Canadian SRI Mutual Funds Return Characteristics · 2015-11-19 · 1 A recent Morgan Stanley Report (2015) found that SRI equity mutual funds in the US performed favourably compared

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.


2

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


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


4

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.


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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.


6

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


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)

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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


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.


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.

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0.10 0.30 0.50 0.70 0.90 1.10 1.30

Returns%

SharpeRatio

CanadianEquitySRIFundsSharpeRatio(5years)

SRIFunds

Benchmark

SRIAverage


10

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


11

Returns:

Overtheoneyearperiod,4/4SRIfundsinthisassetclasssignificantlyoutperformedtheMorningstarbenchmark

Overthreeyearperiod,3/4SRIfundsoutperformedthebenchmark Over5yearperiod,1/4SRIfundsoutperformedbenchmark,theremainderwerein

linewiththebenchmark. Overthe10yearperiod1/2outperformedthebenchmark.


Figure 4: US Equity SRI Risk/Return (3 years)

StandardDeviation:


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20.50

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21.50

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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


12

Over5yearperiod,2/4werelessvolatile Over10yearperiod,1/2lessvolatile

5/10observationshadlowerSDthanbenchmarkover3timeperiods‐roughly50%ofthetime.

SharpeRatio:



SortinoRatio:



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.


13

UsingRIA listingsofCanadianSRIMutualFundsbyAssetClasswe found4SRICanadianInternationalEquityMutualFundsintheMorningstardatabaseinthisassetclass:

MeritasInternationalEquityMeritasInternationalEquitySeriesFNEIEthicalInternationalEquityANEIEthicalInternationalEquityF

Returns:

3/4fundsoutperformedthebenchmarkin1year 0/4fundsoutperformedthebenchmarkovera3yearreturnperiod 3/4fundsoutperformedtheInternationalEquityBenchmarkoverafiveyear

period. 1/2fundsoutperformedthebenchmarkinthe10yeartimeperiod


StandardDeviation:


Over5yearperiod,2/4werelessvolatile Over10yearperiod,1/2lessvolatile


SharpeRatio:




14

SortinoRatio:



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


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


16


SharpeRatio:

13/17outperformedthebenchmarkover3yearperiod 9/14fundsoutperformedthebenchmarkover5yearperiod 0/2fundsoutperformedbenchmarkover10yearperiod


Figure 6: GlobalEquitySRIFunds'SharpeRatios(5 Years)

SortinoRatio:

13/17outperformedthebenchmarkover3yearperiod 12/14fundsoutperformedthebenchmarkover5yearperiod 0/2fundoutperformedbenchmarkover10yearperiod

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17.00

0.50 0.70 0.90 1.10 1.30 1.50 1.70

Returns%

SharpeRatios

GlobalEquitySRIFunds'SharpeRatios(5Years)

SRIFunds

Benchmark

SRIAverage


17


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%


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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


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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


Global equity 7 33

subtotal 30 98

% 31%

Sharpe Ratio

CDN equity 31 45

US equity 6 10


Global equity 22 33

subtotal 62 98

% 63%

Sortino Ratio

CDN equity 32 45

US equity 9 10



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


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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


22


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


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.


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Standarddeviation:

2/8SRIfundswerelessvolatilethanthebenchmarkoverthe3yearperiod. 0/4SRIfundswaslessvolatilethenthebenchmark5yearperiod therewerenoobservationsinthe10yeartimeperiod

2/12observationswerelessvolatilethanbenchmarkover3timeperiods‐17%ofthetime

SharpeRatio:

3/8oftheSRIfundsoutperformedthebenchmarkoverthe3year 1/4SRIfundsoutperformedthebenchmarkinthe5yearperiod therewerenoobservationsinthe10yeartimeperiod


SortinoRatio:

4/8oftheSRIfundsoutperformedthebenchmarkoverthe3year 1/4SRIfundsoutperformedthebenchmarkinthe5yearperiod therewerenoobservationsinthe10yeartimeperiod


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.


