Bollen and Cohen (2004)
Bollen, Nicolas P.B. and Mark A. Cohen. "Mutual Fund Attributes and Investor Behavior." Working Paper, May 24, 2004.
This strong study reviews investments and redemptions in a matched sample of socially screened and unscreened U.S. mutual funds. The study uses CRSP data for the 1980-2002 time period for conventional funds (N=348 in 1980 rising to 8,009 in 2002) and social funds as identified by the Social Investment Forum (N=7 in 1980 rising to 185 in 2002). Social funds are matched to conventional funds on the basis of their risk exposures, as measured by a Carhart model (risk metrics are Beta, Market Capitalization, Price/Book ratio, and a Momentum factor). After adjusting for these factors, the alphas of the social funds were higher than those of the conventional funds, although alphas were negative in both cases (p<0.0383 - Table 3).
Finds that "the monthly volatility of investor cash flows in SR funds is significantly lower than conventional flow volatility. This result suggests that the non-financial SR attribute regulates the speed with which investors reallocate capital among their investments."
Also finds, counterintuitively, that cash flows of SR funds are more sensitive to lagged performance than those of conventional funds, i.e. that social investors are more likely to react to recent performance than other investors. The authors offer two possible explanations. First, socially responsible investing might be viewed as a luxury good: citing work by Ait-Sahalia (2004), they note that consumption of luxury goods tends to rise as wealth rises and fall as wealth falls. Second, as a relatively new investment approach, investor beliefs about SRI are likely to be more diffuse than for conventional investments - as a result, newinformation is likely to be given more weight as investors learn and update their beliefs. This second explanation appears better supported by the data, given that younger funds exhibit the highest sensitivity. Performance sensitivity is also observed in older funds, however, leading the authors to comment that "at least some SR investors view their investment as consumption of a luxury good."
The authors conclude that "our results suggest that SR investors are just as concerned about the performance of their investment as investors in conventional funds, if not more so. Nonetheless, mutual funds companies, which continually compete to offer new funds in an effort to attract investor capital, can expect SR investors to be more loyal than investors in ordinary funds."
LK comment: Moskowitz Prize Honorable Mention in 2004.