canadian sri mutual funds return characteristics · 2015-11-19 · 1 a recent morgan stanley report...
TRANSCRIPT
CarletonCentreforCommunityInnovation
CarletonUniversity
CanadianSRIMutualFunds
Risk/ReturnCharacteristics
CarletonCentreforCommunityInnovation
Dr.TessaHebb
May22nd2015
R15‐02
CanadianSRIMutualFundsRiskReturnCharacteristics
1
Executive Summary:
WefindthattheSRIEquityMutualFundsinCanadaexaminedinthisstudy,financiallyoutperformtheirrespectivebenchmarks63%ofthetime.
WefindthattheSRIEquityMutualFundsoutperformedriskmeasurementstandardindustrybenchmarks55%ofthetime,demonstratingtheabilityforSRIfundstoreduceriskininvestmentportfolios.
ThesefindingsareparticularlystrongforSharperatiosandSortinoratiosthatmeasuretheexcessreturnpereachunitofrisktaken.SRIequityfundsoutperformedthebenchmarkSharpeRatios63%ofthetime,andSortinoratios(whichmeasureexcessreturnagainstdownsideloss)72%ofthetime.
WefindthattheSRIFixedIncomeandBalancedMutualFundsinCanadaexaminedinthisstudy,financiallyoutperformtheirrespectivebenchmarks67%ofthetime.
WefindCanadianFixedIncomeSRIfundsandCanadianBalancedSRIfundstobeinlinewithotherCanadianmutualfundsintheseassetclasseswithregardtoriskreductionintheseportfolios.
AgaintheyshowtheabilityofSRIfundstoreducedownsiderisk,outperformingbenchmarkontheirSortinoratio61%ofthetime.
CanadianSRIMutualFundsRiskReturnCharacteristics
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Contents ExecutiveSummary:................................................................................................................................................1
Introduction................................................................................................................................................................4
Methodology...............................................................................................................................................................6
CanadianSRIEquityMutualFunds...................................................................................................................6
CanadianEquitySRIFunds:............................................................................................................................6
Figure1:CanadianEquitySRIFundsRisk/Returns(5year)......................................................7
Figure2:CanadianEquitySRIFundsSharpeRatio(5years).....................................................9
Figure3:CanadianEquitySRIFundsSortinoRatio(5years)..................................................10
U.S.Equity............................................................................................................................................................10
Figure4:USEquitySRIRisk/Return(3years)...............................................................................11
InternationalEquity........................................................................................................................................12
Figure5: InternationalEquitySRIFunds'SortinoRatio(5‐year)..........................................14
GlobalEquity......................................................................................................................................................14
Figure6: GlobalEquitySRIFunds'SharpeRatios(5Years)....................................................16
SRIEquityFundsConclusions..........................................................................................................................17
Returns.................................................................................................................................................................17
Table1:CanadianSRIEquityMutualFunds'ReturnsMeasuredAgainstBenchmark..17
Figure7:CanadianEquitySRIFundsReturnOutperformanceOverBenchmark...........18
Risk.........................................................................................................................................................................18
Table2:CanadianSRIEquityMutualFundsRiskCharacteristicsMeasuredAgainstBenchmark.....................................................................................................................................................19
Figure8:CanadianEquitySRIFundsSortinoRatioOutperformanceOverBenchmark.............................................................................................................................................................................20
FixedIncomeandBalancedMutualFunds.................................................................................................21
CanadaFixedIncome......................................................................................................................................21
CanadianSRIBalancedFunds.....................................................................................................................23
CanadianFixedIncomeBalanced..............................................................................................................23
CanadianNeutralBalanced:.........................................................................................................................24
Figure9:CanadianNeutralBalancedSRIFunds'SortinoRatios(3years).........................26
CanadianSRIMutualFundsRiskReturnCharacteristics
3
CanadianGlobalEquityBalanced:.............................................................................................................27
Figure10:GlobalEquityBalancedSRIFundsRisk/Return(5years)...................................28
SRIFixedIncomeandBalancedMutualFundsConclusions...............................................................29
Returns.................................................................................................................................................................29
Table3:CanadianSRIFixedIncomeandBalancedMutualFunds'ReturnsMeasuredAgainstBenchmark....................................................................................................................................29
Figure11:CanadianFixedIncomeandBalancedSRIFunds'ReturnOutperformanceOverBenchmark..........................................................................................................................................30
Risk.........................................................................................................................................................................30
Table4:CanadianSRIFixedIncomeandBalancedMutualFundsRiskCharacteristicsMeasuredAgainstBenchmark...............................................................................................................31
FinalThoughts........................................................................................................................................................33
Acknowledgements...............................................................................................................................................34
Abouttheauthor....................................................................................................................................................34
ReferenceList..........................................................................................................................................................34
CanadianSRIMutualFundsRiskReturnCharacteristics
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Introduction
Sociallyresponsible investing(SRI) isoneof fastestgrowing investmenttrendsinthelastdecade.AccordingtotheResponsibleInvestmentAssociationofCanadaover$1trillion(asofDecember 31, 2013) ismanaged in Canada using one ormore responsible investment(RI) strategies. These assets grew from $600 billion tomore than $1 trillion in just twoyears,representinga68%growthrate.RetailSRImutualfundsandventurecapitalfundsinCanada,havegrownfrom$13.48billionto$17.5billioninthisperiod,withtheSRImutualfund industry increasing by52.3%, from$4.36billion to $6.64billion. This compares to29.8%growthintraditionalmutualfundsduringthesameperiod.
