Handbook of the Economics of Finance

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A Random Walk Down Wall Street

Purpose




This paper aims to analyze the portfolio characteristics and the performance measures of sustainability-themed mutual funds, compared to ethical mutual funds that implement different sustainable and responsible investment strategies.




Design/methodology/approach




The study refers to a European sample of 106 ethical funds and 51 sustainability-themed funds. The monthly performance of each fund is downloaded from Bloomberg for the period from January 1996 to December 2015. By applying a Fama and French (1993) three-factor model, the authors overcome the limits of a capital asset pricing model (CAPM) based-single index model, to compare the performance of the two categories of funds.




Findings




Sustainability-themed funds do not differ significantly from ethical funds in terms of portfolio attributes, except for market capitalization, age and net asset value. Regarding performance measures, the results shows that sustainability-themed funds have a lower underperformance than ethical funds (as measured by Jensen’s alpha), whereas the samples do not differ in terms of market risk (as measured by Beta coefficient). The idiosyncratic risk of sustainability-themed funds is positively influenced by the specific portfolio strategies. The sustainability-themed funds show a higher concentration in the industrial sector and a lower exposure to financial sector than ethical funds; in terms of geographical strategy, they are more global and international oriented; they mainly focus on small caps and value stocks.




Research limitations/implications




The different sustainable and responsible investment strategies can be applied simultaneously and in a growing number of possible combinations. Mutual fund managers can consider thematic approach as an efficient opportunity for reconciling financial performance and economic sustainability. It is demonstrated that sustainability-themed funds adopt a portfolio strategy significantly different from ethical funds and from the environmental, social and governance benchmarks. Mutual fund managers implement a thematic specialization without any negative impact on the funds returns compared to ethical funds; actually, with a proper diversified portfolio, they are able to reduce idiosyncratic risk.




Originality/value




The analysis is extremely innovative, especially for the thematic sample. During the past 15 years, literature about sustainable and responsible investment has been focused especially on the differences in terms of risk and performance between socially responsible and conventional funds. This paper, starting from the methodology applied in these studies, wants to compare two different types of socially responsible strategies, with a specific focus on sustainability-themed mutual funds, given their exponential growth in the past few years.

Sustainability-themed mutual funds: an empirical examination of risk and performance

The Value Premium and the CAPM

Book-to-Market across Firm Size, Exchange, and Seasonality: Is There an Effect?

Purpose – The purpose of this paper is to evaluate the performance of socially responsible funds by closely examining funds' investment styles.Design/methodology/approach – The authors apply William Sharpe's method of style analysis to evaluate the performance of 94 US socially responsible mutual funds. By using the fund style as a benchmark, the authors are able to separate the performance attributed to style and selection.Findings – The authors observe that underperformance of socially responsible funds is more pronounced and common than identified in the previous literature. Proponents of socially responsible investing argue that screening process provides an opportunity to fund managers to identify best companies in terms of future financial performance. The paper finds that active management of mutual funds is an important determinant of their performance in socially responsible investing industry. This paper provides evidence supporting that active management of socially responsible funds add value....

Performance evaluation of socially responsible mutual funds using style analysis

Using data from the stock markets of Japan, the U.K, and France, this paper examines the distribution and source of value premium in average stock returns for the period 1975 through 2007. Results from this study indicate a January effect in value premium, which is valid and economically meaningful for all three major non-U.S. markets. Consistent with Loughran (1997), our study suggests that January value premium is more pronounced in large stocks and high January value premium is mostly driven by superior returns of value stocks in January. In particular, value premium for January month is nearly three to nine times that of non-January months. Annualized value premiums for January (non-January months) for Japan, the U.K. and France are 28.08% (9.12%), 15.36% (2.04%), and 30.96% (3.48%). The annualized excess January value premium ranges from 13.32% for the U.K. to 27.48% for France with 18.96% for Japan. Results are robust with respect to alternative value-growth indicators as well as sample periods.

Value premiums and the january effect: international evidence

Purpose – The purpose of this paper is to investigate the seasonal effect in the value premium puzzle. It studies whether the book‐to‐market effect is an outcome of the January effect observed among stock returns.Design/methodology/approach – The paper uses returns of portfolios based on size and BE/ME ratios as Fama and French suggest to define value premium and investigate the seasonality of the BE/ME effect. The paper tests whether the value premiums observed among large and small stocks are different in January and non‐January months. It examines the turn‐of‐the‐year effect on the value premium by analyzing the returns of BE/ME portfolios during the first and last ten trading days of a calendar year.Findings – Empirical evidence supports the fact that value premium has different patterns in January and non‐January months for large and small capitalization firms. It was found that large stocks have a significant value premium only in January and this high January value premium among large stocks is mai...

The value premium and the January effect

Since 1990 there has been a tremendous growth in the investment in international mutual funds. This growth is likely to continue as domestic stock market cools down and more U.S. investors seek higher returns as well as the diversification benefits of foreign assets. Investors are also attracted to international funds in the belief that such funds earn abnormally high returns because of the previous relative inefficiency in those markets. This study examines the annual risk-adjusted returns using Sharpe’s Index for ten portfolios of international mutual funds for the period September 2000 through September 2006. The international funds were analyzed by combining the funds into individual portfolios based on sector, geographics and company size. The benchmarks for comparison were the U.S. mutual fund performance reported by MorningStar. The risk-adjusted returns were then determined and compared to each other and to the U.S. market. During this period, nine out of ten of the international mutual fund portfolios outperformed the U.S. market. The portfolio that contained all International Mutual Funds (IMF) significantly outperformed on a risk-adjusted basis the fund that was made up of all of the U.S. stock mutual funds, (All U.S. Stock Funds- USSF). Additionally, the Foreign Small Value (FSV) portfolio, Foreign Small Growth (FSG) portfolio, Emerging Markets (EM) portfolio, Latin America (LA) portfolio, and the Pacific Asia without Japan (PA-J) portfolio all had average annual returns (not adjusted for risk) that exceeded USMF’s returns by more than 10 percent.

Empirical Analysis Of International Mutual Fund Performance

This paper extends the research on value premium by examining patterns of seasonality exhibited in the book-to-market effect in major global equity markets. The results provide evidence supporting the January effect in the value premium phenomenon. Using stock market indices for Asia Pacific; Europe, Australasia, and Far East (EAFE); and Europe, with and without the U.K., Scandinavian countries, the U.K., U.S., and Japan form 1975 through 2007, the paper provides out-of-sample evidence from twenty-one countries that comprise different index portfolios. As a robustness measures, we use regression analysis, paired means tests, and non-parametric tests to examine whether the persistence of the anomalous January value premium is real and significant. The annualized excess January value premium ranges from 42.96 percent for Scandinavian countries to 9.24 percent for EAFE markets with 20.28 percent for U.S. Even though such a predictable pattern exists, our analysis suggests that large standard deviations would not allow a viable investment strategy.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1948780_code1332876.pdf?abstractid=1948780&mirid=1&type=2

S. P. Uma Rao

Papers

Performance evaluation of socially responsible mutual funds using style analysis

Value premiums and the january effect: international evidence

The value premium and the January effect

Empirical Analysis Of International Mutual Fund Performance

Is the Value Effect Seasonal? Evidence from Global Equity Markets