Chapter 7. Analysis
8. Conclusion and suggestion of further research
The study examines the performance of ethical mutual funds in comparison with matched conventional funds in the US and Scandinavian market.
By investigating the performance of ethical mutual funds in comparison with matched conventional funds we aimed to answer the following question:
- Do the performance of ethical and conventional funds differ to a significant extent?
In implication of this research question, two hypotheses are formulated. The first hypothesis states that SRI portfolios underperform conventional portfolios, due to a constrained investment universe with a reduced diversification effect, in line with Modern Portfolio Theory. Our second hypothesis states that SRI portfolios outperform their conventional peers, since the fund managers are able to detect value-relevant non-public information during the screening process, which will generate abnormal returns.
It is questioned if investors pay a price for investing in SRI funds, or if they acquire superior returns. Previous research on ethical mutual fund performance have presented inconclusive results, a majority of the empirical evidence do suggest that there is not any difference in risk adjusted returns of ethical and conventional mutual funds.
The definitions and terms surrounding the universe of ethical investment are investigated in this report. Ethical investment is not determent by a uniform definition but depends on the specific investors ethical views. Contemplated by The Global Sustainable Investment Association six strategies of implementation of ESG factors have become an emerging global standard in the classification of SRI and ethical investments. The emerging definition is still open for interpretation and possible making the distinction between ethical and conventional funds vague (Rennebog, 2008A).
We test our hypotheses by analyzing monthly fund performance on both portfolio and individual fund level during the period of January 2005 to February 2016 for Norwegian, Swedish and US mutual funds. Danish mutual funds are also examined; the Danish observation period range from April 2010 to February 2016.
First a single-factor model is applied, where a majority of the fund portfolios do not present any significant difference in risk-adjusted returns of ethical and the conventional funds. Nearly all alpha values are negative, indicating that both the ethical and conventional mutual funds
underperform in relation to the market. However, the Norwegian portfolios are exceptions, where both the global and regional portfolios are significantly over-performing their conventional peers.
The regional funds also over-perform the in comparison to the market.
Second, we apply the Carhart multifactor model, controlling for investment styles based on size, book-to-market value and stock price momentum. The multifactor model demonstrates higher explanatory power then the single index model. The alpha values only change marginally when adding the three extra factors to the single factor-model. The most strikingly observation is that ethical funds tend to have a positive SMB coefficient, which imply an exposure to small cap companies. This effect is probably caused by the value sectors higher exposure to unethical industries (Bauer et al.2005).
Third, we extend the Carhart model adding a fifth factor controlling for the funds local exposure.
The overall result shows the funds tends to be exposed to the home bias phenomena by signaling a positive local beta factor. Hence, the funds tend to have a higher focus on their home markets.
After portfolio returns haven been adjusted for market risk, size, book-to-market, momentum and home bias the difference in return between ethical and conventional funds still remain statistically insignificant for all countries, except Norway.
To examine the robustness of the results obtained from the portfolio analysis we further examine the funds on an individual level. The five-factor model was considered most appropriate since it has the highest explanatory power. The overall results confirm the previous findings from the portfolio analysis, except from the findings in the Danish market, where the coefficient values changed. It is believed that this result is due to the small sample obtained from the Danish market and should be assessed with consideration.
The ethical funds are further studied by investigating the development of relative performance through time. The hypothesis contemplated by Bauer et al. 2005, suggests that market of ethical investment have undergone a learning effect where the fund performance in later years are better then back in the establishment phase of the market. Weak signs supporting Bauer’s hypothesis can be observed in the American market. The trend is not present in the Scandinavian market. In the Norwegian market in particular, we identify the opposite effects, where the significant alpha value becomes smaller over the examined time period.
The overall result of the study shows that both ethical and conventional tends to underperform the market. The result between the ethical and conventional fund are inconclusive, indicating that the market generally does not price ethical investments.