SRI investorsuseenvironmental,social,andgovernance(ESG) factors in their investmentdecision‐making. It isevident that thedemandfor theseproductsbyCanadians isontheupswing. A recent study found that 92% of Canadians think it is important to chooseinvestments that align with their values (Standard Life, 2011; NEI, 2014). Investmentmanagers apply a variety of approaches in SRI: best‐of‐class screening, ESG integration,shareholder engagement, negative screening, and impact investing are themost popularmethodsemployed.SRIusestheterm'doingwellbydoinggood'.Itissuggestedthattakingenvironmental, social and governance factors into consideration can reduce risk in aportfolioandmayleadtooutperformance.
The traditional investment approach argues that SRI limits the investment universe andresultsinadecreaseinvalue.Butthisviewisnotbackedupbyempiricalevidence.InfactmoststudiesshowthatSRIfundsdelivercomparableandinsomecasessuperiorreturnstothoseoftraditionalfunds.1
1A recentMorganStanleyReport (2015) found thatSRI equitymutual funds in theUSperformedfavourably compared to traditional counterparts. Osthoff andKempf (2007) found that investorscan earn remarkably high abnormal returns if they employ a long high SRI rating, short low SRIratinginvestingstrategy.AsimilarstudybyRussellInvestmentsalsofoundalinkbetweenESGandvaluecreation(2014)Eccles,Lannou,andSerafein(2012)reinforcetheseresults,findingagroupofhigh sustainability funds had annual abnormal performance of 4.8% higher than a group of lowsustainabilityfunds.
CanadianSRIMutualFundsRiskReturnCharacteristics
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The reasoning behind the link between ESG and financial returns lies in the fact thatcompanieswith high ESG standards have been found to outperform companieswith lowESGratings. Arecentacademicmeta‐studydoneatOxfordUniversitylookedatover190studiesandfoundthat80%ofthestudiesshowedthatstockpriceperformanceispositivelyinfluencedbygoodsustainabilitypractices(Clarketal,2014).Margolisetal,2003lookedat109studiesonthelinkbetweencorporatefinancialandsocialperformanceandCSRandfoundmost studies indicated apositive relationship (54)while only 7 of the 109 studiesfoundanegativerelationship,theremainderwereeitherneutralormixed.
Whilemany studies have focused on the link between financial performance andESG, todate few have focused on whether taking ESG factors into account can lower risk in aportfolio,whichisoneofthecentralclaimsmadebySRIandRIproponents. Increasinglyinvestors are seeking long‐term stable returns. Particularly in this period following thefinancial crisis of 2008, investors are avoiding undue volatility (particularly downwardvolatility)intheirinvestmentportfolios.
This study examines the relationship between risk and return in Canadian SRI mutualfunds. We ask whether Canadian SRI mutual funds areable toprovide solid financial returns for investorswhilesimultaneously reducing risk in their portfolios. Wemeasure these funds risk and return characteristicsagainst the average risk and returns for the CanadianmutualfundsacrosseightcommonassetclassesinCanada.These include equity, fixed income and balanced mutualfunds. Weuse1,3,5,and10yearobservations. Wefind
thattheSRIequitymutualfundsexaminedherefinanciallyoutperformthebenchmark63%ofthetime,whilesimultaneouslyreducingriskintheportfolio.TheSRIequitymutualfundsoutperformed their benchmark on risk factors 55% of the time. They are particularlystrong in generating excess return for each unit of risk taken with Sharpe Ratiosoutperforming63%ofthetimeandSortinoRatios,whichmeasureexcessreturnperunitofdownsiderisk,72%ofthetime.
We find the SRI fixed income and balanced funds examined in this study financiallyoutperform the benchmark 67% of the time, with risk characteristics in line with otherCanadianmutualfundsintheseassetclasses.FixedIncomeandBalancedFundsexaminedoutperformedbenchmark61%ofthetimeintheirSortinoratios(measuringexcessreturnperunitofdownsiderisk).
AllCanadianSRIfundsexaminedinthisstudyhaveanaverageorbelowaverageriskratingfromMorningstar.
CanadianSRIMutualFundsRiskReturnCharacteristics
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Methodology We examined Canadian SRI mutual funds andmeasured their financial returns and riskcharacteristics against applicable Morningstar benchmarks. We used the ResponsibleInvestment Association of Canada's SRI mutual fund listing to identify the Canadian SRIfundstobeusedinthestudy.Weexamined8assetclasses:fourinequity:CanadianEquity,CANUSEquity,CANInternationalEquity,andCANGlobalEquity,andfourinFixedIncomeandBalanced:CanFixedIncome,CANFixedIncomeBalanced,CanadianNeutralBalanced,andCANGlobalEquityBalanced.WeusedMorningstardataacross4timeperiods1year,3year,5yearand10yeardata.WeusedannualizedtotalreturnsandriskdataformonthendMarch31st2015.
Canadian SRI Equity Mutual Funds
Canadian Equity SRI Funds:
MorningstarBenchmark:Canadian Equity Benchmark: Includes 897 funds which meetthe following criteria.Funds in theCanadianEquity categorymust invest at least 90%oftheir equity holdings in securities domiciled in Canada, and their average marketcapitalizationmustbegreaterthantheCanadiansmall/midcapthreshold.
