'A COMPARISON OF FINANCIAL PERFORMANCE AND INVESTMENT STYLES FOR SOCIALLY RESPONSIBLE AND CONVENTIONAL INVESTMENT INDICES IN THE UNITED STATES'.
[Dissertation (University of Nottingham only)]
This paper investigates comparing the financial performance for socially responsible investment equity indices and conventional investment equity indices in the United States, accounting for the recent financial crisis. Two conventional indices are used as a benchmark to four socially responsible indices. The conventional indices used in this paper are the S&P500 Index and CRSP Total Market Index. The socially responsible indices used are the Calvert Social Index, FTSE4Good U.S. Select Index, FTSE4Good U.S. 100 Index and the MSCI KLD 400 Social Index. The time period for this investigation is from 2nd January 2001 to 25th June 2013. There is one primary objective and two minor objectives. To obtain results for the primary objective, we first must obtain results for minor objective 1.
The first minor objective is to establish sub-periods by using the GARCH (1,1) volatility model to coincide with the financial crisis. The illustrated volatility graph identifies four break-points; Panel A (January 2001 to June 2013 - Whole period); Panel B (January 2001 to September 2008 - pre- financial crisis); Panel C (September 2008 to March 2009 - during financial crisis); Panel D (March 2009 to August 2011 - post-financial crisis/pre-debt crisis); and Panel E (August 2011 to June 2013 - during-debt crisis). Once sub-periods are established, we are able to obtain results for the primary objective and minor objective two.
The primary objective is to compare the financial performance for both conventional and SRI indices, for the whole period and sub-periods. Measures used to do this are the Sharpe ratio, Sortino ratio, Treynor ratio and Jensen's alpha. Statistical tests are performed for the Sharpe ratio (Jobson and Korkie (1981) Transformed Sharpe Measure) and Jensen's Alpha (Welch-Two Sample T-test). Our findings suggest that financial performance of SRI indices do not differ significantly from conventional indices. However, one major observation we notice is that whilst all SRI indices outperform the S&P500 Index, they fail to outperform the CRSP Total Market Index. The second major observation is the change in investment behaviour by investors. We notice from 2001 to 2008, and 2008 until 2013, are periods of transition from conventional investing to socially responsible investing. In addition, from 2001 to 2007 (before the financial crisis), volatility was greater for SRI indices than conventional indices. However, after the financial crisis, volatility for conventional indices were greater than SRI indices.
The second minor objective was to obtain information on the investment styles for SRI and conventional indices. For this, we employed the Fama and French (1993) 3-factor model and the Carhart (1997) 4-factor model. For both models, we found the alphas for S&P500 and SRI indices to be negative and statistically significant. Second, we find the S&5P00, Calvert Social Index, FTSE4Good U.S. and FTSE4Good U.S. 100 indices to have more market risk. Third, for the whole period, we find the S&P500 and four SRI indices to have a small tilt towards large cap stocks. Finally, we find that whilst the S&P500 is tilted towards stocks with a high-book-to-market ratio, all four SRI indices are titled towards stocks with a low-book-to-market ratio (or growth stocks). However, only the Calvert Social Index, FTSE4Good U.S Index and MSCI KLD 400 Social Index are statistically significant for the whole period.
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