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.
Sustainable investment responds to demands for carbon and climate-neutral societies. To address the urgency around climate change and provide investors with more qualified information, Morningstar has developed the Low Carbon Designation (LCD) to indicate that the companies held in a portfolio are in general alignment with the transition to a low-carbon economy. The designation is given to portfolios that have low carbon risk and fossil fuel exposure scores. The present study builds on the LCD by examining the relationship between these scores and financial performance. With this aim, we analyze 3920 socially responsible mutual funds from across the world.Results show differences in financial performance according to scores and investment areas. We find evidence that funds considered to have higher levels of sustainability achieved better performance than funds with higher exposure to companies involved in carbon and fossil fuel industries. We provide insights on the informativeness of these new scores with a focus on climate change and their relevance in helping investors to identify climate-aware funds. This study highlights the importance of introducing strategies to develop green finance; the analysis confirms that sustainability improves performance. Finally, the LCD indicator is shown to be relevant for making fairer comparisons among socially responsible funds and, ultimately, for developing low-carbon economies.
Islamic funds are increasingly seen as an alternative to conventional funds, in part due to the growing prominence of Islamic finance. In contrast to most previous literature, this paper focuses on the countries of the Middle East and North African region (MENA), and compares the performance of Islamic and conventional funds during crisis and recovery periods. Results show that the relative performance of Islamic and conventional funds seem to be conditioned by several factors such as the (geographical) context in which the investment is made. Considering the entire MENA region, Islamic funds perform, on average, slightly worse than conventional funds. However, if the analysis is restricted to Gulf Cooperation Council (GCC) countries, the result opposite is found. In addition, the performance gap between the two types of funds either widens or shrinks when considering recovery or crisis times, providing evidence that Islamic funds are more stable in times of distress.
Over the last few years academics and practitioners alike have been analyzing the relative performance of different types of mutual funds, with a particular emphasis on comparing the performance of conventional versus socially responsible investment (SRI). The methods and samples used, as well as the results obtained are diverse, but they generally point to the difficulties found by SRI to yield an equivalent performance as that of its conventional peers-given the investment constraints they face. In this study we focus on the comparative performance of a sample of SRI funds, which we decompose mainly into Environmental, Social and Governance (ESG), environmental, and religious, and which invest in three different geographical areas. For these funds we measure not only performance but, more importantly, their persistence-i.e., whether the best (worst) funds are past winners (losers) as well. This twofold objective turns out to be essential to uncover some trends in the industry. Specifically, whereas ESG, in general, outperform their environmental peers, a deeper scrutiny focusing also on performance persistence reveals that this claim should be tempered, since investing in the best past environmental funds yields superior performance than investing in the best past ESG funds. This result, which holds for the two main geographical regions analyzed (Europe and US/Canada), would indicate that the comparison between these two types of funds is more intricate than what we might a priori expect, being particularly relevant to factor in the comparison an evaluation of performance persistence.
In this article, we examine whether active mutual funds that markedly change their exposure to systematic risk factors subsequently outperform. We propose a new returns-based approach to assess the degree to which mutual funds adjust their risk exposure, with the benefit of not requiring periodically updated information related to funds' portfolio holdings. Applying this measure to active US mutual funds from 1990 to 2016, we provide evidence that mutual fund managers exhibiting substantial changes in their risk exposure generate alphas that are significantly higher than those with limited exposure variation. Other characteristics such as fund tracking errors, fund size, and investment style, or holdings-based measures cannot explain these findings.Analyzing the long-term persistence of active management, we provide evidence that the outperformance is due to managers' skill rather than to luck. Our findings contribute to the empirical evidence suggesting that active management may in some cases, produce short-term performance persistence.
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