INTRODUCTION

Socially responsible investing (SRI) has seen tremendous growth in recent years. For example, the Social Investment Forum Foundation (2010) found that in the United States from 1995 to 2010 total assets professionally managed using SRI strategies increased 360 per cent, while total assets under professional management more broadly grew just 260 per cent. Eurosif (2010) found the European SRI market nearly doubled from 2007 to 2009. The definition of SRI varies widely, but investor motivations generally fall into two categories: (i) aligning investments with personal values or (ii) using investment to affect social change (Schueth, 2003). These investors seek to achieve their financial goals while simultaneously achieving their personal, moral goals.

Finding the right balance can be a challenge. After all, the trade-off between one's values and one's needs for financial returns is anything but simple and straightforward (Lewis and Mackenzie, 2000). Paradoxically, Mackenzie and Lewis (1999) encountered SRI investors who waived their rights to interest payments from an SRI investment while stating that they would increase their total invested if that investment paid a higher interest rate. SRI investors appear committed to their SRI investments even if those investments perform poorly (Webley, Lewis and Mackenzie, 2001). SRI-guided investment funds do not automatically underperform the market (Schueth, 2003; Alam and Rajjaque, 2010), but there is evidence of a financial penalty for SRI investing (Malkiel and Quandt, 1971; Moskowitz, 1992; Tippet, 2001).

For SRI investors, choosing among potential SRI investments (for example, different SRI-guided mutual funds) can require making trade-offs between the social responsibility and financial aspects of the different alternatives. These types of decisions, where people must make trade-offs among attributes linked to valued goals, are very difficult because of the negative emotion these trade-offs produce (Luce et al, 2001). Luce (1998) finds people will often choose options that allow them to avoid having to make trade-offs at all. Mackenzie and Lewis (1999, p. 439) found that people dealt with the trade-off between their SRI and financials goals by avoiding ‘detailed consideration of the costs of’ SRI and/or avoiding ‘rigorous ethical thinking’.

This behavior has significant implications for marketing managers of SRI-guided investment funds because it implies that SRI investors often do not make the connection between the costs they incur and the SRI quality of a fund. Rather, these investors avoid trading-off financial return and social responsibility goals by preferring options that maximize SRI while minimizing fees incurred. As a result, the funds devoting the greatest effort (and incurring the greatest costs) to invest according to the spirit of SRI are at a significant disadvantage relative to funds following the letter of SRI rather than its spirit (and so incurring lower costs).

Our objective here is to examine contexts where investors are more versus less willing to make trade-offs between the social responsibility and financial return aspects of SRI-guided mutual funds. There is evidence that people construe a product differently when considering it in the near versus distant future (Liberman and Trope, 1998; Trope and Liberman, 2000, 2003). When considering the near-future implications of an SRI investment, people are expected to think more concretely about the costs of the investment, making the required trade-offs more visceral and increasing preference for investments that do not require making trade-offs. On the other hand, when considering the distant-future implications of an SRI investment, people are expected to think more abstractly about the investment, thus increasing the focus on its SRI aspects, making the required trade-offs less visceral and thus reducing preference for investments that do not require making trade-offs.

We test our expectations among a unique SRI market – Muslim retail investors. This is no niche financial market. The Pew Research Center (2009) estimates that 23 per cent of the world's population (1.6 billion people) are Muslims, making Islam the second largest and arguably the fastest growing of the major religions. These investors seek investments compliant with Islam's laws on finance and trade. The results of this study help: (i) broaden our understanding of consumers’ decision making when choosing among SRI investment options, and (ii) begin an examination of SRI by Muslim consumers.

LITERATURE REVIEW

SRI in Islam

The history of SRI goes back at least to biblical times, with different religious prescriptions designed to ensure investments were made in activities/businesses that were consistent with a religion's beliefs (for example, Quakers have never condoned investing in war or slavery) (Schueth, 2003). Here we develop a definition of SRI applicable to Muslim investors. The separation of secular and religious life so common in Western economic life is not available to the faithful Muslim. Islam governs and regulates Muslims’ economic activities just as it regulates all other areas of their life. Schueth (2003) discusses three strategies employed by social investors in the United States: screening, shareholder advocacy and community investing. Rather than viewing each as a separate option for social investors, Islam expects its adherents will pursue all three in their investments and financial decisions. Muslims are expected to be active rather than passive in their financial dealings. That is, Muslims are expected to be socially responsible investors as broadly defined in all their financial dealings.