Using RIA listings of Canadian SRI Mutual Funds by Asset Class we examined 22 SRICanadianEquityMutualFundsfoundintheMorningstardatabaseinthisassetclass:
DesjardinsEnvironmentDesjardinsEnvironmentCDesjardinsEnvironmentFGWLEthics(G)DSCGWLEthics(G)NLIAClaringtonInhanceCdnEqSRIClAIAClaringtonInhanceCdnEqSRIClFMeritasJantziSocialIndexMeritasJantziSocialIndexSeriesFMeritasMonthlyDivandIncomeSeriesFMeritasMonthlyDividendandIncomeNEIEthicalCanadianEquityA
CanadianSRIMutualFundsRiskReturnCharacteristics
7
NEIEthicalCanadianEquityFPH&NCommunityValuesCdnEquityAdvPH&NCommunityValuesCdnEquitySrCPH&NCommunityValuesCdnEquitySrDPH&NCommunityValuesCdnEquitySrFRBCJantziCanadianEquityAdvRBCJantziCanadianEquitySrARBCJantziCanadianEquitySrDRBCJantziCanadianEquitySrFRBCJantziCanadianEquitySrI
Findings
Returns:
9/22SRIfundsinthisassetclassoutperformedtheMorningstarbenchmarkin1yearperformance
Overthreeyearperiod,13/20SRIfundsoutperformedthebenchmark Over5yearperiod,16/19SRIfundsoutperformedbenchmark Overthe10yearperiod3/6outperformedbenchmark
SRIfundsoutperformedthebenchmarkin41/67observationsover4timeperiods‐61%ofthetime.
Figure 1: Canadian Equity SRI Funds Risk/Returns (5 year)
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00
Returns%
Risk/StandardDeviation%
CanadianEquitySRIFundsRisk/Returns(5year)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
8
StandardDeviation:
S/Dmeasuresofriskinaportfoliobycalculatingthevolatilityofthereturns,inotherwordshowlargearetheswingsbetweenreturnsovertheperiod.Itmeasuresthevariancefromthemean‐ortherangeofreturnsinagivenperiodfromtheaveragereturninthatperiod.This includes both upswings and downturns in performance. The lower the standarddeviationthelessrisktheinvestortakeson.
Overthreeyearperiod,4/20SRIfundshadlessvolatilereturnsincomparisontobenchmark.
Over5yearperiod,9/19werelessvolatilethenthebenchmark Over10yearperiod,2/6lessvolatilethebenchmark
15/45observationshadlowerSDthanbenchmarkover3timeperiods‐33%ofthetime
SharpeRatio:
Thisratiomeasurestheexcessreturnafundmakesforeachunitofriskittakeson,manyfeel it isabettermeasurementofrisk inan investmentportfolio thanstandarddeviation.WithSharperatios,thehigherthenumberthemorepositivetheoutcomeforinvestors.
13/20outperformedthebenchmarkoverthelastthreeyears 15/19outperformedthebenchmarkoverthelastfiveyears 3/6outperformedthebenchmarkover10yearperiod
31/45observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐69%ofthetime.
CanadianSRIMutualFundsRiskReturnCharacteristics
9
Figure 2: Canadian Equity SRI Funds Sharpe Ratio (5 years)
SortinoRatio
AfinalmeasurementofriskintheportfolioistheSortinoratio.TheSortinoratiomeasuresexcessreturn foreachunitofdownsiderisk. BothStandardDeviationandSharpeRatiospunishfundsthathavevolatilitywhengeneratinghigherreturnsaswellaslowerreturns,but higher return volatility is not the kind of volatility that bothers most investors.Investorsareconcernedwith theriskof losingmoneyordownsiderisk. Like theSharperatiothehigherthenumberthemorepositivetheoutcomeforinvestors.
Overthreeyears,13/20SRIfundsoutperformedbenchmark,whiletheremainderwereinlinewiththebenchmark.
Over5years,16/19SRIoutperformedbenchmark Over10years,3/6outperformedbenchmark
32/45observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐71%ofthetime.
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
0.10 0.30 0.50 0.70 0.90 1.10 1.30
Returns%
SharpeRatio
CanadianEquitySRIFundsSharpeRatio(5years)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
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Figure 3: Canadian Equity SRI Funds Sortino Ratio (5 years)
U.S. Equity
USEquityBenchmark:The benchmark used for this asset class isMorningstar CANUSEquity.FundsintheU.S.Equitycategorymustinvestatleast90%oftheirequityholdingsinsecuritiesdomiciled in theUnitedStates,and theiraveragemarketcapitalizationmustbegreaterthantheU.S.small/midcapthreshold
TherearesubstantiallyfewerUSSRIFundsinCanada.UsingtheRIAlistofsuchfundswefindfourintheMorningstardatabase:
MeritasU.S.EquitySeriesFMeritasUSEquityNEIEthicalAmericanMulti‐StrategyANEIEthicalAmericanMulti‐StrategyF
2.003.004.005.006.007.008.009.0010.0011.00
0.00 0.50 1.00 1.50 2.00
Returns%
SortinoRatio
CanadianEquitySRIFundsSortinoRatio(5years)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
11
Returns:
Overtheoneyearperiod,4/4SRIfundsinthisassetclasssignificantlyoutperformedtheMorningstarbenchmark
Overthreeyearperiod,3/4SRIfundsoutperformedthebenchmark Over5yearperiod,1/4SRIfundsoutperformedbenchmark,theremainderwerein
linewiththebenchmark. Overthe10yearperiod1/2outperformedthebenchmark.
SRIfundsoutperformedthebenchmarkin9/14observationsover4timeperiods‐64%ofthetime.
Figure 4: US Equity SRI Risk/Return (3 years)
StandardDeviation:
Overthreeyearperiod,2/4SRIfundshadlessvolatilereturnsincomparisontobenchmark.
