Analyzing Sustainable Investor Returns

Abstract

We investigate why investors in sustainable mutual funds earn higher dollar-weighted returns than other investors, despite the lower buy-and-hold returns of these funds. Using U.S. equity mutual fund data, we show that conventional investors exhibit poor timing behavior, while sustainable investors do not. We find that this difference is driven by sustainable investors responding more strongly to positive returns without overreacting to negative returns. Moreover, we show that non-sustainable funds with similar characteristics also exhibit higher dollar-weighted returns. This suggests that skilled investors self-select into funds with attributes correlated with sustainability. Our findings highlight the importance of investor behavior in evaluating investment results.

Keywords: sustainable investing, investor timing, flows, mutual funds, active management

JEL Classification: G11, G23, G41, Q56, M14