However, the results for the Norwegian market are unpredicted, it appears like the Norwegian SRI funds have higher risk-adjusted returns, but are less sensitive to market fluctuations than its conventional counterparts, which is contradictive to the risk-return tradeoff. The findings of superior return in the Norwegian ethical market support our second hypothesis and indicate that fund managers are able to detect value-relevant non-public information during the screening process. Furthermore, it is consistent with idea of superior returns due to successful stakeholder management. The result also indicates that the financial loss of a SRI fund due to poor
diversification is offset as social screening amplifies and well-managed and more stable businesses are preferred into its portfolio. However, any conclusions could not be stated and further
investigation into the reason behind the superior returns observed in the Norwegian market is therefore suggested. As discussed previously in this study, the results obtained can be challenged by the broad definition of ethical investments making the difference between ethical and
conventional funds vague. Therefore, research in more narrow categories of the ethical investment universe could be of interest.
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Appendix A
List of Ethical and Matched Conventional Funds
USA- Regional Investment universe
Ticker Fund Name Inception Morningstar
Category
Ticker Fund Name Inception Morningstar
Category CAAPX Ariel Appreciation Fund 01.12.89 Mid cap blend SMCPX ClearBridge Mid Cap Fund Class 1 12.09.00 Mid cap blend ARDFX Ariel Discovery Fund 01.01.11 small blend MSCFX Mairs & Power Small Cap Fund 08.11.11 small blend
ARGFX Ariel Fund 01.11.86 Mid cap blend FAMVX FAM Value Fund Investor Class 02.01.87 Mid cap blend
ADJEX Azzad Ethical Fund 01.11.00 Mid-Cap Growth HAMGX Harbor Mid Cap Growth Fund Institutional Class
01.11.00 Mid-Cap Growth BCAMX Boston Common Large Cap Core Equity
Fund
01.04.12 Large Growth DFOAX Destra Focused Equity Fund Class A 04.12.11 Large Growth BAFWX Brown Advisory Sustainable Growth Fund 01.06.12 Large Growth DFOAX.LW Destra Focused Equity Fund Class A Load
Waived
04.12.11 Large Growth CAAAX Calvert Aggressive Allocation Fund A 01.06.05 Aggressive
Allocation
CLBLX AdvisorOne CLS Global Growth Fund Class N
01.27.06 Aggressive Allocation CAACX Calvert Aggressive Allocation Fund C 01.06.05 Aggressive
Allocation AOGIX American Century One Choice Portfolio®:
Aggressive Investor Class 09.30.04 Aggressive Allocation CCAFX Calvert Capital Accumulation Fund A 01.10.94 Mid-Cap Growth VGRAX Invesco Mid Cap Growth Fund Class A 27.12.95 Mid-Cap
Growth CCACX Calvert Capital Accumulation Fund C 01.10.94 Mid-Cap Growth FRSIX Franklin Small-Mid Cap Growth Fund
Class C
02.10.95 Mid-Cap Growth CCPIX Calvert Capital Accumulation Fund I 01.06.03 Mid-Cap Growth FIIAX Fidelity Advisor¨ Mid Cap II Fund Class A 12.08.04 Mid-Cap
Growth CCAYX Calvert Capital Accumulation Fund Y 01.01.11 Mid-Cap Growth JMGMX JPMorgan Mid Cap Growth Fund Class R6 11.01.11 Mid-Cap
Growth CCLAX Calvert Conservative Allocation Fund A 01.04.05 Conservative
Allocation
