Socially Responsible Funds and Financial Sustainability: Effects of Investment Horizons on Fund Performance

Sammanfattning: This paper investigates the effect of US domestic equity mutual funds' investment horizons on their abnormal returns during 1999 to 2014, and how the effect differs for funds dedicated to socially responsible investments (SRI) and conventional, non-SRI funds. Using average fund turnover as a proxy for the fund investment horizon, we find that SRI funds tend to have significantly longer horizons than non-SRI funds. Additionally, our analysis shows that long horizons have a positive impact on abnormal returns. Yet, SRI funds have no better abnormal returns than non-SRI funds on average. By interacting SRI and horizon, we find that the effect of investment horizon is opposite for SRI and non-SRI funds' abnormal returns, being negative for SRI funds. This may support theories in existing studies that SRI funds hold their assets longer for non-financial reasons, while short-term investors may face stronger downturn effects due to herding behavior. Furthermore, we find that the effect of temporarily increased activity is negative for SRI funds, but positive for non-SRI funds. Thus, SRI funds with a shorter horizon but fewer peaks in activity yield higher abnormal returns than SRI funds with a longer horizon and more frequent peaks in activity. The opposite is true for non-SRI funds. Despite varying expense ratios, the findings do not differ between gross and net returns. The study is based on a sample of 155 SRI funds and two different non-SRI control groups, namely a matched and a randomized sample, on which we perform several OLS as well as time FE regressions to isolate the effect of investment horizon and SRI.