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20.00
20.50
21.00
21.50
22.00
22.50
23.00
0.00 2.00 4.00 6.00 8.00 10.00
Returns%
Risk/StandardDeviation
USEquitySRIRisk/Return(3years)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
12
Over5yearperiod,2/4werelessvolatile Over10yearperiod,1/2lessvolatile
5/10observationshadlowerSDthanbenchmarkover3timeperiods‐roughly50%ofthetime.
SharpeRatio:
2/4outperformedthebenchmarkoverthelastthreeyears 3/4outperformedthebenchmarkoverthelastfiveyears 1/2outperformedthebenchmarkover10yearperiod
6/10observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐60%ofthetime.
SortinoRatio:
4/4outperformedthebenchmarkoverthelastthreeyears 4/4outperformedthebenchmarkoverthelastfiveyears 1/2outperformedthebenchmarkover10yearperiod
9/10observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐90%ofthetime.
International Equity
Morningstar Benchmark: We use the Morningstar Canadian International EquityBenchmark. Funds in the International Equity categorymust invest at least 95%of theirequityassetsincountriesotherthanCanadaandtheUnitedStatesandatleast70%oftheirequityassetsindevelopedcountries.Fundsthatdonotmeetanyoftherequirementsofthemorefocusedgeographicequitycategoriesandthatinvestlessthan90%oftheirassetsinanysinglecountryorregionwillbeassignedtotheInternationalEquitycategory.
CanadianSRIMutualFundsRiskReturnCharacteristics
13
UsingRIA listingsofCanadianSRIMutualFundsbyAssetClasswe found4SRICanadianInternationalEquityMutualFundsintheMorningstardatabaseinthisassetclass:
MeritasInternationalEquityMeritasInternationalEquitySeriesFNEIEthicalInternationalEquityANEIEthicalInternationalEquityF
Returns:
3/4fundsoutperformedthebenchmarkin1year 0/4fundsoutperformedthebenchmarkovera3yearreturnperiod 3/4fundsoutperformedtheInternationalEquityBenchmarkoverafiveyear
period. 1/2fundsoutperformedthebenchmarkinthe10yeartimeperiod
SRIfundsoutperformedthebenchmarkin7/14observationsover4timeperiods‐50%ofthetime.
StandardDeviation:
Overthreeyearperiod,0/4SRIfundshadlessvolatilereturnsincomparisontobenchmark.
Over5yearperiod,2/4werelessvolatile Over10yearperiod,1/2lessvolatile
3/10observationshadlowerSDthanbenchmarkover3timeperiods‐roughly30%ofthetime.
SharpeRatio:
0/4outperformedthebenchmarkoverthelastthreeyears 2/4outperformedthebenchmarkoverthelastfiveyears 1/2outperformedthebenchmarkover10yearperiod
3/10observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐30%ofthetime.
CanadianSRIMutualFundsRiskReturnCharacteristics
14
SortinoRatio:
1/4outperformedthebenchmarkoverthelastthreeyears 3/4outperformedthebenchmarkoverthelastfiveyears 1/2outperformedthebenchmarkover10yearperiod
5/10observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐50%ofthetime.
Figure 5: InternationalEquitySRIFunds'SortinoRatio(5‐year)
Global Equity
MorningstarBenchmark:Canadian Global Equity Benchmark: 2259 funds. Funds in theGlobalEquitycategorymustinvestinsecuritiesdomiciledanywhereacrosstheglobesuchthat their averagemarket capitalization is greater than the small/mid cap threshold, andinvestmorethan5%andlessthan90%oftheirequityholdingsinCanadaortheU.S.Fundsthatdonotmeetanyoftherequirementsofothergeographicequitycategoriesandhavenoformalrestrictionsthatlimitwheretheycaninvestwillbeassignedtothiscategory.
5.006.007.008.009.0010.0011.00
0.50 0.70 0.90 1.10 1.30 1.50 1.70
Returns%
SortinoRatio
InternationalEquitySRIFunds'SortinoRatio(5‐year)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
15
UsingRIAlistingsofCanadianSRIMutualFundsbyAssetClasswefound17SRICanadianGlobalEquityMutualFundsintheMorningstardatabaseinthisassetclass:
IAClaringtonInhanceGlblEqtySRIClAIAClaringtonInhanceGlblEqtySRIClFMeritasMaxGrowthPortfolioSeriesAMeritasMaxGrowthPortfolioSeriesFNEIEthicalGlobalDividendANEIEthicalGlobalDividendFNEIEthicalGlobalEquityANEIEthicalGlobalEquityFPH&NCommunityValuesGlobalEqAdvPH&NCommunityValuesGlobalEqSrCPH&NCommunityValuesGlobalEqSrDPH&NCommunityValuesGlobalEqSrFRBCJantziGlobalEquityAdvRBCJantziGlobalEquitySrARBCJantziGlobalEquitySrDRBCJantziGlobalEquitySrFRBCJantziGlobalEquitySrIFindings
Returns:
12/17SRIfundsoutperformedthebenchmarkoverthe1yeartimeperiod.11/17SRIfundsoutperformedthebenchmarkoverthe3yeartimeperiod.1wasinlinewithbenchmark.
12/14SRIfundsoutperformedthebenchmarkoverthe5yeartimeperiod. 0/2SRIfundsoutperformedinthe10yearperiod.
SRIfundsoutperformedthebenchmarkin35/50observationsover4timeperiods‐70%ofthetime.Theaverageoutperformanceinthe1and3yeartimeperiodswaslarge.
