invest in large-capitalisation stocks. Small cap stocks are riskier and provide higher return over time compared with larger companies reflecting this risk (Famma & French, 1993). It is small cap bias rather than sin stock characteristics that accounts for performance. The paper showed that ‘alcohol, tobacco and sin portfolios do not exhibit any significant outperformance, and the gambling portfolio underperforms’. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2659098
Another consideration highlighted in this paper is other research showing that the US centric nature of typical sin stock portfolios is not generalizable globally. Given that New Zealand based investors invest globally rather than primarily in the US, the US centric data is not a valid comparison. For example, research has shown that alcohol, gambling and tobacco stocks significantly underperform in seven Pacific-Basin markets: Australia India, Japan, South Korea, Malaysia, New Zealand and Singapore (Durand, Koh, and Tan, 2012). These authors concluded that ‘the evidence suggests the price of sin is a manifestation of groupthink’.