Do 'Good Guys' Finish Last? The Relationship between Morningstar Sustainability Ratings and Mutual Fund Performance

https://joi.pm-research.com/content/28/2/77

Posted: 17 Aug 2017

See all articles by Steven D. Dolvin

Steven D. Dolvin

Butler University

Jon A. Fulkerson

University of Dayton

Anna Krukover

Eli Lilly and Company, Ltd - Eli Lilly and Company, Indianapolis

Date Written: August 15, 2017

Abstract

Given the rapid growth of investment products focused on socially responsible investing (SRI), in March 2016 Morningstar began reporting standardized metrics to “grade” the Sustainability (i.e., SRI) level of thousands of mutual funds. While traditional financial theory suggests funds that limit their investment universe should underperform, we find that funds with high Sustainability scores have about the same risk-adjusted returns (i.e., alphas) as other funds. Thus, investors can apparently follow a social mandate without sacrificing financial performance, particularly within the large-cap space. We also find that funds with high Morningstar Sustainability scores generally mimic those of self-proclaimed SRI funds, suggesting that the new metric opens up a larger pool of potential funds for investors focused on SRI. However, funds that specifically designate a social mandate do experience more stable cash flows, suggesting that the mandate may be more beneficial for the fund company than it is for investors.

Keywords: mutual funds; SRI

JEL Classification: G11; G23

Suggested Citation

Dolvin, Steven D. and Fulkerson, Jon A. and Krukover, Anna, Do 'Good Guys' Finish Last? The Relationship between Morningstar Sustainability Ratings and Mutual Fund Performance (August 15, 2017). https://joi.pm-research.com/content/28/2/77, Available at SSRN: https://ssrn.com/abstract=3019403 or http://dx.doi.org/10.2139/ssrn.3019403

Steven D. Dolvin (Contact Author)

Butler University ( email )

4600 Sunset Avenue
Indianapolis, IN 46208
United States

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Anna Krukover

Eli Lilly and Company, Ltd - Eli Lilly and Company, Indianapolis ( email )

Lilly Corporate Center
Indianapolis, IN 46285
United States

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