StandardDeviation:
2/17SRIfundshadlowervolatilitythanthebenchmarkoverthe3yearperiod 5/14SRIfundshadlowervolatilitythanthebenchmarkoverthe5yearperiod 0/2SRIfundshadlowervolatilitythanthebenchmarkoverthe10yearperiod
CanadianSRIMutualFundsRiskReturnCharacteristics
16
7/33observationshadlowerSDthanbenchmarkover3timeperiods‐roughly21%ofthetime.
SharpeRatio:
13/17outperformedthebenchmarkover3yearperiod 9/14fundsoutperformedthebenchmarkover5yearperiod 0/2fundsoutperformedbenchmarkover10yearperiod
22/33observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐67%ofthetime.
Figure 6: GlobalEquitySRIFunds'SharpeRatios(5 Years)
SortinoRatio:
13/17outperformedthebenchmarkover3yearperiod 12/14fundsoutperformedthebenchmarkover5yearperiod 0/2fundoutperformedbenchmarkover10yearperiod
5.00
7.00
9.00
11.00
13.00
15.00
17.00
0.50 0.70 0.90 1.10 1.30 1.50 1.70
Returns%
SharpeRatios
GlobalEquitySRIFunds'SharpeRatios(5Years)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
17
25/33observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐76%ofthetime.
SRI Equity Funds Conclusions
Returns Weused145observationsofthefinancialperformanceof47SRIequitymutualfunds(Canadianequity,USequity,InternationalequityandGlobalEquity)intheCanadianmarketacrossaone,three,fiveand10yeartimeperiods(asofMarch31st2015)andcomparedthemtotheirrespectiveMorningstarbenchmarks.WefoundthattheSRIEquityMutualFundsfinanciallyoutperformedtheirrespectivebenchmarks63%ofthetimewhilealsoreducingriskintheinvestmentportfolio.
Table 1: Canadian SRI Equity Mutual Funds' Returns Measured Against
Benchmark
Equity SRI outperformance Total observations
Return
CDN equity 41 67
US equity 9 14
International equity 7 14
Global equity 35 50
Subtotal 92 145
% 63%
CanadianSRIMutualFundsRiskReturnCharacteristics
18
Figure 7: Canadian Equity SRI Funds Return Outperformance
Over Benchmark
Risk Weusedthreemeasurementsofriskintheseportfolios,StandardDeviation,Sharperatios,andSortinoratiostoevaluatewhetherSRIequitymutualfundsreducerisk.Wemade294observationsofSRIEquityMutualfundsinCanadausingthesethreemeasuresover3,5and10year timeperiodsandcomparing themto their respectivebenchmarks. WefindthattheSRIFundsoutperformedriskmeasurementbenchmarks55%ofthetime.ThesefindingsareparticularlystrongforSharperatiosandSortinoratiosthatmeasuretheexcessreturnpereachunitofrisktaken,usingthesetworatiostheSRIfundsareableto generate excess return at lower risk than thebenchmark63% for their Sharperatio and 72% of the time for their Sortino ratio. Reducing downside risk isparticularlystrongforSRIfundswhencomparedtothebenchmark.
0%10%20%30%40%50%60%70%80%
CanadianEquitySRIFundsReturnOutperformanceOverBenchmark
CDNequity
USequity
Internationalequity
Globalequity
CanadianSRIMutualFundsRiskReturnCharacteristics
19
Table 2: Canadian SRI Equity Mutual Funds Risk Characteristics Measured
Against Benchmark
Equity Funds SRI outperformance Total observations
S/D
CDN equity 15 45
US equity 5 10
International equity 3 10
Global equity 7 33
subtotal 30 98
% 31%
Sharpe Ratio
CDN equity 31 45
US equity 6 10
International equity 3 10
Global equity 22 33
subtotal 62 98
% 63%
Sortino Ratio
CDN equity 32 45
US equity 9 10
International equity 5 10
CanadianSRIMutualFundsRiskReturnCharacteristics
20
Global equity 25 33
subtotal 71 98
% 72%
Total risk observations 163 294
% 55%
Figure 8: Canadian Equity SRI Funds Sortino Ratio Outperformance Over
Benchmark
0%10%20%30%40%50%60%70%80%90%100%
CanadianEquitySRIFundsSortinoRatioOutperformanceOverBenchmark
CDNequity
USequity
Internationalequity
Globalequity
CanadianSRIMutualFundsRiskReturnCharacteristics
21
Fixed Income and Balanced Mutual Funds
Canada Fixed Income
MorningstarBenchmark: Canadian Fixed Income: includes 1041 fundswhichmeet thefollowingcriteria.FundsintheCanadianFixedIncomecategorymustinvestatleast90%oftheir fixedincomeholdingsinCanadiandollarswithanaveragedurationgreaterthan3.5yearsandlessthan9.0years.Inaddition,thesefundsmustinvestprimarilyininvestment‐grade fixed‐income securities, such that the average credit quality of the portfolio as awholeisinvestmentgrade(BBBorequivalentratingorhigher)andnotmorethan25%oftheportfolio'sholdingsare invested inhighyield fixed incomesecurities.Forpurposesofthecategorydefinition,upto30%ofaFund'sassetsmaybeheldinForeignFixedIncomeproductswhichwillbetreatedasCanadiancontentprovidedthatthecurrencyexposureonthoseholdingsishedgedintoCanadianDollars.
