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SRI investors in United States better off with passively managed funds

19 July 2018
Bert Scholtens
Bert Scholtens

SRI investors operating on US stock markets are better off investing in passive than in active funds. In the United States active SRI funds do not systematically outperform passive SRI funds. Because costs are lower, investing in passive SRI funds has become more attractive than investing in actively managed funds.

This is the conclusion of Professor Bert Scholtens of the University of Groningen and Dr Xing Chen of the University of St Andrews based on their research of 142 SRI funds. Their findings are remarkable as most investors in SRI still opt for actively managed funds. The researchers attribute this to investors’ loyalty to their funds and their relative indifference to poor investment fund performance.

Innovative international research

Scholtens and Chen analysed the coherence and financial performance of different investment forms. Their project is the first international study in which sustainable exchange-traded funds (ETFs, also known as index trackers) are also investigated. Their conclusions will be published in Corporate Social Responsibility and Environmental Management.

Explosive growth of SRI and index funds

The explosive growth of SRI in the 21st century is matched by the rapid rise of index funds. The two are also combined more and more often. In the United States in particular there are now numerous SRI index funds such as iShares MSCI KLD 400 Social, Market Vectors Solar Energy and PowerShares Cleantech.

The rise of these passive funds, which have much lower management costs, evokes the question how responsible investors should manage their investments: actively of passively? To answer that question Scholtens and Chen looked at SRI funds in the United States in the period 2004-2015. Using the Bloomberg Fund Search Engine and the US Forum for Sustainable and Responsible Investment (USSIF) (i.e. the American equivalent to the Dutch Association of Investors for Sustainable Development (VBDO)), the researchers identified 142 funds that explicitly take into account the social and environmental performance of companies one way or another.

Limited opportunities for extraordinary returns

Investors opting for actively managed funds often expect extraordinary returns on their investments (i.e. alpha). The US markets being extremely efficient, fund managers there only have limited opportunities to maintain a persistent risk-adjusted excess return (i.e. positive alpha). In addition, SRI funds mostly do not perform significantly better than the market as a whole. According to the researchers, this is the very reason that there is no difference between the alpha of active and passive SRI funds, although actively managed funds are clearly more expensive than passive funds.

These conclusions are equally valid for the crisis years (2007-2009). Furthermore, it turns out that during this crisis period sustainable funds were less susceptible to turbulence than conventional funds. Scholtens and Chen therefore conclude that SRI funds provide investors with some protection.

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Last modified:19 July 2018 09.07 a.m.
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