Responsible or Thematic? The True Nature of Sustainability-Themed Mutual Funds

Abstract

The aim of the paper is to compare the risk-adjusted performance of sustainability-themed funds with other categories of mutual funds: sustainable and responsible mutual funds that implement different approaches in portfolio selection and management, and thematic funds not committed to responsible investments. The study analyses a sample of about 1000 European mutual open-end funds where 302 are sustainability-themed funds, 358 are other responsible funds, and 341 other thematic funds. Risk-adjusted performance is analyzed for the period 2007–2017 using different methodologies: a single factor Capital Asset Pricing Model (CAPM), a Fama and French (1993) 3-factor model, and a Fama and French (2015) 5-factor model. Our main findings demonstrate that the risk-adjusted performance of ST funds is more closely related to their responsible nature than to their thematic approach. Sustainability-themed mutual funds are more similar to other socially responsible funds than to other thematic funds, as confirmed by performance analysis over time. They are also better than other thematic funds in overcoming financially turbulent periods and currently benefit from SRI regulation and disclosure.

Does the Asset Allocation Policy Affect the Performance of Climate-Themed Funds? Empirical Evidence from the Scandinavian Mutual Funds Market

“…However, our research indicated that managers investing globally or on Europe and Japanese markets may narrowly beat the market. Additionally, we confirmed that SRI funds perform better during a crisis, and achieve average results or underperform the market in non-crisis periods which is consistent with several prior studies [30,33,81,82]. As far as the industry factor is concerned, our results are consistent with the findings of Busse and Tong [83] who proved the importance of industry-selection skill for fund performance and with the studies of Jin and Han [35] on the positive correlation between that green funds preference and innovation indicators in the Chinese market.…”

“…In addition, several authors have indicated that SRI funds perform better during a crisis, when it is possible to outperform the market. However, funds achieve average results or even underperform the market in non-crisis periods [30,33,81,82]. In our research, the alpha parameter confirmed the relationship mentioned above because we mainly covered periods of increases in the market, in particular in the North America region.…”

Financial Performance of SDG Mutual Funds Focused on Biotechnology and Healthcare Sectors

“…From this point of view, fund portfolios that concentrate all their stocks mainly in one specific sector, such as the healthcare or biotechnology sectors, could lose investment opportunities generated in other sectors, increasing their idiosyncratic risk, which lessens funds' risk-adjusted return. Recent empirical evidence provides support for modern portfolio theory in the energy sector [2][3][4] and in other specific sectors analyzed as a group [7], assuming that the state of the economy remains unchanged over time in global markets. However, managers usually adjust their management strategy to the economic situation by incorporating a dynamic trading strategy into the fund portfolios.…”

“…This study adds to previous finance literature by being, to the best of our knowledge, the first to analyze the financial performance of sustainable development goals (SDG)-related funds (so called thematic mutual funds) focused on the biotechnology and healthcare sectors (SDG 3). While previous studies have focused on analyzing SDG funds related to the water sector [1], the renewable energy sector [2][3][4][5][6] or several thematic sectors as a group [7], limited attention has been paid to mutual funds focused on sustainable development goals in the area of health, although the United Nations encourages the private sector to contribute to progress towards sustainable development goals by also investing in firms related to healthcare issues.…”

Sustainable Funds’ Performance Evaluation

“…Federica Ielasi and Monica Rossolini in their research made a conclusion that sustainability-themed mutual funds are more similar to other thematic funds. The authors made the performance analysis and stressed that such funds can give better results during financial crisis and that have extra benefits from SRI regulation and disclosure [49].…”