Performance evaluation of socially responsible mutual funds using style analysis

Abstract

Purpose -The purpose of this paper is to evaluate the performance of socially responsible funds by closely examining funds' investment styles.Design/methodology/approach -The authors apply William Sharpe's method of style analysis to evaluate the performance of 94 US socially responsible mutual funds. By using the fund style as a benchmark, the authors are able to separate the performance attributed to style and selection. Findings -The authors observe that underperformance of socially responsible funds is more pronounced and common than identified in the previous literature. Proponents of socially responsible investing argue that screening process provides an opportunity to fund managers to identify best companies in terms of future financial performance. The paper finds that active management of mutual funds is an important determinant of their performance in socially responsible investing industry. This paper provides evidence supporting that active management of socially responsible funds add value.Originality/value -This study will help investors in allocating their portfolios among many of the available SR funds. The result -actively managed SR funds outperform their passive counterparts -will be valuable for those investors who are willing to invest in socially responsible funds but are concerned about the financial performance.

The Performance of Socially Responsible Investments in Indonesia: A Study of the Sri Kehati Index (SKI)

“…However, social screening for SRI is incompatible with the modern portfolio theory. Modern portfolio theories suggest that any restrictions imposed on a portfolio's selection results in inferior performance (Das and Rao 2013;Jones et al 2008;Reyes and Grieb 1998). The underperformance of the SRI fund might be causing a smaller diversification effect.…”

“…Socially responsible investors use a combination of financial and social criteria to focus on their investment decisions, hence the investments they select are consistent with their personal value's system and beliefs, (Das and Rao 2013;Hamilton et al 1993;Sauer 1997). SRI describes an investment process which considers and adopts the issues of Environmental, Social, Governance (ESG) or ethical considerations.…”

Exposition to Factors of the Investment Funds Market in Brazil

“…According to Das and Uma Rao (2013), the model of Sharpe (1992), with a limited number of asset classes, is successful because most fund managers are restricted to buy and hold assets in a well-defi ned and limited number of classes, in order to meet or exceed the returns in relation to benchmarks. So, stylistic diff erences between fund managers are mainly due to assets in their portfolios, and they are captured in this type of regression (Das & Uma Rao, 2013).…”

“…So, stylistic diff erences between fund managers are mainly due to assets in their portfolios, and they are captured in this type of regression (Das & Uma Rao, 2013). It is noteworthy that, according to Schutt and Caldeira (2013), […] return-based style analysis constitutes a powerful tool so that the investor identifi es in a simple way the risk factors to which each fund is exposed and thus choses the best suited to his style.…”

“…With style factors delimited by 11 indexes of assets and 5 trend factors, the authors found that the funds had signifi cant positive exposure to emerging stock markets. Das and Uma Rao (2013) examined the investment styles of 94 socially responsible funds of the USA, following the 12 asset classes proposed by Sharpe (1992). Th ey observed that the lower performance of socially responsible funds is more pronounced than that identifi ed in literature, but even so the active management of these funds adds long-term value.…”