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Is ethical investing doomed?

In theory, ethical investors must underperform unconstrained ones. In practice, however, things aren't so simple
August 6, 2019

Imagine a manager were to launch a fund that invested only in stocks whose names began with letters from the first half of the alphabet. Would you invest in it?

I suspect not, and for a good reason. Common sense tells us that a constrained choice should not lead to better outcomes than unconstrained ones. Sure, there might be many great investments in the A-M segment of the market. But if there are, an unconstrained fund manager can buy them as well as our A-M fund. If on the other hand there are better investments in the N-Z segment, our A-M fund cannot buy them, but unconstrained funds can.

Common sense, therefore, tells us that the A-M fund must underperform on average over the longer run, because there’ll be times when N-Z stocks do better. At least sometimes, constraints will bite.

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