Market timing and selectivity performance of socially responsible funds

Abstract

Purpose

The purpose of this paper is to examine the market timing and stock selection abilities of socially responsible (SR) mutual funds. Some high-profile SR fund managers try to embrace market timing and security selection plans to add value to the performance. Market timing relies on forecasting the equity market and shifting assets into or out of the market in anticipation of market movements. The selectivity measure assesses fund managers ability to select undervalued securities. Furthermore, the authors examine whether fund characteristics play any role in market timing and security selection ability.

Design/methodology/approach

The authors use Treynor and Mazuy's’ (1966) and Henriksson and Mertons’ (1981) model to examine the market timing and security selection ability. The study uses a decade of monthly returns to examine the skills of fund managers in the SR industry for the period from July 2002 to June 2012.

Findings

The main findings are that the managers – though not very successful – do indulge in stock selection and market timing activities. It was found that 48 funds have positive statistically significant stock selectivity coefficients and only a very small number of five funds with positive statistically significant market timing coefficients. Results suggest that there is a trade-off between the two activities. It was found that aggressive funds, funds with higher growth rate and riskier funds are more likely to engage in market timing rather than stock selection.

Practical implications

The implication is that SR managers cannot achieve superior stock selection and market timing ability simultaneously. Risk-averting investors in SR funds expect SR behavior from the managers. This means that managers of SR funds, with very little evidence of market timing ability, may have to refrain from market timing of SR funds.

Originality/value

Using a Morningstar dataset comprising almost all SR funds in existence as of June 2012, this is probably the most exhaustive long-term study to date on market timing and stock selection abilities of SR fund managers.

Citation

Das, P.K. and Rao, S.P.U. (2015), "Market timing and selectivity performance of socially responsible funds", Social Responsibility Journal, Vol. 11 No. 2, pp. 258-269. https://doi.org/10.1108/SRJ-07-2013-0088