Superior Fund Performance by Exclusion. Does an Exclusion and Norms-Based Strategy Enhance Performance for Socially Responsible Retail Investors?

Abstract

The study examines whether there is a significant relationship between risk-adjusted returns and the intensity of exclusion and norms-based screening. The approaches to socially responsible investing adopted by mutual funds in the Swedish premium pension system are quantified and the monthly performances over the three year period March 2011 – March 2014 are estimated with Jensen’s alpha, Carhart’s four-factor alpha and the Sharpe ratio. The results show significant advantages of applying nine out of twelve applicable screens to the socially responsible investment strategy when Jensen’s alpha and the Sharpe ratio are measurements of performance. The relationship is quadratic with a diminishing positive effect and is ascribed to a trade-off between Portfolio Theory and Stakeholder Theory.