Performance of Socially Responsible Investment Funds in South Africa

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This thesis examines how the risk-adjusted performance of Socially Responsible Investment (“SRI”) funds are affected by key events in South Africa, namely, the introduction of King IV and the introduction of socially responsible indices in South Africa, events and their impact on socially responsible investing in South Africa which has not been previously addressed by other studies. This gap in research is what this thesis looks to address. The thesis also examines the risk-adjusted performance of a sample of SRI funds relative to conventional investment vehicles, using a matched sample of conventional funds and the South African equity market, using the JSE All Share Index as a proxy, as benchmarks, over a ten-year period ending the 31st of December 2018. Previous studies, both globally and locally, have either identified under-performance of socially responsible investment funds relative to conventional funds on a risk-adjusted basis or no statistically significant difference in risk-adjusted performance. The risk-adjusted performance metrics which were considered were the Sharpe, Treynor and Sortino ratio's as well as the Jensen's alpha measure. These performance metrics were applied to a sample size of 29 funds for the full research period. The findings were that there was a statistically significant difference in performance from sub-period to sub-period which indicates that risk-adjusted performance of the sample varied with key events in the SRI investment landscape. The direction of the impact was unexpected as risk-adjusted performance of the sample deteriorated with these events. It was also found that in most instances, the sample of SRI funds on average tended to underperform each of the two benchmarks, with the average underperformance being statistically significant for both benchmarks across the full research period, thus resulting in the conclusion that on a risk-adjusted basis, socially responsible investment funds tend to underperform conventional investment funds. The thesis raised concerns, stemming from the findings, for the future and viability of the socially responsible investing industry from both an asset manager and investor perspective due to the inferior risk-adjusted returns relative to conventional funds and detailed recommendations for further research into the topic. Key words: socially responsible investing, risk-adjusted performance, Sharpe ratio, Treynor ratio, Jensen's alpha, Sortino ratio, King IV, FTSE/JSE Responsible Investment indices