With this in mind, SRI-guided mutual funds wishing to be acceptable investments for Muslims cannot ignore any of the restrictions and requirements of Shari’a (Islamic law), which lays out rules and guides for all aspects of life, including business (Algaoud and Lewis, 2007). From a Western economic perspective, perhaps the most significant restriction imposed by Islam is the explicit prohibition on the charging of interest (riba) in all its forms (Qur’an 4:161). Earning a profit from doing nothing, as occurs when interest is charged, is seen as patently unfair to one's economic counterpart. It is much fairer to share the returns of a financed project in proportion to the effort and risk undertaken by each party (Algaoud and Lewis, 2007). Islam also applies a strict code of ethics that restricts business and investment undertakings to halal (permitted/allowed) activities. Faithful Muslims, for instance, would not invest in banks charging interest, liquor distillers or pork producers. Further, priority should be given to investment in the production of essential goods satisfying the needs of the majority of the community (Algaoud and Lewis, 2007). From an Islamic perspective, it is hard to justify supporting the production of luxury goods when so many live in poverty.

The Qur’an (5:90–91) also explicitly prohibits games of chance (maysir), and business activities containing an aspect of gambling have been forbidden by the Shari’a (Siddiqi, 1985). Similarly, business activities containing aspects of speculation (gharar) or excessive or unnecessary risk have been prohibited. It is accepted that in any transaction there are some small risks and uncertainties that are necessary. Entering into a transaction blindly or taking on unnecessary risk have been prohibited (Algaoud and Lewis, 2007). Thus, traditional insurance and financial hedging instruments like stock index options are not available to faithful Muslims because of their high levels of uncertainty.

To facilitate Islam's social justice agenda, Muslim investors pay zakat, a compulsory almsgiving based on the value of assets held for a full year that facilitates the transfer of income from the wealthy to the needy to ensure everyone has a fair standard of living (nisab). Zakat is collected by the state or by Islamic financial institutions and distributed to the poor directly or through religious institutions (Algaoud and Lewis, 2007). Zakat may also be used to ‘purify’ dividends received from investments in companies engaged primarily in halal activities but with some interest-related activities (Elfakhani et al, 2007).

Islam's restrictions and requirements create additional costs for SRI-guided mutual funds serving Muslims. These funds will have higher management fees than equivalent Western mutual funds because the funds engage in specialized SRI compliance tasks, withhold zakat, and pay Shari’a supervisory boards to oversee/assure the appropriateness of their operations. Beyond these differences in management fees, traditional Western mutual funds and Islamic mutual funds are quite similar. Both offer a range of investing objectives from focused sector funds to fully diversified index funds, are subject to the quality of investment decisions made by fund managers, and may recoup marketing costs through front- or back-end fees (loads). In fact, many Islamic financial products use administrative techniques to make their behavior nearly indistinguishable from traditional Western financial products, leading to accusations that products are compliant with the letter, but not the spirit of Shari’a (Dusuki, 2010; Rethel, 2011).

Effects of near- versus distant-future mindsets

There is significant evidence that people construe products/events differently when employing near- versus distant-future mindsets (Liberman and Trope, 1998; Trope and Liberman, 2000, 2003; Trope et al, 2007). These differences in construal affect purchase intentions and follow-through (Alexander et al, 2008). The research on construal level theory shows that people with a distant-future mindset represent products in terms of abstract, high-level considerations of the desirability of the product. Adopting a near-future mindset changes how products are construed. People with near-future mindsets represent products in terms of concrete, low-level considerations of the product's feasibility (Trope and Liberman, 2000, 2003).

These differences in construal will affect investors’ evaluation of mutual funds. Investors with a distant-future mindset will construe funds more abstractly, overweighting the funds’ desirability aspects in an evaluation (Trope and Liberman, 2000, 2003). These desirability aspects might include the implications of an investment (for example, the value of SRI). Investors with a near-future mindset, on the other hand, will construe funds more concretely, overweighting the funds’ feasibility aspects in an evaluation (Trope and Liberman, 2000, 2003). These feasibility aspects might include the specific characteristics of a fund and their levels (for example, a fund's level of social responsibility and its management fees).

