The performance evaluation and style analysis of socially responsible investment funds in South Africa.
Naidoo, Jeremy Ebenezer.
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Socially Responsible Investing (SRI) has been widely acknowledged as an integral part of modern-day investment practice, gaining significant growth since its early history. While SRI consciousness has grown steadily in South Africa; there is a paucity of research on the effect of its restrictions on investor’s portfolios. Considering the limited studies documented, the extant research delves into the profile of the South African responsible investing industry, highlighting its vast development and investment strategies. To assess the viability of socially responsible investments and provide investors with the ability to make more informed decisions, scholars in finance have raised pertinent questions, primarily focused on the impact of utilising environmental, social and governance (ESG) criteria on socially responsible investment performance. As such, this study aimed to explore this research domain and position its results within the currently inconclusive literature. The objective of the study was to evaluate active SRI in South Africa, with a focus exclusively on SRI funds. The approach followed was twofold. Firstly, by employing the Fama and French 3-factor model and Carhart 4-factor model, the study assessed the risk-adjusted performance of SRI funds relative to their conventional counterparts (conventional funds and passive benchmarks) over two evaluation periods (2009-2013 and 2014-2018). The findings showed that after significant underperformance of SRI funds in the earlier period, they tend to perform better in the latter period. The improvement in performance over the study was termed a ‘learning effect’ - the older funds have finally caught up with conventional funds (or outperformed them) while funds that were launched recently still trail their conventional peers. Furthermore, the models showed similar findings for the market loading, size (SMB) and value (HML) factors – SRI funds exhibited a lower sensitivity to market fluctuations as compared to non-SRI funds, a higher exposure to small-cap stocks, and exhibited a larger exposure to growth stocks in the earlier period (2009-2013) while a greater exposure to value stocks in the latter period (2014-2018). The second research aim of the study made use of Return-Based Style Analysis (RBSA) to identify and compare the determinants of SRI funds to non-SRI funds (conventional funds). To date, this method has not been previously applied to SRI funds in South Africa. The findings of the RBSA model showed that SRI funds, on average, exhibited moderate to high levels of active management, which were also found to be substantially higher than non-SRI funds. This indicated that the imposition of additional constraints by SRI funds (through SRI criteria) does not hinder the fund manager from adding value through active management. Furthermore, the classifications of SRI funds were shown, on average, to comply with their investment mandates and relevant regulation, i.e. correctly classified. Taking into account the asset class exposures of SRI funds, the regression results showed that these exposures were found, on average, to almost mirror the exposures of the funds’ actual asset holdings. With respect to the comparative style analysis of SRI and non-SRI funds, a distinguishable asset class exposure was shown whereby SRI funds were found to have a value-tilt while non-SRI funds exhibited a growth-tilt over the evaluation period.