Do US domestic green

funds perform well? Dissertation

Master in Finance
University of Minho
Student: Cátia Martins Pg36569
Supervisor: Maria do Céu Cortez
January 2019
 INTRODUCTION

The main objective of this study is to evaluate the performance of US domestic

green funds. The motivation for research topic is associated to the fact that in the past
years, the world has been experiencing environmental changes that have become a
major concern in society.
 INTRODUCTION

This dissertation investigates this topic by analyzing if green funds investors in the
US can do well, without sacrificing financial performance. Besides that, I will
analyze if green funds have a performance that is statistically different from the
market and from conventional funds. Since there are a few studies about the
performance of green funds, this is the main motivation to perform this study.
 Corporate Social Responsibility and Financial Performance

Many investors seek to obtain a good financial performance and, at

the same time, incorporate social criteria in their investment decisions.
However, it is controversial that including social criteria in the financial
performance of investments is beneficial.

There are two theoretical views on the financial impact of SRI: LITERATUR
 the first argues that investing in a socially responsible way can be E REVIEW
harmful for investors as well as for companies; - FRIEDMAN (1970)
- environmental performance will lead to additional costs that are not
offset by potential gains
 the second claims that socially responsible investing can bring
advantages for both companies and investors.
 THE RELATION BETWEEN ENVIRONMENTAL
PERFORMANCE AND FINANCIAL PERFORMANCE

Negative Cordeiro and Sarkis (1997) , Lioui and Sharma (2012) , Boulatoff and
Boyer (2009)

LITERATURE
REVIEW Positive Klassen and McLaughlin (1996) , King and Lenox (2001), Wahba (2008) ,
Nakao et al. (2007) , Derwall et al. (2005) ; Hart and Ahuja (1996) ,
Manrique and Martí-Ballester (2017) , Jo et al. (2015) , Konar and Cohen
(2001) , Entreat et al. (2014) , Busch and Lewandowski (2018)

No relation Puopolo et al. (2015)

 LITERATURE
REVIEW
There are many studies that
compare the performance of
socially responsible funds with
conventional ones or the market.
Overall, the majority of the studies
find that the conventional SRI
funds have similar performance to
conventional funds and to the
market.
Climent and Soriano (2011)
Chung et.al (2012)
Mallett and Michelson (2010)
Muñoz et al.(2014)
Ibikunle and Steffen (2017)
US green funds underperform
conventional funds
Green funds underperform the
conventional ones
US green fund returns are alike to
SRI and index returns
In crisis market periods SR funds
have a statistically insignificant
performance, however in non-
crisis market periods US SR funds
underperform the market
Green mutual funds underperform
relative to the conventional funds
 Unconditional Models
• - Carhart (1997) four-factor model
• - Fama and French (2015) five-factor model
METHODOLO
GY Conditional models

• - Fama and French (2015) five-factor model

  Fund performance in different market states

 - Carhart (1997) four-factor with a dummy variable

METHODOLO  -Fama and French (2015) five-factor model with a dummy

GY variable

where is the dummy variable that is equal to 0 in expansion periods and

1 in recession periods.
  The dataset for this study include US funds that invest domestically
(US equity funds). Selecting the green funds is one of the most

DATA
crucial and difficult steps for this study, since there isn’t a clarifying
classification of what is a green fund.

 The green mutual funds were identified using the most recent
information provided by the US SIF (US SIF 2018).
Green funds
As Chung et al. (2012) I collected data from SR funds and
select only funds with a positive (key: P) or restricted
investment (Key: R) in the “environment” category .
As Climent and Soriano (2011) the sample excludes
bonds funds, balanced, guaranteed, index and
institutional funds.
DATA
Conventional funds
The conventional funds were identified using DataStream
where all the mutual funds available for US were
identified.
The matching procedure was based on the following
criteria: base date, Lipper classification and the total
net assets as Nofsinger and Varma (2013).
For each green fund two conventional funds were
selected with the closest number in total net assets.
  Two equally weighted portfolios will be create with the average monthly
returns of each fund.

Conventional index - Standard & Poor`s 500 index

DATA Green index - MSCI KLD 400 index 

 1-month treasury bill will be extracted from the website of Professor Kenneth
R. French. From this website I will also collect the risk factors, the SMB
factor, the HML factor, the MOM factor, the RMW factor and the CMA factor.