GMAAX.lw Aberdeen Diversified Income Fund Class A Load Waived
29.06.04 Conservative Allocation CALCX Calvert Conservative Allocation Fund C 01.04.05 Conservative
Allocation GMACX Aberdeen Diversified Income Fund Class
C 29.06.04 Conservative
Allocation CEIAX Calvert Equity Income Fund A 01.10.11 Large Value BLVIX William Blair Large Cap Value Fund Class
I
24.10.11 Large Value CEICX Calvert Equity Income Fund C 01.10.11 Large Value VRVIX Vanguard Russell 1000 Value Index Fund
Institutional Shares
10.12.10 Large Value CEIYX Calvert Equity Income Fund Y 01.10.11 Large Value IEDRX Voya Large Cap Value Fund Class R 05.08.11 Large Value CSIEX Calvert Equity Portfolio A 01.08.87 Large Growth GABGX GAMCO Growth Fund Class AAA 04.10.87 Large Growth CEYIX Calvert Equity Portfolio I 01.11.99 Large Growth DPCEX Delaware Pooled Select 20 Portfolio 31.03.00 Large Growth CIEYX Calvert Equity Portfolio Y 01.08.87 Large Growth WTEIX Westcore Growth Fund Retail Class 06.01.88 Large Growth CMIFX Calvert Large Cap Core Portfolio A 01.04.98 Large blend CGMFX CGM Focus Fund 09.03.97 Large blend CMICX Calvert Large Cap Core Portfolio C 01.06.98 Large Blend BRLIX Bridgeway Blue Chip 35 Index Fund 31.07.97 Large Blend CMIIX Calvert Large Cap Core Portfolio I 01.04.98 Large Blend SUWAX.LW Deutsche Core Equity Fund Class A Load
Waived
02.08.99 Large Blend CLYCX Calvert Large Cap Core Portfolio Y 01.04.13 Large Blend AMINX Amana Mutual Funds Trust Income Fund
Institutional
25.09.13 Large Blend CLVAX Calvert Large Cap Value Fund A 01.12.99 Large Value EVSTX Wells Fargo Disciplined U.S. Core Fund -
Class C
30.06.99 Large Value CLVCX Calvert Large Cap Value Fund C 01.12.08 Large Value WWLAX.LW Westwood LargeCap Value Fund A Class
Load Waived
31.12.07 Large Value CLVYX Calvert Large Cap Value Fund Y 01.12.99 Large Value TFFYX Touchstone Focused Fund Class Y 12.02.99 Large Value CMAAX Calvert Moderate Allocation Fund A 01.04.05 Moderate
Allocation
FBFZX Franklin Balanced Fund Advisor Class 07.03.06 Moderate Allocation CMACX Calvert Moderate Allocation Fund C 01.04.05 Moderate
Allocation
FBLAX Franklin Balanced Fund Class A 07.03.06 Moderate Allocation CCVAX Calvert Small Cap Fund A 01.10.04 Small blend MOPAX MainStay Epoch U.S. Small Cap Fund
Class A
01.02.04 Small blend CSCCX Calvert Small Cap Fund C 01.04.05 Small blend JISOX John Hancock Funds New Opportunities
Fund Class 1
14.10.05 Small blend CSVIX Calvert Small Cap Fund I 01.04.05 Small blend KSCYX Kinetics Small Capital Opportunities Fund
Class Institutional
12.08.05 Small blend CSCYX Calvert Small Cap Fund Y 01.10.13 Small blend KPSCX KP Small Cap Equity Fund Institutional
Shares
10.01.14 Small blend CSXAX Calvert U.S. Large Cap Core Responsible
Index Fund A
01.06.00 Large blend FEVAX First Eagle U.S. Value Fund Class A 04.09.01 Large blend CSXCX Calvert U.S. Large Cap Core Responsible
Index Fund C
01.06.00 Large blend FEVCX First Eagle U.S. Value Fund Class C 04.09.01 Large blend CISIX Calvert U.S. Large Cap Core Responsible
Index Fund I 01.06.00 Large blend FEVAX.LW First Eagle U.S. Value Fund Class A Load
Waived 09.04.01 Large blend
CISYX Calvert U.S. Large Cap Core Responsible Index Fund Y
01.07.12 Large blend AFNAX AAM/Bahl & Gaynor Income Growth Fund Class A
