Stock picking, market timing and style differences between socially responsible and conventional pension funds: evidence from the United Kingdom

Abstract

As far as we are aware, this study presents the first comparative analysis of the stock picking and market timing abilities of managers of conventional and socially responsible (SR) pension funds, and of their use of superior information. For the United Kingdom, the results obtained show a slight stock picking ability on the part of SR pension fund managers (although it disappears if multifactorial models are considered), and a negative market timing ability on the part of both SR and conventional pension fund managers (these results hold for multifactorial models controlled by home bias). In relation to the management styles, both conventional and SR pension funds usually invest in small cap and growth values, although it is the SR pension funds that are the most exposed to these styles. We also observed that, while conventional pension fund managers make certain use of superior information to follow stock picking strategies, managers of SR pension funds use superior information to follow market timing strategies.

Performance of European socially responsible funds during market crises: Evidence from France

“…In terms of selectivity, the results show that the significantly lower abilities of SRI funds, in comparison to their matched-peers, are attributed to funds that use negative screens, as well as the superior ability of SRI funds to time the market and local factors. A possible explanation for this result is the fact that SRI fund 21 Evidence of "perverse" market timing abilities is also found by many previous studies on conventional funds (e.g., Ferson & Schadt, 1996;Sawicki & Ong, 2000) and by most of the existing studies on SRI mutual funds (e.g., Ferruz, Muñoz, & Vargas, 2010;Gregory & Whittaker, 2007;Kreander et al, 2005;Muñoz et al, 2014;Renneboog et al, 2008). 22 Muñoz et al (2015) also find evidence that both SRI and conventional fund managers in the US successfully time the book-to-market factor.…”

Selectivity and timing abilities of international socially responsible funds

“…To the best of our knowledge, there are only two papers that focus on this subject, one for the US (Girard et al, 2007) and another for the UK market (Ferruz et al, 2010), and they exhibit contradictory results. While the former found that most SRI funds exhibit neutral market timing and significantly negative selectivity skills, the latter showed that both SRI and conventional pension fund managers exhibit neutral stock-picking and significantly negative market timing abilities.…”

The abilities of managers in UK pension funds. Are socially responsible managers superior?

“…The market exposure (β 1 ) is similar in both conventional and SR pension funds. With regard to the style strategies, conventional and SR funds invest in small cap and growth values, in line with Ferruz et al (2010). Nonetheless, the momentum strategies are diverse: absent or positive momentum strategies in conventional funds (panel A), and contrarian momentum strategies in SR funds (panel B).…”

“…To date, only Ferruz et al (2010) provide a comparative analysis of stock-picking and market timing abilities in pension funds. Accordingly, this analysis extends the existing literature on SR pension funds, with the results showing significantly negative performance and similar investment strategies in both conventional and SR pension funds.…”

“…Only Ferruz et al (2010) evaluate UK global equity pension funds (SR and conventional), finding a slight stock picking ability of SR pension fund managers, and negative market timing ability of both SR and conventional managers. These authors also observe that, while conventional pension fund managers make certain use of superior information to follow stock-picking strategies, SR pension fund managers use superior information to follow market timing strategies.…”