 The monthly returns were obtained from the DataStream.

 Lagged information variables - the short-term rate and dividend yield

   Fund Name Inception date Lipper Global Total net
Classification assets
1 Green ARIEL FOCUS FD.INVR.CL. 01/02/2006 Equity US 40,8
  FID.ADVI.ASST.MANAGER 85% CL.C 02/10/2006 Equity US 40,9
Conventional HARTFORD GW.OPPS.FD.CL. R3 21/12/2006 Equity US 44,5
2 Green ASPIRATION REDWOOD FUND 16/11/2015 Equity US 84,5
  SEI INST MGD TAX-MANAGED MANAGED VOLATILITY Y 30/04/2015 Equity US 87,7
Conventional AQR TM LARGE CAP MULTI- STYLE FUND I 11/02/2015 Equity US 92,8
3 Green BROWN ADVISORY WINSLOW SUSTBY.FD.INSTL.SHS. 29/06/2012 Equity US 861,3
  TOUCHSTONE FOCD.FD.CL.Y 16/04/2012 Equity US 829,1001
Conventional WELLS FARGO PREMIER LARGE CO GR FD R6 03/12/2012 Equity US 789,5
4 Green PARNASSUS ENDEAVOR FUND INVESTOR 29/04/2005 Equity US 2709,7
  AMERICAN CENTURY MID CAP VALUE FUND I 31/01/2005 Equity US 2375,5
Conventional MFS VAL.FD.CL.R4 01/04/2005 Equity US 2975,6
5 Green PARNASSUS FUND INVESTOR 27/08/1987 Equity US 776,1001

Table 1- List of
  ANCHOR SA WELLINGTON CAPITAL APPRECTN PORT 1 23/03/1987 Equity US 771
Conventional AMG MANAGERS BRANDYWINE FUND I 23/05/1986 Equity US 786,2
6 Green PARNASSUS MID CAP FUND INVESTOR 29/04/2005 Equity US 2271,2

7
 
Conventional
Green
ADVANCED SRS WELLINGTON MANAGEMENT HEDGED EQ PTF
DFA US.CORE EQ.1 PRTF.
TIAA-CREF INSTL.SOCIAL CHOICE EQ.FD.RTMT.CL.
05/12/2005
21/10/2005
12/12/2002
Equity US
Equity US
Equity US
2067,6
26071,1
657,7
US green and
8
 
Conventional
Green
AMERICAN FUNDS AMCAP FUND R2
BRIGHTHOUSE/WELL CORE EQUITY OPPTY PTFL B
GREEN CENTURY EQUITY FUND INDIVIDUAL INVESTOR
31/05/2002
30/07/2002
22/09/1997
Equity US
Equity US
Equity US
614,8
683,2
243,4
conventional
9
 