13.07.12 Large blend DSEPX Domini Social Equity Fund -- A shares 01.11.08 Large blend ECERX Eaton Vance Stock Fund Class C 01.10.09 Large blend DIEQX Domini Social Equity Fund -- Institutional
shares
01.11.08 Large blend DEYCX Dreyfus Large Cap Equity Fund Class C 15.09.08 Large blend DSEFX Domini Social Equity Fund -- Investor shares01.06.91 Large blend DLQAX Dreyfus Large Cap Equity Fund Class A 10.08.92 Large blend DSFRX Domini Social Equity Fund -- R shares 01.11.03 Large blend CDGCX Crawford Dividend Growth Fund Class C 27.01.04 Large blend
Ethical Funds Matched Conventional Funds
PAGAX ESG Managers Growth Portfolio - Class A 01.01.10 Large blend MARNX Convergence Core Plus Fund Institutional Class
29.12.09 Large blend PAGCX ESG Managers Growth Portfolio - Class C 01.01.10 Large blend CDGRX Copeland Risk Managed Dividend
Growth Fund Class A Shares
28.12.10 Large blend PAGIX ESG Managers Growth Portfolio -
Institutional Class
01.01.10 Large blend DLCAX Dana Large Cap Equity Fund Class A 28.07.10 Large blend GCEQX Green Century Equity 01.06.91 Large Growth TLGUX Consulting Group Large Cap Equity Fund 18.11.91 Large Growth NBSRX Neuberger Berman Socially Resp Inv 01.03.94 Large Growth RPEAX Davis Opportunity Fund Class A 12.01.94 Large Growth NRARX Neuberger Berman Socially Resp R3 01.05.09 Large Growth CAMLX Congress Large Cap Growth Fund R Share 31.03.09 Large Growth NBSTX Neuberger Berman Socially Resp Tr 01.03.97 Large Growth DAVPX Davenport Core Fund 15.01.98 Large Growth NRAAX Neuberger Berman Socially Responsive A 01.05.09 Large Growth FACEX Frost Growth Equity Fund Investor Class
Shares 01.07.08 Large Growth
NRACX Neuberger Berman Socially Responsive C 01.05.09 Large Growth GNEIX Geneva Advisors Equity Income Fund Class I
30.04.10 Large Growth NBSLX Neuberger Berman Socially Responsive I 01.11.07 Large Growth KLCAX.LW Federated Kaufmann Large Cap Fund
Class A Load Waived
05.12.07 Large Growth PRBLX Parnassus Core Equity Fund 01.08.92 Large Blend DSPIX Dreyfus Basic S&P 500 Stock Index Fund 30.09.93 Large Blend PARWX Parnassus Endeavor Fund 01.04.05 Large Growth MADDX FDP BlackRock Janus Growth Fund
Institutional Shares
27.07.05 Large Growth PARMX Parnassus Mid Cap Fund 01.04.05 Mid-Cap Blend ACMFX American Century Legacy Multiple Cap
Fund Advisor Class
31.05.06 Mid-Cap Blend PXWEX Pax Ellevate Global Women's Index Fund -
Individual Investor 01.10.93 World Stock SEQAX Guggenheim World Equity Income Fund
Class A 01.10.93 World Stock
PXWIX Pax Ellevate Global Women's Index Fund - Institutional Class
01.04.06 World Stock GTNRX Invesco Global Low Volatility Equity Yield Fund Class R
31.10.05 World Stock PXWGX Pax World Growth Fund - Individual
Investor
01.06.97 Large Growth EPGAX.LW Fidelity Advisor¨ Equity Growth Fund Class A Load Waived
09.03.96 Large Growth PWGIX Pax World Growth Fund - Institutional
Investor 01.04.07 Large Growth GGCIX GAMCO Growth Fund Class I 11.01.08 Large Growth
PXGAX Pax World Growth Fund A 01.05.13 Large Growth EEHAX Equinox EquityHedge U.S. Strategy Fund Class A Shares
09.09.13 Large Growth PXGRX Pax World Growth Fund R 01.04.07 Large Growth KLCAX Federated Kaufmann Large Cap Fund
