How Performance of Risk-Based Strategies is Modified by Socially Responsible Investment Universe?

31 Pages Posted: 23 Jun 2013 Last revised: 13 Nov 2014

See all articles by Philippe Bertrand

Philippe Bertrand

AMGSM-IAE Aix-en-Provence, Aix Marseille University, CERGAM; KEDGE Business School

Vincent Lapointe

Ostrum AM

Date Written: March 1, 2014

Abstract

Risk-based allocation strategies, also known as Smart Beta allocation, define the weights of assets in portfolios as functions of the individual and common asset risk. In this paper we focus on the Minimum Variance (MV), Maximum Diversification (MD), Equal Risk Contribution (ERC) and Equal-Weight (EW) risk-based allocation strategies. The popularity of risk-based strategy is commonly justified by their good record of out-performing the cap-weighted (CW) allocation strategy. Because of the low-volatility profile of risk-based allocation this is especially true when crises occur. From March 15, 2002 to May 1, 2012 we investigate how using a Socially Responsible Investment universe impacts performance of risk-based allocation strategies. We use different measures of performance, included risk-adjusted one (multi-factor models), and we propose to disentangle the effect of using a SRI universe from the effect of using risk-based allocations. SRI universe only contains firms that have good environmental, social and governance performance. This kind of filtering is increasingly popular among institutional investors. On the estimation period, using European stocks, we find that the use of the SRI universe improves performance of risk-based allocations. However this improvement is not uniform among all the risk-based allocation strategies.

Keywords: Socially responsible investment, alternative and smart beta strategies, risk-adjusted performance, robust covariance matrix

JEL Classification: G11, C58, C60, G32, M14

Suggested Citation

Bertrand, Philippe and Lapointe, Vincent, How Performance of Risk-Based Strategies is Modified by Socially Responsible Investment Universe? (March 1, 2014). International Review of Financial Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2282372 or http://dx.doi.org/10.2139/ssrn.2282372

Philippe Bertrand

AMGSM-IAE Aix-en-Provence, Aix Marseille University, CERGAM ( email )

Chemin de la Quille - Puyricard
Aix en Provence, 13089
France

KEDGE Business School ( email )

Domaine de Luminy - BP 921
BP 921
Marseille, PACA 13288
France

Vincent Lapointe (Contact Author)

Ostrum AM ( email )

Paris
France

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