Abstract

http://ssrn.com/abstract=1754644
 


 



The Effect of the Business Cycle on the Performance of Socially Responsible Equity Mutual Funds


Andrea J. Roofe Sattlethight


Florida International University; Strayer University

February 3, 2011


Abstract:     
The paper applies a two-state switching regression to examine the behavior of a hypothetical portfolio of ten socially responsible equity mutual funds during the expansion and contraction phases of US business cycles between April 1991 and June 2009, based on the Carhart four-factor model, using monthly data. The information on business cycles was tracked using the dividend yield. Fund returns were less volatile during an expansion than during contraction, as indicated by the standard deviation of returns. During the contraction/trough periods, fund excess returns were explained by the differential between small and large capitalization companies (β = 0.26, p = 0.005), the difference between the returns on stocks trading at high and low book to market value (β = 0.38, p <0.0001), the market excess return over the risk-free rate (β = 0.75, p <0.0001) and fund objective (β = 0.014, p = 0.01). During the expansion/peak periods, fund excess returns were explained by fund objective (β = -0.007, p = 0.02), and the market excess return over the risk-free rate (β = 0.925, p <0.0001).

The SRI investor adds a third criterion to the wealth maximization process, namely social performance, in addition to the conventional risk-return trade-off. SRI fund managers adopted a long-term investment horizon, and were prepared to sacrifice short-term returns for the psychic benefit of investing in companies with a high social performance rating. The benefit of the social performance criterion is affect, or the psychic benefit associated with the form of the investment. SRI fund managers adopted a long-term investment horizon, and were prepared to sacrifice return for the psychic benefit of investing in companies with a high social performance rating. The research suggests that the SRI investor may exhibit a risk profile unlike that of the traditional investor. The findings also suggest that excess returns earned by SRI investors are not adversely affected by the inclusion of a social performance criterion, however defined.

Number of Pages in PDF File: 3

Keywords: socially responsible investments, mutual funds, business cycle

JEL Classification: M14, D81,G10,G11, G30, G39

working papers series


Download This Paper

Date posted: February 5, 2011 ; Last revised: October 13, 2011

Suggested Citation

Roofe Sattlethight, Andrea J., The Effect of the Business Cycle on the Performance of Socially Responsible Equity Mutual Funds (February 3, 2011). Available at SSRN: http://ssrn.com/abstract=1754644 or http://dx.doi.org/10.2139/ssrn.1754644

Contact Information

Andrea J. Roofe Sattlethight (Contact Author)
Florida International University ( email )
University Park
Miami, FL 33199
United States
HOME PAGE: http://www.fiu.edu/~statcon
Strayer University ( email )
United States
Feedback to SSRN


Paper statistics
Abstract Views: 516
Downloads: 88
Download Rank: 164,574

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.328 seconds