Using RIA listings of Canadian SRI Mutual Funds by Asset Class we found 10 SRI FixedIncomeMutualFundsintheMorningstardatabaseinthisassetclass:
MeritasCanadianBondMeritasCanadianBondSeriesFNEICanadianBondNEICanadianBondSeriesFNEIIncomeSeriesANEIIncomeSeriesFPH&NCommunityValuesBondAdvPH&NCommunityValuesBondSrCPH&NCommunityValuesBondSrDPH&NCommunityValuesBondSrFFindings:
Returns:
7/10SRIfundsoutperformbenchmarkover1year 5/10fundsoutperformbenchmark3years, 4/8SRIfundsoutperformedthebenchmarkinthe5yearperiod 1/3SRIfundsoutperformedthebenchmarkinthe10yearperiod
CanadianSRIMutualFundsRiskReturnCharacteristics
22
SRIfundsoutperformedthebenchmarkin17/31observationsover4timeperiods‐55%ofthetime.
Standarddeviation:
2/10SRIfundswaslessvolatilethanthebenchmarkoverthe3yearperiod 1/8SRIfundswaslessvolatilethenthebenchmarkoverthe5yearperiod 1/3SRIfundswaslessvolatilethanthebenchmarkoverthe10yearperiod
4/21observationswerelessvolatilethanbenchmarkover3timeperiods‐19%ofthetime
SharpeRatio:
4/10oftheSRIfundsoutperformedthebenchmarkoverthe3year 3/8SRIfundsoutperformedthebenchmarkinthe5yearperiod 1/3SRIFundsoutperformedthebenchmarkinthe10yearperiod
8/21observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐38%ofthetime
SortinoRatio:
4/10oftheSRIfundsoutperformedthebenchmarkoverthe3year 3/8SRIfundsoutperformedthebenchmarkinthe5yearperiod 1/3SRIFundsoutperformedthebenchmarkinthe10yearperiod
8/21observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐38%ofthetime
CanadianSRIMutualFundsRiskReturnCharacteristics
23
Canadian SRI Balanced Funds
Canadian Fixed Income Balanced
MorningstarBenchmark: Funds in the Canadian Fixed Income Balanced categorymustinvestatleast70%oftotalassetsinacombinationofequitysecuritiesdomiciledinCanadaand Canadian dollar‐denominated fixed income securities and between 5% and 39% oftheirtotalassetsinequitysecurities.
Using RIA listings of Canadian SRI Mutual Funds by Asset Class we found 12 SRI FixedIncomeBalancedMutualFundsintheMorningstardatabaseinthisassetclass:
DesjardinsSocieTerraSecMktPortCDesjardinsSocieTerraSecMktPortFDesjardinsSocieTerraSecureMarketPortIAClaringtonInhanceCnsrvSRIPortT6MeritasIncome&GrowthPortfolioAMeritasIncome&GrowthPortfolioFMeritasIncome&GrowthPortfolioTMeritasIncomePortfolioSeriesAMeritasIncomePortfolioSeriesFMeritasIncomePortfolioSeriesTNEIEthicalSelectConservativePortANEIEthicalSelectConservativePortF
Findings:
Returns
10/12SRIfundsoutperformbenchmarkover1year 5/8fundsoutperformbenchmark3years, 3/4SRIfundsoutperformedthebenchmarkinthe5yearperiod Thereisno10yeardataforSRImutualfundsinthisassetclass
18/24SRIfundobservationsoutperformedthebenchmarkinover3timeperiods‐75%ofthetime.
CanadianSRIMutualFundsRiskReturnCharacteristics
24
Standarddeviation:
2/8SRIfundswerelessvolatilethanthebenchmarkoverthe3yearperiod. 0/4SRIfundswaslessvolatilethenthebenchmark5yearperiod therewerenoobservationsinthe10yeartimeperiod
2/12observationswerelessvolatilethanbenchmarkover3timeperiods‐17%ofthetime
SharpeRatio:
3/8oftheSRIfundsoutperformedthebenchmarkoverthe3year 1/4SRIfundsoutperformedthebenchmarkinthe5yearperiod therewerenoobservationsinthe10yeartimeperiod
4/12observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐33%ofthetime
SortinoRatio:
4/8oftheSRIfundsoutperformedthebenchmarkoverthe3year 1/4SRIfundsoutperformedthebenchmarkinthe5yearperiod therewerenoobservationsinthe10yeartimeperiod
5/12observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐42%ofthetime
Canadian Neutral Balanced:
MorningstarBenchmark: Canadian Neutral Balanced Benchmark includes funds whichmeetthefollowingcriteria:FundsintheCanadianNeutralBalancedcategorymustinvestatleast 70% of total assets in a combination of equity securities domiciled in Canada andCanadiandollar‐denominated fixed incomesecuritiesandbetween40%and60%of theirtotalassetsinequitysecurities.
CanadianSRIMutualFundsRiskReturnCharacteristics
25
UsingRIAlistingsofCanadianSRIMutualFundsbyAssetClasswefound19SRICanadianNeutralBalancedMutualFundsintheMorningstardatabaseinthisassetclass:
DesjardinsSocieTerraBalPortCDesjardinsSocieTerraBalPortFDesjardinsSocieTerraBalancedPortfolioIAClaringtonInhanceBalSRIPortAIAClaringtonInhanceBalSRIPortT6MeritasBalancedPortfolioMeritasBalancedPortfolioSeriesFMeritasBalancedPortfolioTMeritasGrowthandIncomePortfolioAMeritasGrowthandIncomePortfolioFMeritasGrowthPortfolioAMeritasGrowthPortfolioFMeritasGrowthandIncomePortfolioTNEIEthicalBalancedANEIEthicalBalancedFPH&NCommunityValuesBalancedAdvPH&NCommunityValuesBalancedSrCPH&NCommunityValuesBalancedSrDPH&NCommunityValuesBalancedSrF
Findings:
Returns:
15/19fundsexperiencedhigherreturnsthanbenchmarkovera1yearperiod 11/15outperformedbenchmarkover3yearperiod. 6/10SRIfundsoutperformedbenchmarkovera5yearperiod 1/3SRIfundsoutperformedbenchmarkinthe10yeartimeperiod
SRIfundsoutperformedthebenchmarkin33/47observationsover4timeperiods‐70%ofthetime.