Conventional
Green
AB GROWTH FUND ADVISOR
ALGER CAP.APPREC.FD.CL.C
PARNASSUS CORE EQUITY FUND INVESTOR
31/03/1997
08/08/1997
19/04/1993
Equity US
Equity US
Equity US Income
202,8
217,3
9591,898
funds
  PTNM.EQ.INC.FD.CL.A 14/10/1993 Equity US Income 8184,898
Conventional JP MORGAN EQUITY INCOME FUND I 01/09/1989 Equity US Income 9908
10 Green ARIEL APPRECIATION FUND INVESTOR CL. 19/07/1990 Equity US Sm&Mid Cap 997,3
  ICM SML.CO.PRTF.INSTL. CL. 28/02/1991 Equity US Sm&Mid Cap 890
Conventional INVESCO OPPENHEIMER MID CAP VALUE FUND A 03/12/1991 Equity US Sm&Mid Cap 824,2
11 Green ARIEL FUND INVESTOR CL. 16/03/1987 Equity US Sm&Mid Cap 1303,8
  NORTHWESTERN MUTUAL MCG STK PFOLIO 30/11/1990 Equity US Sm&Mid Cap 1095,2
Conventional INVESCO OPPENHEIMER DISCOVERY FUND A 02/02/1987 Equity US Sm&Mid Cap 1341,1
12 Green WALDEN SMALL CAP FUND 30/10/2008 Equity US Sm&Mid Cap 110,5
  MML MID CAP GROWTH FUND SERVICE 15/08/2008 Equity US Sm&Mid Cap 103,4
Conventional NATIONWIDE NVIT MULT- MNGR MCG FD II 24/03/2008 Equity US Sm&Mid Cap 138,2
13 Green WALDEN SMID CAP FUND 29/06/2012 Equity US Sm&Mid Cap 57,1
  AMERICAN BEACON STEPHENS SMCP.GW.FD.Y CL. 27/02/2012 Equity US Sm&Mid Cap 59,4
Conventional MADISON MID-CAP FD.CL.R6 29/02/2012 Equity US Sm&Mid Cap 54,1
Empirical Results
   No. of obs. Mean excess Standard Kurtosis Skewness Min Max
returns deviation
US green portfolio 188 0.00667 0.0442 5.942 -0.471 -0.196 0.175
US conventional portfolio 188 0.00663 0.0420 5.192 -0.828 -0.187 0.117
S&P500 188 0.00662 0.0393 5.090 -0.764 -0.169 0.109
MSCI KLD 400 188 0.00644 0.0394 4.475 -0.594 -0.155 0.106
SMB 188 0.000422 0.0238 2.837 0.303 -0.0478 0.0681
HML 188 -0.000737 0.0255 5.364 0.0765 -0.112 0.0829
RMW 188 0.00307 0.0155 3.468 0.240 -0.0399 0.0508
CMA 188 -0.000434 0.0141 2.873 0.329 -0.0333 0.0370
MOM 188 0.00109 0.0440 22.29 -2.659 -0.344 0.125

Table 2- descriptive statistics of US global green and conventional funds, market benchmarks and risk factors
 Panel A: Benchmark S&P500
Portfolios adj.
Green (1) 0.0001 0.9870*** 0.2969*** -0.0022 -0.1110*** 0.9724
           
N+ 6[1] 13[13] 13[12] 4[3] 4[1]  
N- 7[0] 0[0] 0[0] 9[3] 9[7]
Conventional (2) -0.0003 1.0030*** 0.3269*** -0.1417*** 0.0264* 0.9799
         
Table 3 - N+ 10[1] 26[26] 23[22] 10[6] 13[6]  
N- 16[4] 0[0] 3[0] 16[12] 13[5]
Unconditional Difference (1)-(2) 0.0004 -0.016 -0.0299 0.1395*** -0.1374***

Carhart four-factor 0.445

Panel B: Benchmark MSCI KLD 400
model performance Portfolios adj.
Green (1) 0.0003 0.9983*** 0.2424*** 0.0370 -0.0877*** 0.9700
N+ 6 [1] 13[13] 12[10] 7[4] 6[1]  
N- 7[1] 0[0] 1[1] 6[3] 7[7]
Conventional (2) -0.0000 1.0000*** 0.2791*** -0.1015** 0.0463** 0.9529
N+ 10[1] 26[26] 22[17] 10[7] 16[7]  
N- 14[2] 0[0] 4[1] 16[12] 10[2]
Difference (1)-(2) 0.0003 -0.0017 -0.0367 0.1385*** -0.1341*** 0.4431
 Panel A: Benchmark S&P500
Portfolios adj.
Green (1) -0.0003 1.0219*** 0.3000***0.0707** 0.0334 -0.0073 0.9628
Table 4- N+
N-
5[1]
8[0]
13[13]
0[0]
13[12]
0[0]
8[4]
5[1]
8[2]
5[0]
7[2]
6[0]
 
 

Unconditional Conventional (2)

0.0003
- - -
0.9724*** 0.3032*** 0.1237*** 0.1275*** 0.1154*** 0.9820

Fama and
N+ 13[2] 26[26] 23[20] 11[9] 8[5] 6[3]  
N- 13[2] 0[0] 3[0] 15[11] 18[11] 20[11]  
Difference (1)-(2) -0.0006
French five-
0.0496** -0.0032 0.1944*** 0.1609*** 0.1081* 0.2798
Panel B: Benchmark MSCI KLD 400
Portfolios adj.
factor model Green (1)
N+
-0.0001
5 [2]
1.0266*** 0.2450*** 0.1118***
13 [13] 12 [8] 8 [5]
0.0419
8[2]
-0.0642
3[6]
0.9645
 

performance N-
Conventional (2)
8 [1]
0.0006
0[0]
0.9579***
1[1]
0.2574***
5[2]
-0.0781*
5[0] 10[2]
-0.1338***
 
