The Performance of Responsible Equity Funds During Market Crises

Abstract

The purpose of this thesis is to study the performance of responsible equity funds during periods market crises. Previous literature has found evidence of outperformance by stocks of responsible companies and responsible mutual funds during market crises. Additionally, this thesis provides evidence of the performance of responsible equity funds and compares risk-adjusted returns of responsible investing to those of conventional equity mutual funds du-ring a sample period of almost two decades.

This study employs a dataset of 110 US-based socially responsible funds and 120 US-based conventional equity funds from January 2000 to October 2019. These mutual fund groups are used to construct two time-series of the returns of an equal-weighted portfolio of the SRI funds and conventional funds, respectively. The abnormal returns of SRI and non-SRI are measured using the capital asset pricing model, the Fama-French three-factor model and the Carhart four-factor model. In order to measure the performance of these portfolios during crisis periods, these asset pricing models are extended to include crisis and non-crisis period alphas.

The results suggest that both responsible funds and conventional funds do not generate abnormal returns during the whole sample period. In addition, SRI significantly underper-forms non-SRI during crises and their non-crisis period performance are similar. However, during January 2010 – October 2019 the SRI portfolio outperforms the conventional portfolio during crises and normal market conditions, although, the difference between the two is not significant.

Responsible investing does not provide investors with downside protection during periods of market turbulence. On the contrary, SRI underperforms during market crises which contra-dicts previous research. Additionally, the performance of SRI does not significantly differ from that of non-SRI during normal market conditions. These results suggest that investors should not expect abnormal returns while investing responsibly. However, investors should not favor non-SRI neither, since the risk-adjusted returns of SRI do not significantly differ from those of conventional mutual funds.