StandardDeviation:
2/15SRIfundsexhibitedlowervolatilityovera3yearperiod 3/10SRIfundsexhibitedlowervolatilityovera5yearperiod
CanadianSRIMutualFundsRiskReturnCharacteristics
26
1/3fundsexhibitedlowervolatilityovera10yearperiod6/28observationswerelessvolatilethanbenchmarkover3timeperiods‐21%ofthetime
SharpeRatio:
6/15fundsoutperformedthebenchmarkoverthe3yearperiod(2wereinlinewithbenchmark)
1/10outperformedoverthe5yearperiodhoweverallveryclosetobenchmark. 0/3outperformedoverthe10yearperiod,onewasclosewithbenchmark.
7/28observationshadstrongerSharperatiosthanthebenchmarkover3timeperiods‐25%ofthetime
Sortino:
12/15fundsoutperformedthebenchmarkovera3yearperiod 6/10fundsoutperformedbenchmarkovera5yearperiod 1/3fundsoutperformedthebenchmarkovera10yearperiod
19/28observationshadstrongerSortinoratiosthanthebenchmarkover3timeperiods‐68%ofthetime
Figure 9: Canadian Neutral Balanced SRI Funds' Sortino Ratios (3 years)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00
Returns%
SortinoRatio
CanadianNeutralBalancedSRIFunds'SortinoRatios(3years)
SRIFunds
Benchmark
SRIAverage
CanadianSRIMutualFundsRiskReturnCharacteristics
27
Canadian Global Equity Balanced:
MorningstarBenchmark:CanadianGlobalEquityBalanced:includes1760funds.Fundsinthe Global Equity Balanced category must invest less than 70% of total assets in acombination of equity securities domiciled in Canada and Canadian dollar‐denominatedfixedincomesecurities.Inaddition,theymustinvestbetween61%and90%oftheirtotalassetsinequitysecurities.
UsingRIAlistingsofCanadianSRIMutualFundsbyAssetClasswefound10SRICanadianGlobalEquityMutualFundsintheMorningstardatabaseinthisassetclass:
DesjardinsSocieTerraGrowthPlusPortDesjardinsSocieTerraGrowthPortplusCDesjardinsSocieTerraGrowthPortPlusFNEIEthicalSelectGrowthPortANEIEthicalSelectGrowthPortFRBCJantziBalancedAdvRBCJantziBalancedSrARBCJantziBalancedSrDRBCJantziBalancedSrFRBCJantziBalancedSrIFindings
Returns:
6/10fundsoutperformedthebenchmarkover1yearperiod 5/8fundsoutperformedthebenchmarkover3yearperiod 6/7fundsoutperformedthebenchmarkover5yearperiod No10yeardataavailableforSRIfundsinthisassetclass
SRIfundsoutperformedthebenchmarkin17/25observationsover3timeperiods‐68%ofthetime.
CanadianSRIMutualFundsRiskReturnCharacteristics
28
Figure 10: Global Equity Balanced SRI Funds Risk/Return (5 years)
Standarddeviation:
7/8fundswerelessriskythanthebenchmarkover3yearperiod 6/7fundswerelessriskythanbenchmarkover5yearperiod No10yeardata
13/15SRIfundobservationswerelessvolatilethanbenchmarkover2timeperiods‐87%ofthetime.
SharpeRatio:
6/8fundsoutperformedbenchmarkover3yearperiod 7/7fundsoutperformedbenchmarkover5yearperiod Thereisnotenyeardataavailable
13/15observationshadstrongerSharperatiosthanthebenchmarkover2timeperiods‐87%ofthetime.
5.00
6.00
7.00
8.00
9.00
10.00
11.00
4.00 5.00 6.00 7.00 8.00
Returns%
Risk/StandardDeviation
GlobalEquityBalancedSRIFundsRisk/Return(5years)
SRIFunds
Benchmark
SRIAverages
CanadianSRIMutualFundsRiskReturnCharacteristics
29
SortinoRatio:
7/8fundsoutperformedbenchmarkover3yearperiod 7/7fundsoutperformedbenchmarkover5yearperiod
14/15SRIfundobservationshadstrongerSortinoratiosthanbenchmarkover2timeperiods‐93%ofthetime.
SRI Fixed Income and Balanced Mutual Funds Conclusions
Returns We used 127 observations of the financial performance of 51 SRI Fixed Income andBalanced mutual funds (CAN Fixed Income, CAN Fixed Income Balanced, CAN NeutralBalanced,andCANGlobalEquityBalanced)intheCanadianmarketacrossaone,three,fiveand10yeartimeperiods(asofMarch31st2015)andcomparedthemtotheirrespectiveMorningstarbenchmarks.WefoundthattheseSRIFixedIncomeandBalancedMutualFunds financiallyoutperformed their respectivebenchmarks67%of the timewithriskcharacteristicsinlinewithbenchmarkfundsineachassetclass.
