Ethical strategy focus and mutual fund management: Performance and persistence

• Published in: Journal of cleaner production 2019-03, Vol.213, p.618-633
• Main Authors: Matallín-Sáez, Juan Carlos, Soler-Domínguez, Amparo, Tortosa-Ausina, Emili, de Mingo-López, Diego Víctor
• Format: Article
• Language: English
• Subjects: Environmental; Mutual fund; Persistence; SRI; Sustainability
• ISSN: 0959-6526; 1879-1786
• DOI: 10.1016/j.jclepro.2018.12.130

The aim of this study is to analyze whether managers, practitioners and individual investors could obtain higher risk-adjusted returns by allocating their investments to funds that integrate specific levels of socially responsible (SR) criteria in their portfolios. This is achieved by comparing the performance of mutual funds according to their SR characteristics: environmental, governance, social, and sustainability attributes. For a large sample of 3920 equity SR mutual funds around the world, performance is measured using a multifactor model that incorporates relevant benchmarks according to the fund investment objectives, and using Carhart's (1997) methodology to measure mutual fund performance persistence. In general, fund performance is not significant, the average being negative and close to zero. Funds achieving relatively high levels of SR attributes in their portfolios seem to experience overall worse performances. This evidence is, however, mainly driven by the behavior of worst-performing funds. Moreover, investing in the previous best SR funds could lead investors to greater overall returns in most areas and levels of SR attributes considered. This evidence highlights the role of managers in enhancing the returns of a portfolio with a well-defined SR investment policy. Therefore, there is no incompatibility between pursuing higher ethical (and sustainable) values as well as greater financial performances from investments—provided managers have the skills necessary to choose the right SR funds. •We compare the performance of socially responsible (SR) funds.•Funds with high SR attributes experience overall worse performances.•Investing in the previous best SR funds leads to greater overall returns.•The evidence highlights managers’ role for designing SR investment policies.•Ethical and sustainable values are compatible with greater performances.