Does socially responsible mutual fund performance vary over the business cycle? New insights on the effect of idiosyncratic SR features

Abstract

This study analyses the performance and market timing of US socially responsible (SR) mutual funds in relation to business cycle regime shifts and different grouping criteria: Ethical strategy focus, SR attributes scores and Morningstar category. Different methodologies are applied and results highlight the importance of considering specific benchmarks related to the investment style in evaluating the SR fund performance. Our results show that, in aggregate, the abnormal performance of SR funds is negative and significant in expansion periods, but no significant differences are found in recession periods. When specific benchmarks are considered, performance improves in recession periods, particularly for environmental funds, those with high SR attributes scores, and funds from the nine Morningstar style box categories. Market timing of SR funds takes positive values and is partially significant. Previous evidence of negative timing after a recent financial crisis vanishes when specific benchmarks are considered. For comparative purposes the performance of conventional US mutual funds is also analysed. There are no significant differences between the performance of SR and conventional mutual funds when a fair comparison is made within the same style categories. When all the SR funds are considered, they underperform conventional funds in expansion sub‐periods, but in recession sub‐periods they perform better, although the differences observed are not significant.

The Impact of COVID-19 Lockdowns on Sustainable Indexes

“…Thus, our results seem to support the hypothesis that sustainable indexes were not more resilient than traditional indexes during the COVID-19 lockdowns. These results are in line with the findings of Leite and Cortez [37] and Matallín-Sáez et al [60] on sustainable funds and with the recent research of Folger-Laronde et al [20]. Although sustainable indexes do not appear to have had an insurance role [58] during the COVID-19 outbreak, the mean difference is not statistically significant; thus, financial-first investors may alternatively choose sustainable or traditional investments.…”

Corporate culture, ethical stimulus, and managerial momentum: Theory and evidence

“…The Morningstar Stewardship Grade for funds goes beyond the usual analysis by allowing investors and advisors to assess funds based on factors that Morningstar, the data provider, believes influence the following three points: the manner in which funds are run, the degree to which the management company's and fund board's interests are aligned with fund shareholders, and the degree to which shareholders can expect their interests to be protected from potentially conflicting interests of the management company (see e.g., Matallín‐Sáez, Soler‐Domínguez, de Mingo‐López, & Tortosa‐Ausina, ). The analysts of the Morningstar Stewardship Grade assess and assign each fund a letter grade from A (best) to F (worst).…”

Are sustainable investments crisis resistant?

“…3) The third category of studies want to reveal the connection between ESG and financial performance by comparing the performance of traditional and ESG investment opportunities. The papers on the topic differ according to what they compare: the performance of an ESG index on the market to that of a traditional index (Tripathi-Bhandari, 2016), the performance of an ESG investment fund to that of a traditional investment fund (Becchetti et al, 2015;Matallín-Sáez et al, 2018;Nofsinger-Varma, 2014) or they set up ESG portfolios meeting different ESG screening criteria (Kempf-Osthoff, 2007;Statman-Glushkov, 2009), and evaluate their performance using risk adjusted performance indicators (e.g. Sharpe ratio, Treynor ratio, alpha parameters measured according to different asset pricing models).…”

“…Ishihara described such a definition of a crisis as valid (Ishihara, 2005:6). While authors analysing the performance of ESG investments in crisis periods typically identify a crisis according to macro-economic cycles (Becchetti et al, 2015;Matallín-Sáez et al, 2018;Tripathi-Bhandari, 2016), I differentiated between crisis and non-crisis periods on the basis of how the stock market evolved.…”