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Canadian Socially Responsible Investment Mutual Funds Performance Evaluation Using Data Envelopment Analysis

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Multiple Criteria Decision Making in Finance, Insurance and Investment

Part of the book series: Multiple Criteria Decision Making ((MCDM))

Abstract

Socially responsible investment (SRI) mutual funds, which rely on social, environmental and ethical considerations in the investment decision-making process, have experienced significant growth over the past 20 years worldwide. This chapter examines the performance, over the 2008–2011 period, of a survivorship bias-free sample of 85 Canadian SRI funds, using a Data Envelopment Analysis (DEA) approach. This technique does not require the specification of benchmarks and allows measuring the relative efficiency of decision making units/funds in the presence of a multiple input-output setting. Various performance indicators or efficiency scores are derived using higher-order moments and tail-risk measures, fee structures, net returns, and fund size. The results confirm the suitability of the DEA-based performance setting and suggest that front-end loads and fund size are the main causes of the inefficiency of Canadian SRI mutual funds. These findings carry important implications for the fund-selection process and performance persistence, and would be of interest to regulators, practitioners, and institutional and individual investors.

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Notes

  1. 1.

    The asset pricing literature lends strong theoretical and empirical support to the hypothesis that higher moments (co-skewness and co-kurtosis with the market portfolio) are priced by rational risk-averse investors (Harvey and Siddique 2000; Dittmar 2002).

  2. 2.

    The nonlinear-based benchmarks are used extensively in hedge fund performance measurement. These models are empirically supported by Fung and Hsieh (2001), who show similarity in the payoffs of the trend-following strategies and those of a lookback straddle strategy. Agarwal and Naik (2004) confirm these results for a large number of equity-oriented hedge fund strategies with payoffs resembling a short position in a put option on the market index. Similarly, Chan et al. (2007) develop new measures of hedge fund systematic risks such as illiquidity risk exposure and nonlinear factor models.

  3. 3.

    The growth in assets under management (AUM) and the number of SRI funds has been rapid over the past 20 years, worldwide. AUMs for Canadian SRI retail mutual funds under SRI guidelines remained unchanged from 2004 to 2011, at 4.4 billion CDN, but are down from 5.5 billion CDN in 2008 (SIO 2013). The corresponding AUMs under SRI guidelines for all Canadian funds are 57.9, 600.9, and 566.7 billion CDN in 2004, 2011, and 2008, respectively. Their estimated share of total AUM in Canada is 3.2 %, 20.1 %, and 20.4 % in 2004, 2011, and 2008, respectively.

  4. 4.

    Two other related streams of research in SRI fund performance: The first stream focuses on the role of the screening mechanisms adopted by SRI funds, such as negative screening, positive screening and norms-based screening. In particular, various studies test the association between these strategies and performance/risk (see Barnett and Salomon 2006; Lee et al. 2010; Laurel 2011; Humphrey and Lee 2011). The second stream examines the important smart money effect for the relationship between SRI fund performance and money flows (see Renneboog et al. 2007, 2008; Benson and Humphrey 2008).

  5. 5.

    Mutual funds in Canada are often registered as investment trusts and competition is restricted by not permitting foreign-domiciled funds to register for sale domestically. Fund management services are subject to domestic consumption taxes in Canada and the Canadian distribution model uses financial advisors selling and servicing no-load funds (Alpert et al. 2013).

  6. 6.

    Available from the Social Investment Organization http://www.socialinvestment.ca.

  7. 7.

    Available from Qtrade Financial Group http://www.qtrade.ca.

  8. 8.

    DEA has several advantages over traditional methods of performance measurement. First, it avoids the benchmark specification problem since there is no need to identify any theoretical model (like CAPM) as a benchmark. Instead, DEA measures the performance of a fund relative to the best-performing ones. Second, DEA is a multidimensional approach that can take into account many inputs and outputs. Hence, it is possible to consider, along with risk and return, other factors that could serve in the evaluation of a fund's performance. Finally, DEA not only measures performance, it also has a powerful ability to identify the reasons behind a fund’s poor performance. In fact, slack variables in DEA present the major source of inefficiency and give insight into how a fund can ameliorate its performance (Choi and Murthi 2001).

  9. 9.

    Charnes et al. (1978) use the term ‘decision-making unit’ to refer to the unit under evaluation. “Generically a DMU is regarded as the entity responsible for converting inputs into outputs and whose performances are to be evaluated” (see Cooper et al. 2007).

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Acknowledgements

We would like to thank Hatem Ben-Ameur, Walid Khoufi, and Bob Welch for their helpful comments. Financial support from Goodman School of Business is gratefully acknowledged.

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Authors and Affiliations

  1. Department of Finance, Operations, and Information Systems, Goodman School of Business, Brock University, St. Catharines, ON, Canada

    Mohamed A. Ayadi

  2. Department of Accounting and Finance, University of Sfax, Sfax, Tunisia

    Zouhour Ben Ghazi

  3. Department of Management Sciences, IHEC Sfax, Sfax, Tunisia

    Habib Chabchoub

Authors
  1. Mohamed A. Ayadi
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  2. Zouhour Ben Ghazi
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Correspondence to Mohamed A. Ayadi .

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Editors and Affiliations

  1. College of Business Administration, University of Bahrain, Sakhir, Bahrain

    Minwir Al-Shammari

  2. College of Business Administration, University of Bahrain, Sakhir, Bahrain

    Hatem Masri

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Ayadi, M.A., Ben Ghazi, Z., Chabchoub, H. (2015). Canadian Socially Responsible Investment Mutual Funds Performance Evaluation Using Data Envelopment Analysis. In: Al-Shammari, M., Masri, H. (eds) Multiple Criteria Decision Making in Finance, Insurance and Investment. Multiple Criteria Decision Making. Springer, Cham. https://doi.org/10.1007/978-3-319-21158-9_5

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