25

UsingRIAlistingsofCanadianSRIMutualFundsbyAssetClasswefound19SRICanadianNeutralBalancedMutualFundsintheMorningstardatabaseinthisassetclass:

DesjardinsSocieTerraBalPortCDesjardinsSocieTerraBalPortFDesjardinsSocieTerraBalancedPortfolioIAClaringtonInhanceBalSRIPortAIAClaringtonInhanceBalSRIPortT6MeritasBalancedPortfolioMeritasBalancedPortfolioSeriesFMeritasBalancedPortfolioTMeritasGrowthandIncomePortfolioAMeritasGrowthandIncomePortfolioFMeritasGrowthPortfolioAMeritasGrowthPortfolioFMeritasGrowthandIncomePortfolioTNEIEthicalBalancedANEIEthicalBalancedFPH&NCommunityValuesBalancedAdvPH&NCommunityValuesBalancedSrCPH&NCommunityValuesBalancedSrDPH&NCommunityValuesBalancedSrF

Findings:

Returns:

15/19fundsexperiencedhigherreturnsthanbenchmarkovera1yearperiod 11/15outperformedbenchmarkover3yearperiod. 6/10SRIfundsoutperformedbenchmarkovera5yearperiod 1/3SRIfundsoutperformedbenchmarkinthe10yeartimeperiod


StandardDeviation:

2/15SRIfundsexhibitedlowervolatilityovera3yearperiod 3/10SRIfundsexhibitedlowervolatilityovera5yearperiod


26

1/3fundsexhibitedlowervolatilityovera10yearperiod6/28observationswerelessvolatilethanbenchmarkover3timeperiods‐21%ofthetime

SharpeRatio:

6/15fundsoutperformedthebenchmarkoverthe3yearperiod(2wereinlinewithbenchmark)

1/10outperformedoverthe5yearperiodhoweverallveryclosetobenchmark. 0/3outperformedoverthe10yearperiod,onewasclosewithbenchmark.


Sortino:

12/15fundsoutperformedthebenchmarkovera3yearperiod 6/10fundsoutperformedbenchmarkovera5yearperiod 1/3fundsoutperformedthebenchmarkovera10yearperiod


Figure 9: Canadian Neutral Balanced SRI Funds' Sortino Ratios (3 years)

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Returns%

SortinoRatio

CanadianNeutralBalancedSRIFunds'SortinoRatios(3years)

SRIFunds

Benchmark

SRIAverage


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



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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


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


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%


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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


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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





Subtotal 25 76

% 33%

Sharpe Ratio





Subtotal 32 76

% 42%

Sortino Ratio





32


Subtotal 46 76

% 61%

Total observations 103 228

% 45%


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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.


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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.

Reference List Clark,G.L.,FeinerA.,ViehsM.(2014)FromStockholdertoStakeholder,Arabesque,Report(November).

Eccles,R.G.,Ioannou,I.,&Serafeim,G.(2012).TheImpactofCorporateSustainabilityonOrganizationalProcessesandPerformance.HarvardBusinessSchoolWorkingPaperSeries.HarvardBusinessSchool.

Margolis,J.D.,Elfenbein,H.A.,&Walsh,J.P.(2007).DoesitPaytobeGood?AMeta‐AnalysisandRedirectionofResearchontheRelationshipBetweenCorporateSocialandFinancialPerformance.HarvardUniversity,UniversityofCalifornia,andUniversityofMichigan.

MorganStanley(2015)SustainableReality:UnderstandingthePerformanceofSustainableInvestmentStrategies,InstituteforSustainableInvesting,Report,(March).

NEI(2014)asreferencedbyDebAbbey,(2015)AdvisorswithaDifference,InvestmentExecutive(March16th2015)


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OsthoffP.,andKempfA.(2007)TheEffectofSociallyResponsibleInvestingonPortfolioPerformance,EuropeanFinancialManagement,Vol.13,No.5,pp.908‐922,November2007

RussellInvestments(2014)AreESGtiltsconsistentwithvaluecreation?RossL.,SongP.,andPearceW.(July).

StandardLife(2011)Sociallyresponsibleinvestingconsumerdriven:Ipsossurvey,pressrelease,October27,2011,IpsosReid/StandardLife,Canada.

Documents

Canadian SRI Mutual Funds Return Characteristics · 2015-11-19 · 1 A recent Morgan Stanley Report (2015) found that SRI equity mutual funds in the US performed favourably compared