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Typical and Tail Performance of Canadian Equity SRI Mutual Funds

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Abstract

While no evidence for timing ability is identified, selection performance before (after) management-related costs for a comprehensive and survivorship-free sample of Canadian equity SRI funds is significantly positive (insignificant) and not statistically different from that for non-SRI funds. Conditioning and multifactor benchmarking improve selection performance. Based on block-bootstrap tests, luck (and not ability), or the lack thereof, is associated with fund membership in the tails of the cross-sectional selection and timing performance distributions. Accounting for the effects of cross-correlations changes inferences about the interpretation of the significance of traditionally calculated t-values.

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Notes

  1. The smart money effect for the relationship between SRI fund performance and money flows is also important. Major determinants of SRI fund flows are past returns and social screen strength (Renneboog et al. 2008b, 2011), although the fund-flow sensitivity to past and current returns is lower than that for conventional funds (Benson and Humphrey 2008).

  2. Derwall and Koedijk (2009) find similar and better performance relative to their non-SRI counterparts for SRI bond and balanced funds, respectively.

  3. The same method is used by Ayadi and Kryzanowski (2005, 2011) for samples of Canadian equity and fixed-income funds, by Cuthbertson et al. (2008) for a large sample of UK unit trusts, and by Fama and French (2010) to distinguish between luck and skill for US equity funds.

  4. Examples include Chen and Knez (1996), Ferson and Schadt (1996), Kryzanowski et al. (1997), Christopherson et al. (1998), Ayadi and Kryzanowski (2005), Bauer et al. (2006), and Renneboog et al. (2007, 2008a). Conditioning is performed using information publicly available to uninformed investors, such as dividend yields, interest rates, and default and term structure variables.

  5. Kim (2014) discusses the theory of skill versus luck in the assessment of CEO performance. She contends that measures of a CEO’s performance can be very noisy even after accounting for systematic economic events over which the CEO has no control because the CEO could have been lucky or unlucky. Hence luck can produce false positive or false negative performance inferences when judging CEO performance.

  6. Some papers develop style-adjusted performance measures for SRI funds (see for example Fernandez-Izquierdo and Mattalan-Saez, 2007).

  7. Untabulated results on the fund return residuals using all benchmark models show that the null hypothesis of normally distributed residuals is consistently rejected (based on the Jarque-Bera test) for 71 % of the SRI funds. Furthermore, additional tests (Breusch-Pagan test for heteroskedasticity and Ljung-Box test for serial correlation) reveal that fund return residuals are often heteroskedastic essentially with unconditional models and that they are serially correlated for more than 55 % of all funds across all benchmark models.

  8. Launched in January 2000, the JSI is a market capitalization weighted index consisting of 60 Canadian companies drawn from the S&P/TSX composite index and non-member companies with exceptional social standards. Companies are selected based on a rating framework which incorporates environmental, social and governance practices. Jantzi Research Inc. merged with Sustainalytics in August 2009, and now operates under the name Jantzi-Sustainalytics (see www.jantziresearch.com for more details on this index).

  9. DY is used by Ferson and Schadt (1996), Kryzanowski et al. (1997), and Ayadi and Kryzanowski (2005). TB is used by Ferson and Schadt (1996) and Ayadi and Kryzanowski (2005). In the SRI fund performance literature, the two instruments were used by Schroder (2004), Bauer et al. (2006, 2007), Renneboog et al. (2007, 2008a), and Cortez et al. (2009).

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Acknowledgments

Financial support from Senior Concordia University Research Chair in Finance, Goodman School of Business, IFM2 and SSHRC are gratefully acknowledged. We would like to thank Michael Brennan, Yunieta Nainggolan (discussant), Emilia Peni (discussant) and participants at the 2011 Mid-West meetings (Chicago) and the 2011 EFA meetings (Savannah). We also thank Kaveh Moradi Dezfouli for his excellent research assistance.

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Authors and Affiliations

  1. Department of Finance, Operations, and Information Systems, Goodman School of Business, Brock University, St. Catharines, ON, Canada

    Mohamed A. Ayadi

  2. Department of Management Sciences, HEC Montreal, Montreal, QC, Canada

    Hatem Ben-Ameur

  3. Department of Finance, John Molson School of Business, Concordia University, Montreal, H3G 1M8, QC, Canada

    Lawrence Kryzanowski

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  1. Mohamed A. Ayadi
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Correspondence to Mohamed A. Ayadi.

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Ayadi, M.A., Ben-Ameur, H. & Kryzanowski, L. Typical and Tail Performance of Canadian Equity SRI Mutual Funds. J Financ Serv Res 50, 57–94 (2016). https://doi.org/10.1007/s10693-015-0215-0

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