RESEARCH OBJECTIVES

Understanding how SRI-focused retail investors decide which SRI-guided mutual funds to invest in is critical for those marketing these funds. Investing decisions are complex and multifaceted. SRI investors spread their investments across a range of funds with different risk-return profiles (Michelson et al, 2004). Muslim investors’ preferences for financial products may show a lack of understanding of the principles of Shari’a Compliance (Rammal and Zurbruegg, 2007). Inevitably, SRI-focused mutual fund investors need to make trade-offs between their desired level of a fund's social responsibility and the fees they are willing to incur to receive that level. The need to trade-off these highly valued attributes creates a negatively emotion-laden decision environment (Luce, 1998; Luce et al, 2001). Avoiding or otherwise coping with this negative emotion is an important goal guiding such investment decisions (Simonson, 1992; Larrick, 1993; Luce et al, 1997).

Like other socially responsible investors, we expect that Muslim investors will tend to pursue mutual fund investment options that allow them to avoid having to trade-off their faithfulness (social responsibility) and the management fees (costs) they incur in an investment (Luce et al, 1999). That is, they will prefer funds following Shari’a-compliant investing strategies over those following traditional Western investing strategies and funds with lower management fees over those with higher management fees. The strength of this preference for options not requiring trade-offs will be affected by the context of the investment decisions. Contexts where the trade-offs are less negatively emotion-laden will see greater willingness to make trade-offs between faithfulness and management fee attributes of the mutual fund options (Luce, 1998).

We expect that SRI investors’ temporal mindset is a contextual variable affecting trade-off willingness. The weightings of feasibility and desirability aspects of investments differ for investors with near- versus distant-future mindsets (Trope and Liberman, 2000, 2003), resulting in differing levels of negative emotion from trade-offs of social responsibility and cost. For example, Muslim investors with near-future mindsets likely construe mutual funds more concretely, overweighting specific levels of fund attributes and thus increasing the negative emotion from faithfulness versus management fee trade-offs. Muslim investors with a distant-future mindset, on the other hand, likely construe mutual funds more abstractly, overweighting the high-level desirability aspects of the funds. This greater focus on the abstract, desirability aspects of the funds (rather than their concrete, feasibility aspects) lessens the negative emotion generated by faithfulness versus management fee trade-offs. As a result, Muslim investors with near-future mindsets are expected to be less willing to make faithfulness versus management fee trade-offs than those with distant-future mindsets. Rather, they will prefer options allowing them to maximize their preferences for both attributes.

Thus, we propose that among Muslim investors:

Hypothesis 1:

  • Preference for faithful compliance by a fund will be greater when mutual fund options are considered in the near future versus distant future.

Hypothesis 2:

  • Tolerance for higher management fees will be lower when mutual fund options are considered in the near future versus distant future.

METHOD

In this study, participants were randomly assigned to one of two choice-based conjoint experimental conditions – near-future mindset versus distant-future mindset. Choice-based conjoint has become the most commonly used form of conjoint among marketing research practitioners (Sawtooth Software, 2008). In choice-based conjoint, respondents are asked to make choices from among a series of several sets of alternatives, mimicking actual marketplace behavior. Within choice sets, each alternative or profile is described on a number of attributes whose levels vary across alternatives; across choice sets, attribute levels also vary within alternative. Our two choice-based conjoint experimental conditions differed from each other only in the mindset prime presented to participants before the actual choice exercises; the choice tasks themselves were invariant across prime condition. This novel approach allowed for comparison of utilities across conditions, something that is not generally proper in conjoint experiments, where attributes and/or levels within attributes vary across condition.

Participants

Sixty students enrolled in MBA or Executive Education classes at a university in Saudi Arabia were recruited to participate in a study that they were told examined their interest in various mutual fund opportunities. The sample had large majorities who were enrolled in Executive Education, who were younger than 40 years of age and who were male. We found no evidence that responses varied with respect to participants’ demographic characteristics. In addition, we found no evidence that participant demographics varied across our priming conditions. Accordingly, we present no further analysis involving participant demographics. Participants’ demographic characteristics are shown in Table 1.