Class A
12.05.07 Large Growth PXSCX Pax World Small Cap Fund - Individual
Investor 01.03.08 Large Growth FDYZX Franklin DynaTech Fund Advisor Class 15.05.08 Large Growth
PXSIX Pax World Small Cap Fund - Institutional Class
01.03.08 Small Blend KSOCX Kinetics Small Capital Opportunities Fund Advisor Class C
16.02.07 Small Blend PXSAX Pax World Small Cap Fund A 01.05.13 Small Blend LSCNX Loomis Sayles Small Cap Value Fund
Class N
01.02.13 Small Blend PXSRX Pax World Small Cap Fund R 01.03.08 Small Blend MYSVX Madison Small Cap Fund Class Y 09.01.07 Small Blend MMDEX Praxis Growth Index Fund - Institutional 01.05.07 Large Growth GNVRX Geneva Advisors All Cap Growth Fund
Class Retail
09.28.07 Large Growth MGNDX Praxis Growth Index Fund A 01.05.07 Large Growth GSPTX Goldman Sachs Capital Growth Fund
Class IR
30.11.07 Large Growth MPLIX Praxis International Index Fund -
Institutional
01.12.10 Foreign Large Blend
VIEAX Virtus International Equity Fund Class A 16.09.10 Foreign Large Blend MMSIX Praxis Small Cap Fund - Institutional 01.05.07 Small Growth GTSIX Invesco Small Cap Growth Fund Investor
Class
07.04.06 Small Growth MMSCX Praxis Small Cap Fund A 01.05.07 Small Growth GTSYX Invesco Small Cap Growth Fund Class Y 03.10.08 Small Growth MVIIX Praxis Value Index - Institutional 01.05.06 Large Value WHGLX Westwood LargeCap Value Fund
Institutional Class
28.06.06 Large Value MVIAX Praxis Value Index A 01.05.01 Large Value WVAAX Waddell & Reed Advisors Value Fund
Class A 15.12.00 Large Value
MYPVX Sentinel Sustainable Core Opportunities Fund (A Shares)
01.06.96 Large Blend SAPYX ClearBridge Appreciation Fund Class I 30.01.96 Large Blend CVALX Sentinel Sustainable Core Opportunities
Fund (I Shares)
01.04.06 Large Blend CLQRX Columbia Disciplined Core Fund Class R 12.11.06 Large Blend WAEGX Sentinel Sustainable Mid Cap Opportunities
Fund (A Shares) 01.02.94 Mid-Cap Growth LMGAX Lord Abbett Growth Opportunities Fund
Class A 08.01.95 Mid-Cap
Growth CEGIX Sentinel Sustainable Mid Cap Opportunities
Fund (I Shares)
01.11.99 Mid-Cap Growth GGOAX Goldman Sachs Growth Opportunities Fund Class A
05.24.99 Mid-Cap Growth TISCX TIAA-CREF Social Choice Equity
Institutional
01.07.99 Large blend SUWAX Deutsche Core Equity Fund Class A 08.02.99 Large blend TRPSX TIAA-CREF Social Choice Equity Premier 01.09.09 Large blend DFMAX Davidson Multi-Cap Equity Fund Class A 08.11.08 Large blend TICRX TIAA-CREF Social Choice Equity Retail 01.03.06 Large Blend CAMWX Cambiar Opportunity Fund Class
Institutional
11.03.05 Large Blend TRSCX TIAA-CREF Social Choice Equity Retirement01.10.02 Large Blend MILCX BNY Mellon Large Cap Stock Fund Class
Investor
07.11.01 Large Blend WSEFX Walden Equity Fund 01.06.99 Large Blend LCCAX Columbia Contrarian Core Fund Class A 11.02.98 Large Blend WAMFX Walden Midcap Fund 01.08.11 Mid-Cap Growth FAKSX Frost Mid Cap Equity Fund Investor Class
Shares 02.13.12 Mid-Cap
Growth WASOX Walden Small Cap Innovations Fund 01.10.08 Small Growth IGWAX.LW Ivy Micro Cap Growth Fund Class A Load
Waived
17.02.09 Small Growth WASMX Walden SMID Cap Innovations Fund 01.06.12 Small Growth JSIGX Jacob Small Cap Growth Fund
Institutional Class shares
12.11.12 Small Growth