Does socially responsible mutual fund performance vary over the business cycle? New insights on the effect of idiosyncratic SR features

Abstract

This study analyses the performance and market timing of US socially responsible (SR) mutual funds in relation to business cycle regime shifts and different grouping criteria: Ethical strategy focus, SR attributes scores and Morningstar category. Different methodologies are applied and results highlight the importance of considering specific benchmarks related to the investment style in evaluating the SR fund performance. Our results show that, in aggregate, the abnormal performance of SR funds is negative and significant in expansion periods, but no significant differences are found in recession periods. When specific benchmarks are considered, performance improves in recession periods, particularly for environmental funds, those with high SR attributes scores, and funds from the nine Morningstar style box categories. Market timing of SR funds takes positive values and is partially significant. Previous evidence of negative timing after a recent financial crisis vanishes when specific benchmarks are considered. For comparative purposes the performance of conventional US mutual funds is also analysed. There are no significant differences between the performance of SR and conventional mutual funds when a fair comparison is made within the same style categories. When all the SR funds are considered, they underperform conventional funds in expansion sub-periods, but in recession sub-periods they perform better, although the differences observed are not significant.