Abstract
Ethical mutual funds (MFs) have grown in popularity over the past few years. However, the investors generally have concerns about their profitability compared to the investment group of non-ethical MFs. Performance comparison could be a potential way to address this concern, but the differences in their essential investment objectives raise the issue of heterogeneity between the ethical and non-ethical investment groups. Motivated by addressing this heterogeneity, this article proposes a general nonconvex metafrontier framework for comparing different investment groups of MFs. Investment groups can exhibit heterogeneity from different perspectives, such as from regulations, resource constraints, to name a few. To provide a rather complete framework for estimating the frontiers, the diversified, convex and nonconvex evaluation approaches are adapted and presented in a multi-moment setting. The proposed metafrontier framework is then applied to an empirical example where the investment groups are heterogeneous from the ethical perspective. The empirical results suggest that the ethical constraint does not necessarily lead to a worse financial performance; quite the contrary, the results provide some evidence on the outperformance of ethical MFs over the non-ethical MFs.
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