Title
The Effect of the Business Cycle on the Performance of Socially Responsible Equity Mutual Funds
Document Type
Dissertation
Degree
Doctor of Philosophy (PhD)
Department
Business Administration
Advisor's Name
Karen Paul
Advisor's Title
Committe Chair
Advisor's Name
Sungu Armagan
Advisor's Name
William Newburry
Advisor's Name
Paulette Johnson
Keywords
business cycle, CAPM, Carhart, switching regression, SRI, mutual fund, socially responsible
Date of Defense
9-28-2011
Abstract
The current study applies a two-state switching regression model to examine the behavior of a hypothetical portfolio of ten socially responsible (SRI) equity mutual funds during the expansion and contraction phases of US business cycles between April 1991 and June 2009, based on the Carhart four-factor model, using monthly data. The model identified a business cycle effect on the performance of SRI equity mutual funds. Fund returns were less volatile during expansion/peaks than during contraction/troughs, as indicated by the standard deviation of returns. During contraction/troughs, fund excess returns were explained by the differential in returns between small and large companies, the difference between the returns on stocks trading at high and low Book-to-Market Value, the market excess return over the risk-free rate, and fund objective. During contraction/troughs, smaller companies offered higher returns than larger companies (ci = 0.26, p = 0.01), undervalued stocks out-performed high growth stocks (hi = 0.39, p <0.0001), and funds with growth objectives out-performed funds with other objectives (oi = 0.01, p = 0.02). The hypothetical SRI portfolio was less risky than the market (bi = 0.74, p <0.0001). During expansion/peaks, fund excess returns were explained by the market excess return over the risk-free rate, and fund objective. Funds with other objectives, such as balanced funds and income funds out-performed funds with growth objectives (oi = -0.01, p = 0.03). The hypothetical SRI portfolio exhibited similar risk as the market (bi = 0.93, p <0.0001). The SRI investor adds a third criterion to the risk and return trade-off of traditional portfolio theory. This constraint is social performance. The research suggests that managers of SRI equity mutual funds may diminish value by using social and ethical criteria to select stocks, but add value by superior stock selection. The vii result is that the performance of SRI mutual funds is very similar to that of the market. There was no difference in the value added among secular SRI, religious SRI, and vice screens.
Recommended Citation
Roofe Sattlethight, Andrea, "The Effect of the Business Cycle on the Performance of Socially Responsible Equity Mutual Funds" (2011). FIU Electronic Theses and Dissertations. Paper 525.
http://digitalcommons.fiu.edu/etd/525