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Managerial Abilities: Evidence from Religious Mutual Fund Managers

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Abstract

In this study, we analyze the financial performance and the managerial abilities of religious mutual fund managers, implementing a comparative analysis with conventional mutual funds. We use a broad sample, free of survivorship bias, of religious equity mutual funds from the US market, for the period from January 1994 to September 2010. We build a matched-pair conventional sample in order to compare the results obtained for both kinds of mutual fund managers. We analyze stock-picking and market timing abilities, topics widely neglected for the specific case of religious mutual fund managers. We also study style timing abilities. As far as we are aware, this aspect has not been studied previously for religious mutual fund managers. Our results indicate that religious mutual fund managers underperform both the market and their conventional counterparts. This result is driven by negative stock-picking ability which could be generated by excluding “Sin” stocks from their portfolios. Moreover, they are not able to time the market or any of the following styles: size, book-to-market, and momentum.

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Notes

  1. Definitions of SRI can be found in the following works, among others: Sparkes and Cowton (2004), Benson et al. (2006) or Glac (2008).

  2. Eurosif (the European Sustainable Investment Forum) is a pan-European network and think-tank whose mission is to develop sustainability through European financial markets (http://www.eurosif.org/).

  3. The Social Investment Forum (SIF) is the US membership association for professionals, firms, institutions, and organizations engaged in socially responsible and sustainable investing (http://www.socialinvest.org/).

  4. For instance Christian mutual funds (excluding firms which in any way promote or support abortion, companies whose policies are judged to be anti-family, such as companies which produce or distribute pornography or whose policies undermine the sacrament of marriage, etc.), or Islamic mutual funds (excluding firms from the pork products sector, conventional financial services such as banking or insurance, etc.). In Appendix 1, we show additional evidence about this assumption.

  5. Markowitz (1952) defines a portfolio as mean–variance efficient if it provides the major expected return for a given level of variance (risk) and the lowest variance for a given level of expected return. To maximize the risk/return relationship, investors make up their portfolio by selecting from the investment universe those investments which would make up the efficient portfolio. In theory, selecting from only a subset of the investment universe (for example, selecting from among socially responsible companies only) could result in a suboptimum portfolio.

  6. The religious mutual funds investors would be included in this SRI approach.

  7. GCC (Gulf Cooperation Council) countries are the following: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.

  8. For the identification of the religion represented by a fund of our sample, we also get information from Table 1 of Peifer (2010, p. 5).

  9. A more detailed explanation about these matching procedures and the algorithm used to calculate the distance can be found in the original work of Bollen (2007, p. 700).

  10. See, among others, the works of Ferson and Schadt (1996), Christopherson et al. (1998), Cortez and Silva (2002), Roy and Deb (2004), Cortez et al. (2009), or Ferruz et al. (2010).

  11. Calculation has been made using the difference between the monthly return of the MSCI North America Gross and the MSCI North America Price, followed by the adding of the 12 values prior to a specific month. Information obtained from MSCI Barra: http://www.mscibarra.com/

  12. Information obtained from the Federal Reserve (the American equivalent to the European Central Bank). http://www.federalreserve.gov/releases/h15/data.htm.

  13. We get a correlation coefficient of −0.8011 for short-term interest rate and term spread and of −0.6353 for short-term interest rate and quality spread.

  14. One-month US Treasury-Bills have been considered as the variable representative of the risk-free asset.

  15. Taking into account the characteristics of our sample of funds (domestic equity mutual funds of the US market), the market benchmark used includes stocks of the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the Nasdaq Stock Exchange (NASDAQ).

  16. All this information was obtained from the Kenneth French website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/.

  17. We have removed from our sample the religious mutual funds that are index funds, since this kind of mutual funds implement a passive management strategy. Consequently, we also eliminate the conventional mutual fund corresponding to the religious mutual funds removed. In total, we eliminate 6 religious mutual funds and 17 conventional mutual funds. We build the religious and conventional portfolios without considering all these funds in order to avoid bias in our timing analyses.

  18. In other words, the negative financial performance shown by religious mutual funds is generated by negative stock-picking ability and not by incorrect market timing ability.

  19. These results are set out in an initial version of the work of Gregory and Whittaker (2007), which is substantially longer than the final published version. This working paper can be seen at the following website: http://business-school.exeter.ac.uk/documents/papers/finance/2005/0504.pdf

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Acknowledgments

The authors would like to thank the financial support provided by University of Zaragoza (Spain) through the research projects UZ2009-SOC-05 and UZ2010-SOC-02. We also would like to express our acknowledgements to Aragon Government by the funding received as Public and Official Research Group (GIECOFIN).

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Correspondence to Fernando Muñoz.

Appendices

Appendix 1

Screening Activity of Religious Mutual Funds

Religious mutual funds typically implement a negative screens SR strategy. Dion (2009) analyzed the compatibility between the religious investing criteria of some Christian mutual funds and the shareholder resolutions from the “Interfaith Center for Corporate Responsibility” about corporate unethical/illegal practices. In the study, this author analyses the next three Christian mutual funds: Ave Maria mutual funds, LKCM Aquinas Funds, and Centurion mutual funds (all of them are considered in the present study). The author outlines the screen strategy declared by these religious funds in its prospectus.

Ave Maria Mutual funds show the following:

Besides searching for the best investment opportunities, our portfolio managers screen out companies based on moral guidelines established by our Catholic Advisory Board. These screens eliminate from consideration companies which support abortion, pornography, and companies which offer their employees non-marital partner benefits.

For LKCM Aquinas Funds, Dion states that this kind of religious mutual funds excludes from their eligible universe of stocks any companies in the sphere of abortion, pornography, contraceptives, embryonic stem cell research, and weapons of mass destruction sectors, or which fail environmental responsibility and fair employment practices. Additionally, these funds implement a shareholder activism strategy by trying to influence company policy through dialog and other efforts.

Finally, according to Dion (2009), the Centurion funds will avoid investment in companies involved in abortion, pornography, promotion of non-traditional marriage, alcohol, tobacco, gambling, and any others which create addiction.

Moreover, the prospectus for Amana funds, which is an Islamic mutual fund, contains the following information:

Investment strategy: Amana Mutual Funds Trust is designed to provide investment alternatives which are consistent with Islamic principles. Generally, Islamic principles require investors not to share in profit and loss, to receive no usury or interest, and to not invest in a business that is prohibited by Islamic principles. Some of the businesses not permitted are liquor, wine, casinos, pornography, insurance, gambling, pork processing, and interest-based banks or finance associations.

Appendix 2

See Table 5.

Table 5 List of religious mutual funds

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Ferruz, L., Muñoz, F. & Vargas, M. Managerial Abilities: Evidence from Religious Mutual Fund Managers. J Bus Ethics 105, 503–517 (2012). https://doi.org/10.1007/s10551-011-0982-y

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