Table 1 Demographic characteristics of study participants
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Procedure

Participants logged into the survey Website at their convenience and were randomly assigned to an experimental condition (near-future mindset versus distant-future mindset). An introductory screen welcomed them and explained that the purpose of the survey was to get their opinion of financial products; this welcome screen and the entire survey were in Arabic. To introduce participants to the mutual fund attributes used in the upcoming choice task and get them to consider their importance, the next screen contained measures of stated importance across seven attribute domains, structured as 7-point bipolar statements that contrasted, for example ‘Compliance with Western Financial Principles’ with ‘Compliance with Shari’a Principles’. Instructions to this question were ‘Considering mutual funds, of the two items paired, which is more important to you? Mark the point between the paired concepts to indicate how much you care about one versus the other’. Figure 1 presents the English language translation of the stated importance matrix; note that for some attributes the expected preferred item was on the right side of the matrix and for others it was on the left.

Figure 1
figure 1

The stated preference matrix participants completed for mutual fund features (Translated).

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The following screen contained the prime manipulation depending on assigned experimental condition. Each prime consisted of a short citation from the Qur’an, shown to participants in JPEG format.Footnote 1 The authors chose these specific Qur’an verses because these verses fit the theoretical requirements of the study. Both verses sets have to do with riba, one with the present, day-to-day mechanics of the prohibition and the other with the long-term consequences of ignoring it. The verses are used to prime a temporal mindset in participants. The near-future mindset prime contained two Qur’anic verses that specifically mention the prohibition of interest in Islam. This prime shortens consumers’ temporal frame for considering their investment decision by focusing them on the here and now and the immediate task of complying with Islam's economic restrictions. The distant-future mindset prime consisted of three verses reminding the reader that, according to Islam, all will appear before their Lord on the Day of Judgment and that the life and wealth of this world will avail them not at that time. This prime lengthens consumers’ temporal frame for considering their mutual fund investment decision by extending the frame to include the hereafter. See Table 2 for translations of the two primes.

Table 2 Qur’an verses used as primes in the study's two conditions
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Thus, under both primes participants were reminded of the Qur’an and their Islamic faith. However, the near-future mindset prime was very specific with respect to economic and financial regulation called for by the Shari’a, and the distant-future mindset prime was specific with respect to mortality and the transitory nature of this life.

Following the prime, participants were shown the first of 12 random choice tasks. Each choice task consisted of three mutual fund concepts and a fourth ‘no choice’ option. The mutual fund concepts were defined on seven attributes, which mirrored the stated attributes participants saw earlier. Table 3 lists the attributes, with the label by which they will be referred throughout the rest of the article, and the levels of each that were used. The Compliance and Management Fee attributes are necessary for our hypothesis testing. Importantly, the levels of the Compliance attribute showed the presence or absence of an SRI-focus by the mutual fund. For Muslims engaged in SRI, a fund managed in compliance with Shari’a Principles would be seen as an SRI option, whereas a fund managed in compliance with Western financial principles would not be.

Table 3 Mutual fund concept attributes and levels used in the choice-based conjoint
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The other five attributes were chosen in an effort to give participants the type of information they would expect to have when evaluating a mutual fund. These attributes are widely touted on Websites catering to mutual fund investors (for example, www.investing-in-mutual-funds.com/compare-mutual-funds.html, www.kiplinger.com/tools/fundfinder/fundsearch.php and www.wikinvest.com/wiki/Mutual_Funds). They are also found in previous research (Dellva and Olson, 1998; Jones et al, 2007).

Figure 2 is a sample random choice task. After the fourth and eighth choice tasks, participants were shown a progress screen that indicated that they were a third and two-thirds, respectively, of the way through and that they were doing an excellent job.

Figure 2
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Example of the choice-based conjoint task for mutual fund concepts completed by participants (Translated).

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Following the choice tasks, participants were asked demographic questions. Specifically, they were asked whether they were pursuing an MBA or were enrolled in Executive Education, their age range and their gender.

Results and discussion

To analyze the data, we derived participant-level utilities via Hierarchical Bayesian (HB) estimation.Footnote 2 For a technical explanation of this estimation, see Lenk et al (2006). These utilities are subsequently used in two ways. To understand how important an attribute is compared with other attributes, the range of utilities across levels within each attribute is calculated; the relative magnitude of this range for one attribute compared with another indicates the relative importance of the attributes. The utilities are also used to calculate share of preference for different hypothetical mutual funds described by the dimensions we tested in an illustration of how our primes and level of management fee would be expected to impact utilities and thus actual marketplace behavior.

