Performing a series of multi-factor regressions, in line with
the previous performance variability studies mentioned earlier,
the results showed that SR screening contributes modestly to
the variability of mutual fund performance, along with asset
allocation policy and active management. The contribution
“is, on average, between 4% and 10%,” or about half the average
contribution made by active management.
Although this analysis highlights the role SR plays in the
variability of returns, prior empirical evidence that absolute
returns for SR funds and traditional funds, on average, are
rather similar still stands. These facts may help soften some
critics’ view that an SR approach is a certain path to underperformance. In other words, SR investors “can achieve portfolio
performance equivalent to that of conventional funds while also
achieving socially responsible objectives.”
Indeed, equal performance is at least the minimum threshold
for SR investing compared to the traditional approach. But
the research also shows diversity of the SR contributions along
geographic, industry, and style factors. The new methodology
allows for the detection of additional investment opportunities
and the possibility for an SR portfolio manager to not only
avoid underperformance but perhaps achieve superior performance results.
Devin Ekberg, CFA®, CPWA®, is the managing director of education at
Investments & Wealth Institute. Contact him at firstname.lastname@example.org.
Brière, M., J. Peillex, and L. Ureche-Rangau. 2017. Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance?
Financial Analysts Journal 73, no. 3: 53–65.
Brinson, G. P., L. R. Hood, and G. L. Beebower. 1986. Determinants of
Portfolio Performance. Financial Analysts Journal 42, no. 4: 39–44.
Social Investment Forum. 2016. Report on US Sustainable, Responsible and
Impact Investing Trends 2016, 11th ed. ( www.ussif.org/trends).
Xiong, J. X., R. G. Ibbotson, T. M. Idzorek, and P. Chen. 2010. The Equal
Importance of Asset Allocation and Active Management. Financial
Analysts Journal 66, no. 2: 1–9.
Socially responsible (SR) mutual funds are suddenly a major market for the asset management industry, grow- ing rapidly in the past decade to more than $8 trillion
USD in assets under management in the United States in 2016
(Social Investment Forum 2016). Much has been written, and
many opinions formed, about the merits of SR screening in
general and its performance in particular. Researchers Brière
et al. (2017) propose a new approach to isolate the effects of
SR screening in mutual funds when conducting performance-attribution analysis.
Previous studies relied on sample comparisons of average
mutual fund performance, matched with conventional peers or
a benchmark index. Although informative for making broad
conclusions on the merits of SR screening, the results tend to
mask subtle insights such as the level of dispersion in returns,
industry or style effects, or situational performance.
In contrast, the proposed method builds on an existing model
using three classic determinants of the variability of portfolio
performance—market return, asset allocation policy, and active
portfolio management—identified by Brinson et al. (1986) and
later clarified by Xiong et al. (2010). A fourth component, the
effects of SR screening on a fund’s return variability, is added to
disentangle the effects of other sources of performance, especially active management.
Brière et al. (2017) used data from two portfolio peer groups,
U.S. and global equity funds classified as “socially responsible”
or ‘“‘ESG’ (environmental, social, governance).” The researchers
performed return-based style analysis to determine both SR
and conventional benchmarks for the funds, allowing them to
characterize the funds’ performance. Additionally, they constructed geographic, industry, and style benchmarks. Once
the proper benchmarks were identified and constructed, they
screened the compositions to include “all the companies that
were rated strictly above BBB by the MSCI ESG STATS database for corporate social responsibility.”
Do Social Responsibility Screens Matter
When Assessing Mutual Fund Performance?
Reviewed by Devin Ekberg, CFA®, CPWA®