PMC Market Commentary: June 20, 2014
Impact investing, also commonly known as Socially Responsible Investing (SRI), has become increasingly popular over the past two decades as investors strive to marry a desire for doing good while still generating solid investment performance. There has been a significant amount of research done on the subject of whether SRI can generate excess returns over non-SRI approaches. Some of the academic papers outline three general camps into which investors belong regarding SRI: First, some believe that SRI investors can “do good” while also “doing well” (from a performance perspective). Those in this category believe that investing in socially conscious companies can generate superior performance. Second, some believe that limiting the universe of available securities from which to choose will necessarily hinder performance. The idea underlying this belief is that since the palette of potential investments meeting socially conscious standards is limited, performance will also be constrained. Third, there are those that believe that SRI investing is neutral – that there is no difference between SRI and non-SRI performance.
Much of the academic research tends to support the view that at the mean there is no difference between SRI and non-SRI performance. In a forthcoming study, PMC’s Quantitative Research Group (QRG) affirms those results, showing that - on average - SRI mutual fund performance is not statistically or economically different from non-SRI mutual fund performance.
However, QRG makes a unique contribution to the literature in that they go beyond looking at the average. They refine the study to analyze the distributions of the total returns of SRI and non-SRI funds. What they find is that while performance is not statistically different at the mean, there are drastic differences as one moves out toward the tails of the distributions. Specifically, the distribution of SRI fund returns is narrower than that of non-SRI funds. Essentially, what this means is that top-performing SRI funds tend to underperform top-performing non-SRI funds, while bottom-performing SRI funds outperform bottom-performing non-SRI funds.
One of the reasons this may be the case relates back to the relatively limited universe of SRI stocks. The universe of socially conscious stocks likely has more homogenous characteristics than the non-SRI universe.
QRG’s research on SRI will be published soon.
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