As one might expect given the participants, Shari’a Compliance dominated the other attributes regardless of experimental condition. Across conditions, Shari’a Compliance had more than six times the estimated importance of the next most important attribute, which were Management Fees. Paired t-tests of the importance of Shari’a Compliance compared with the other attributes were all significant, both across mindset primes (smallest t(59)=13.3, P=0.00) and within each mindset prime (for the near-future mindset prime, smallest t(34)=10.6, P=0.00 and for the distant-future mindset prime, smallest t(24)=6.9, P=0.00). Supporting Hypothesis 1, the importance of Shari’a Compliance in the near-future mindset prime condition was significantly greater than it was in the distant-future mindset prime condition, M=13.9 and M=10.1, respectively, t(58)=4.1, P=0.00.

The importance of Management Fees was also significant across experimental conditions, t(58)=2.1, P=0.04. In the near-future mindset prime condition, Management Fees were significantly more important than they were in the distant-future mindset prime condition, M=2.4 and M=1.5, respectively. In other words, participants cared more about the level of Management Fee they would have to pay in the near-future mindset prime condition – where concern for Shari’a Compliance was also higher – than they did in the distant-future mindset prime condition, where concern for Shari’a Compliance was lower.

Supporting Hypothesis 2, the differences in the importance of the Management Fee attribute was driven by differences in the utilities associated with the 2.0 per cent Management Fee and not differences in the utilities associated with the 1.0 per cent Management Fee. Utilities for a 1.0 per cent Management Fee did not significantly differ between prime conditions, M=1.0 and M=0.8 in the near-future and distant-future mindset conditions, respectively, t(58)<1.0 while there was a significant difference for tolerance of the 2.0 per cent Management Fee across conditions, M=−1.4 and M=−0.7 in the near-future and distant-future mindset conditions, respectively, t(58) −2.7, P=0.01.

To vividly illustrate support for Hypothesis 2 by showing the impact of differences in utilities for Shari’a Compliance and Management Fees across primes, we estimated shares of preference based on the HB estimates of participant-level utilities.Footnote 3 Because of the dominance of Shari’a Compliance over all other attributes, and because our hypothesis specifically concerned how the utility of different Management Fees would interact with condition – as well as for simplicity sake – we chose to hold Shari’a Compliance and all other attributes except Management Fees constant when we estimated the following shares. In addition, for expositional ease, we created the predicted shares for only the highest and lowest Management Fees. Thus, within each experimental condition, shares are estimated for two products, both Shari’a compliant and similar in every other regard except that one was associated with a 1.0 per cent Management Fee and one was associated with a 2.0 per cent Management Fee. Figure 3 contains the predicted preferences for those two mutual funds.

Figure 3
figure 3

HB estimation of the share of preference for low versus high management fees when considering a Shari’a-compliant mutual fund in different prime conditions.

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Consistent with Hypothesis 2, under the near-future mindset prime condition, 97 per cent of participants are estimated to prefer the low Management Fee option, whereas under the distant-future mindset prime condition only 68 per cent are estimated to have that same preference. This dramatic difference illustrates the unwillingness of Muslim investors who construe investment options concretely to make the expected – and necessary – trade-off between financial return and social responsibility aspects of those investment options.

GENERAL DISCUSSION

Our primary objective in writing this article was to further our understanding of how SRI-focused retail investors decide which SRI-guided mutual fund(s) to invest in. We were particularly interested in exploring contexts where investors are more versus less willing to trade-off social responsibility attributes and financial return attributes of SRI-guided mutual funds. We expected that whether one had a near-future versus distant-future mindset while considering available mutual fund options would affect the level of negative emotion generated when making the relevant trade-offs and so would affect the resulting investment choices. Consistent with our expectations, we found that SRI-focused retail investors primed to take a distant-future mindset were more willing to choose mutual fund options that traded-off social responsibility and financial return attributes than were those primed to take a near-future mindset. Those with a distant-future versus near-future mindset were more willing to incur the higher management fees one would expect from mutual funds pursuing the spirit and not just the letter of SRI.

