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Delegated Portfolio Management with Socially Responsible Investment Constraints

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  • Fabretti, Annalisa

    () (University of Rome “Tor Vergata")

  • Herzel, Stefano

    () (University of Rome “Tor Vergata")

Abstract

We consider the problem of how to set a compensation for a portfolio manager who is required to restrict the investment set, as it happens when applying socially responsible screening. This is a problem of Delegated Portfolio Management where the reduction of the investment opportunities to the subset of sustainable assets involves a loss in the expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, the manager and the market, we compute the optimal bonus as a function of the manager's risk aversion and his expertise, and of the impact of the portfolio restriction on the Mean Variance efficient frontier. We conclude by discussing the problem of selecting the best managers when his ability is not directly observable by the investor.

Suggested Citation

  • Fabretti, Annalisa & Herzel, Stefano, 2010. "Delegated Portfolio Management with Socially Responsible Investment Constraints," Sustainable Investment and Corporate Governance Working Papers 2010/7, Sustainable Investment Research Platform.
  • Handle: RePEc:hhb:sicgwp:2010_007
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    References listed on IDEAS

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    8. Larry D. Wall, 1995. "Some lessons from basic finance for effective socially responsible investing," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 1-12.
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    Cited by:

    1. Sheng, Jiliang & Wang, Xiaoting & Yang, Jun, 2012. "Incentive contracts in delegated portfolio management under VaR constraint," Economic Modelling, Elsevier, vol. 29(5), pages 1679-1685.
    2. Annalisa Fabretti & Stefano Herzel & Mustafa C. Pinar, 2014. "Delegated Portfolio Management under Ambiguity Aversion," CEIS Research Paper 304, Tor Vergata University, CEIS, revised 06 Feb 2014.

    More about this item

    Keywords

    Delegated portfolio management; Socially responsible investment; Incentives; Extrinsic incentives; Intrinsic motives;

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