Table 3: Canadian SRI Fixed Income and Balanced Mutual Funds' Returns
Measured Against Benchmark Fixed Income and Balanced
SRI outperformance Total observations
Return
CDN Fixed Income 17 31
CDN Fixed Income Balanced 18 24
CDN Neutral Balanced 33 47
CDN Global Equity Balanced 17 25
Subtotal 85 127
% 67%
CanadianSRIMutualFundsRiskReturnCharacteristics
30
Figure 11: Canadian Fixed Income and Balanced SRI Funds' Return
Outperformance Over Benchmark
Risk
Weusedthreemeasurementsofriskintheseportfolios,StandardDeviation,Sharperatios,andSortinoratiostoevaluatewhetherSRIFixedIncomeandBalancedmutualfundsreducerisk.Wemade228observationsofSRIFixedIncomeandBalancedMutualfundsinCanadausingthesethreemeasuresover3,5and10yeartimeperiodsandcomparingthemtotheirrespectivebenchmarks. WefindthattheSRIFundsareinlinewiththebenchmarkinterms of risk to the portfolio.However the SRI funds are able to generate excessreturnatlowerriskthanthebenchmark61%ofthetime,measuredbytheirSortinoratio.ReducingdownsideriskisparticularlystrongforSRIfundswhencomparedtothebenchmark.
0%10%20%30%40%50%60%70%80%
CDNFixedIncome
CDNFixedIncomeBalanced
CDNNeutralBalanced
CDNGlobalEquityBalanced
CanadianFixedIncomeandBalancedSRIFunds'ReturnOutperformanceOver
Benchmark
CDNFixedIncome
CDNFixedIncomeBalanced
CDNNeutralBalanced
CDNGlobalEquityBalanced
CanadianSRIMutualFundsRiskReturnCharacteristics
31
Table 4: Canadian SRI Fixed Income and Balanced Mutual Funds Risk
Characteristics Measured Against Benchmark
Fixed Income and Balanced SRI outperformance Total observations
S/D
CDN Fixed Income 4 21
CDN Fixed Income Balanced 2 12
CDN Neutral Balanced 6 28
CDN Global Equity Balanced 13 15
Subtotal 25 76
% 33%
Sharpe Ratio
CDN Fixed Income 8 21
CDN Fixed Income Balanced 4 12
CDN Neutral Balanced 7 28
CDN Global Equity Balanced 13 15
Subtotal 32 76
% 42%
Sortino Ratio
CDN Fixed Income 8 21
CDN Fixed Income Balanced 5 12
CDN Neutral Balanced 19 28
CanadianSRIMutualFundsRiskReturnCharacteristics
32
CDN Global Equity Balanced 14 15
Subtotal 46 76
% 61%
Total observations 103 228
% 45%
CanadianSRIMutualFundsRiskReturnCharacteristics
33
Final Thoughts
Many SRI skeptics believe that SRI funds underperform the market and add risk to aninvestmentportfoliobyreducingtheuniverseavailabletotheinvestor. Ourresearchfindtheopposite tobe true. Thisstudyexamines therelationshipbetweenriskandreturn inCanadianSRImutual funds. We found thatCanadianSRIequitymutual fundsareable toprovidesolidfinancialoutperformanceforinvestorswhilesimultaneouslyreducingriskintheirportfolios.
We measure these funds risk and return characteristicsagainst the average risk and returns for the CanadianmutualfundsacrosseightcommonfundclassesinCanada.These include equity, fixed income and balanced mutualfunds. Weuse1,3,5,and10yearobservations. WefindthattheSRIequitymutualfundsexaminedherefinanciallyoutperform the benchmark 63% of the time, whilesimultaneously reducing risk in the portfolio. The SRIequity mutual funds outperformed their benchmark on
risk factors55%of the time. Theyareparticularlystrong ingeneratingexcessreturn foreach unit of risk taken with Sharpe Ratios outperforming 63% of the time, and SortinoRatios,whichmeasure excess return per unit of downside risk, 72% of the time. Thesefindings suggest that SRI funds are able to protect investors fromdownside risk in theirequityportfolios.
We find the SRI Fixed Income and Balanced funds examined in this study financiallyoutperformthebenchmark67%ofthetime,withoutaddingunduerisktotheirportfolios.InfacttheFixedIncomeandBalancedFundsexamined,outperformedbenchmark61%ofthetimeintheirSortinoratios(measuringexcessreturnperunitofdownsiderisk).ThesefindingsechothoseofsimilarstudiesconductedonUSSRImutualfunds(MorganStanley,2014; Russell Investments 2014). The demonstrate the fact that taking environmental,social and governance factors into consideration can lead to outperformance and reduceriskinaportfolio.Bothoftheseconsiderationsareofsignificantimportancetoinvestors.
SRImutualfundsinthisstudyshowthattakingESGintoaccountininvestmentselectionlowersdownsiderisks.
CanadianSRIMutualFundsRiskReturnCharacteristics
34
Acknowledgements We would like to thank Hakan Mustafa, Research Associate with the Carleton Centre for
Community Innovation for his assistance with this report.
About the author Dr.TessaHebbistheDirectoroftheCarletonCentreforCommunityInnovation,CarletonUniversity,Canada.HerresearchfocusesonResponsibleInvestmentandImpactInvestmentisfundedbytheSocialSciencesandHumanitiesResearchCouncil,GovernmentofCanada.ShereceivedherdoctoratefromOxfordUniversity.ShehaspublishedmanybooksandarticlesonresponsibleinvestingandimpactinvestingpoliciesincludingthevolumesTheRoutledgehandbookofResponsibleInvestment,SRIinthe21stCentury:DoesitmakeaDifferencetoSociety,WorkingCapital:thePowerofLabor’sPensions;NoSmallChange:PensionFundCorporateEngagement;andTheNextGenerationofResponsibleInvesting.
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