Ethical strategy focus and mutual fund management: performance and persistence

Over the last few years academics and practitioners alike have been analyzing the relative performance of different types of mutual funds, with a particular emphasis on comparing the performance of conventional versus socially responsible investment (SRI). The methods and samples used, as well as the results obtained are diverse, but they generally point to the difficulties found by SRI to yield an equivalent performance as that of its conventional peers—given the investment constraints they face. In this study we focus on the comparative performance of a sample of SRI funds, which we decompose mainly into Environmental, Social and Governance (ESG), environmental, and religious, and which invest in three different geographical areas. For these funds we measure not only performance but, more importantly, their persistence—i.e., whether the best (worst) funds are past winners (losers) as well. This twofold objective turns out to be essential to uncover some trends in the industry. Specifically, whereas ESG, in general, outperform their environmental peers, a deeper scrutiny focusing also on performance persistence reveals that this claim should be tempered, since investing in the best past environmental funds yields superior performance than investing in the best past ESG funds. This result, which holds for the two main geographical regions analyzed (Europe and US/Canada), would indicate that the comparison between these two types of funds is more intricate than what we might a priori expect, being particularly relevant to factor in the comparison an evaluation of performance persistence.