A secondary objective in writing this article was to begin an examination of Muslims as socially responsible investors. Minimally, practicing Muslims can be viewed as socially responsible investors because they seek to ensure their investments are made in activities/businesses that are consistent with their Islamic beliefs. Practicing Muslims, for instance, would avoid investing in banks charging interest, liquor distillers or pork producers. More broadly, it is important to note that in governing economic transactions, Islam places fairness and justice at the center of society (Qur’an 2:239). Muslims are expected to be active, not passive shareholders. Muslim investors are also expected to facilitate Islam's social just agenda by paying zakat, a compulsory almsgiving based on the value of assets held for a full year that facilitates the transfer of income from the wealthy to the needy to ensure everyone has a fair standard of living (nisab).

We found that among Muslim investors the explicit and implicit importance for Shari’a Compliance in mutual fund options is quite high. It is important to note that our participants were MBA and Executive Education students in Saudi Arabia, a particularly conservative Islamic country. We would expect these participants would show very strong preferences for Shari’a-compliant investments and greater willingness to accept the costs of that compliance creating a very conservative test of our hypotheses. Finding contextual effects with this informed, conservative group implies that marketers will find even stronger effects among less conservative, less informed Muslims. Our results are particularly important because much of the global Muslim community lacks experience with banks and their financial products and thus making small improvements in their financial decision making will have outsized returns to the global economy. According to Maris Strategies, assets in Islamic finance rose 29 per cent from 2008 to 2009 to US$822 billion driven by growth in retail banking as unbanked Muslims around the world are attracted to Shari’a-compliant retail financial products – of the 1.6 billion Muslims in the world, just 14 per cent use banks compared with 92 per cent of US and 95 per cent of UK households (Oakley, 2010).

Managerial implications

Our findings should be particularly interesting to marketers of socially responsible investments broadly (not just Shari’a-compliant mutual funds). Recognizing that the investing context will have a significant effect on SRI investors investment decisions offers marketers a chance to adjust their strategies to improve their chances with investors. For marketers of investment funds that are committed to implementing the spirit of SRI (and so incur greater costs), marketers need to focus investors on the long-term, abstract desirability aspects of the investment. Investors should be asked to consider how making an investment will satisfy their values and provide long-term benefits. Such a distant-future mindset will make it easier for SRI investors to accept the costs required to implement a socially responsible investment strategy.

For marketers of investment funds that implement the letter rather the spirit of SRI (and so incur lower costs), marketers need to focus investors on the near-term, concrete feasibility aspects of the investment. These marketers want to call attention to their ability to provide an investment option that does not require investors to trade-off social responsibility and cost. Investors should be asked to focus on the concrete levels of fund attributes and the near-future impact of their investment. Such a near-future mindset will make it harder for SRI investors to make social responsibility versus cost trade-offs, increasing the appeal of low-cost SRI investments.

We manipulated participants’ temporal mindset using Qur’an verses that focused participants on either the near- or distant-future implications of Islam's riba restrictions. Marketers of SRI investments could use similar priming techniques to influence the temporal mindset of potential investors. Asking investors to consider the specifics of a fund and the mechanics of its implementation of a SRI strategy is expected to prime a near-future mindset. For example, asking SRI investors to compare the specific features of an SRI mutual fund against other (even non-SRI) funds should increase the concrete construals of a near-future mindset, increasing trade-off difficulty. Alternatively, asking investors to consider the implications of the success of the social cause supported by the SRI fund should prime a distant-future mindset. For example, asking SRI investors to imagine a world free of some injustice should increase the abstract construals of a distant-future mindset, decreasing trade-off difficulty.

Future research

Our research was conducted within a single, particularly conservative Muslim population. A more secular Muslim population might be less inclined to place Shari’a Compliance so far above all other aspects of mutual funds, and may be less willing to accept higher management fees even when reminded of the ultimate reasons why their faith says such is important. The relative strength of one's SRI goals likely affects the negative emotion generated from trade-offs involving those goals. Future research should explore the interaction of decision context and strength of SRI goals on investors’ willingness to make SRI-goal trade-offs.

Our research focused on investors motivated to align their investments with their personal values. Future research should examine whether investors whose motivation is to use investment to affect social change are guided by the same investment decision-making process as personal values investors. It may be that SRI investors driven by sustainable business concerns place relatively higher emphasis on investments driven by the spirit, rather than just the letter, of SRI.