Performance persistence of socially responsible investment funds

Abstract

Socially Responsible Investment (SRI) considers social, ethical, and environmental elements of investment strategies. SRIs are now well-established, offering a variety of products to investors. Sustainable investments are popular among institutional investors as well as retail investors. Most companies have incorporated sustainable practices and sustainability reporting into their operations. SRIs have grown into a widely-followed investment practice, as there are dozens of new funds and pooled investment vehicles focusing on socially conscious investing. The fund industry is more focused on embracing sustainability practices in its operations. The aim of this study is to analyze the performance persistence of SRI funds in the United States (US) from 2001 to 2021 including two significant financial crisis and non-financial crisis. First, we examine the performance persistence of SRI funds before, during, and after the 2008 global financial crisis. Second, the performance persistence of SRI funds before and during the COVID-19 pandemic is investigated. If performance of SRI funds persists over the two global crises, investors can use our results to guide their investment decisions and make investment decisions accordingly. We use Carhart (1997) and Fama French (2005) models to measure the performance of SRI funds. Carhart (1997) model consists of four factors: risk, price, company size, and momentum factor. Fama French (2005) model was an extended version of Fama French (1993) model. This model consists of risk, price, company size, profitability, and investment factors to explain the fund returns. Next we follow Hendricks, Patel, and Zeckhauser (1993) and Carhart (1997) recursive methods to analyze the performance persistence of SRI funds. Funds are categorized into ten portfolios based on the previous year's performance. Finally, we compute and analyze the monthly performance of each portfolio. The results from both Carhart (1997) and Fama French (2005) models are consistent. The results indicate that performance persistence can be seen in the best performing funds before and during the financial crisis. However, the best performing funds do not guarantee future success post the financial crisis. For the worst performing funds, we found that they continue performing poorly during and after the financial crisis. The results show that the worst performing funds had negative returns before the COVID-19 pandemic; performance persistence is absent in the best performing funds during the COVID-19 pandemic. Identifying fund performance persistence in different market conditions is important for investors because it provides valuable information that can help them make better investment decisions, manage risk, build a diversified portfolio, evaluate investment strategies, and better understand how a fund may perform in different market conditions. By monitoring funds’ performance persistence, fund analysts can identify potential problems early and make necessary adjustments to their recommendations. Fund analysts can enhance their reputation as trusted advisors by providing informed recommendations.