-0.1795*** 0.9593
N+ 15 [2] 26 [26] 22 [16] 11[9] 7 [5] 4 [1]  
N- 10 [1] 0 [0] 4 [1] 15[11] 19[11] 22 [12]  
Difference (1)-(2) -
0.00075 0.0687*** -0.0124 0.1899*** 0.1757*** 0.1153* 0.2992
 Benchmark Panel A: S&P500 Panel B: MSCI KLD 400
Portfolios Green Conventional Difference (1)- Green Conventional Difference
(2) (1)-(2)
(1) (2) (1) (1)
-0.0004 -0.0003 -0.0001 -0.0001 -0.0000 -0.0001
0.0012 -0.0012 0.0024* -0.0004 -0.0028** 0.0024*
-0.0042 -0.0046* 0.0004 -0.0067** -0.0084* 0.0017

Table 5 - 0.9982***
-0.0295
0.9857***
0.0630***
0.0125
-0.0926**
0.9923***
0.0049
0.9681***
0.0998***
0.0242
-0.0949**

Conditional -0.0705 0.0892** -0.1597* 0.0502 0.2541*** -0.2040**

Carhart four-
0.2821*** 0.3370*** -0.0549 0.2411*** 0.2995*** -0.0585*
0.1575*** -0.0104 0.1678** 0.1107 -0.0679 0.1786**

factor model 0.2232*

0.0136
0.1810
-0.1204***
0.0422
0.1340***
0.3660**
0.0615**
0.3183
-0.0752***
0.0477
0.1366***

performance 0.0044
-0.1608
-0.1085***
-0.3462***
0.1129**
0.1854
-0.0901
-0.3472***
-0.1985***
-0.5699***
0.1084**
0.2227*
-0.0806*** 0.0408*** -0.1214*** -0.0585*** 0.0613** -0.1198***
0.0172 0.0036 0.0135 0.0190 0.0115 0.0074
-0.1894*** -0.0690 -0.1203 -0.1509*** -0.0299 -0.1210
0.0012 -0.0012 0.0024* -0.0004 -0.0028** 0.0024*
adj. 0.9757 0.9828 0.5208 0.9726 0.9658 0.5233
 Benchmark Panel A: S&P500 Panel B: MSCI KLD 400
Portfolios Green Conventional Difference Green Conventional Difference
(1)-(2) (1)-(2)
(1) (2) (1) (2)
-0.0001 -0.0000 -0.0001 -0.0003 -0.0000 -0.0002
0.0020* -0.0014 0.0034** -0.0003 -0.0037*** 0.0034**
0.0048 -0.0039 0.0087* -0.0013 -0.0097** 0.0084*
1.0184** 0.9686*** 0.0498*** 1.0143*** 0.9497*** 0.0646***

Table 6 - *
-0.0010 0.0303* -0.0313 0.0153 0.0504 -0.0350

Conditional 0.0548
0.3096**
-0.0243
0.3177***
0.0791
-0.0080
0.1561*
0.2672***
0.0762
0.2820***
0.0798
-0.0148

Fama and
*
0.1718* 0.0090 0.1628 0.1372 -0.0346 0.1719

French five-
0.4326 0.0691 0.3635 0.5041* 0.1482 0.3559
0.0539 -0.1026*** 0.1566*** 0.1140*** -0.0441 0.1580***

factor model 0.0276

-0.2079*
-0.1432***
-0.2086***
0.1707**
0.0007
-0.0564
-0.4363***
-0.2185***
-0.4216***
0.1621**
-0.0147

performance 0.0369
-0.0584
-0.1029***
0.0435
0.1398**
-0.1019
0.0715
-0.0040
-0.0781
0.0980
0.1496**
-0.1019
-0.0462 -0.1806 0.1344 0.0513 -0.0954 0.1467
0.0282 -0.1311*** 0.1593** -0.0506 -0.2086*** 0.1579**
0.0602 -0.0797 0.1399 -0.0636 -0.1974 0.1339
0.1995 -0.3596** 0.5592* 0.1858 -0.3956 0.5814**
adj. 0.9667 0.9850 0.4001 0.9679 0.9685 0.4144