Business and Society

Does it pay to be a saint or a sinner in times of crisis?

April 30, 2013 | 3 min read

The approach of the researchers Nelson Areal, Maria Ceu Cortez and Florinda Silva (all from University of Minho, Portugal) differs from many studies, which typically compare the performance of SRI funds as a whole to conventional benchmarks and funds. They write that this conventional approach disregards “the fact that the former are not coherent in their social objectives and that not all dimensions of social responsibility are rewarded in the same way.” Besides using different types of screens (positive, negative, or best-in-class), funds may also apply a variety of criteria and types of screens which can also influence performance—an impact that is often overlooked in the literature, according to the authors.

Religious & social vs. “vice”

Areal, Cortez and Silva refer to Galema et al. (2008) [1], who “call attention to the fact that the empirical evidence documented in the literature may reflect the aggregation of different dimensions of social responsibility that may have different effects on performance. In this line of research, we argue that the heterogeneity in the types of screens and criteria of social responsibility employed by socially responsible funds must be considered when evaluating fund performance.” In their own research sample, they have included US equity funds over the period of October 1993 to September 2009 that use different types of filters, such as: religious criteria (MRI funds), social criteria (SRI funds) and ‘irresponsible’ criteria. For the latter, they use the “Vice Fund”, which explicitly assumes itself as a socially irresponsible fund investing in alcohol, gambling, weapons and tobacco.

Areal, Cortez and Silva analyze the performance of these funds over different market regimes, in order to assess whether socially responsible investments perform better in periods of crisis. Distinguishing fund performance over different market regimes has not been done often. “It can be argued that firms that are socially responsible should benefit from a reputation that protects them from stock price declines associated with crises. There are only very few studies that have addressed this issue directly (Schnietz and Epstein[2], and Jones et al.[3]). We consider this a major contribution of this paper,” the authors write.

Dealing with econometrics problems

Moreover, the researchers use a Markov-switching conditional CAPM approach, suggested by Abdymomunov and Morley[4] to identify endogenously market regimes. They write, “This model has the advantage of, while parsimonious, being able to deal with many econometrics problems that usually affect fund performance studies. Estimates of fund performance obtained with the Markov switching conditional CAPM regressions are noticeable. Indeed, we document different alphas and betas for periods of high and low market volatility for the Vice fund, which outperforms the market and portfolios of socially responsible funds (both MRI and SRI) in low volatility regimes, but underperforms in periods of high volatility.”

The risk estimates also change according to market conditions. “The Vice fund exhibits a higher beta in low volatility regimes and a lower beta in high volatility regimes. Although to a less extent, this evidence is also found for the MRI portfolio. In contrast, the SRI portfolio exhibits similar betas across the two market regimes. These results suggest that SRI fund managers do not adjust fund betas according to market conditions. Therefore, the higher performance of the SRI portfolio in high volatility periods might be a consequence of the characteristics of the underlying assets. This is consistent with the argument that stocks of socially responsible companies provide better investments during periods of crisis.”

Areal, Cortez and Silva conclude: “The fact that the implementation of the Markov-switching conditional CAPM overcomes most of the econometric problems inherent to the standard performance evaluation methodologies allows our results to be interpreted with a higher degree of confidence. Yet, the fact that there is only one fund that considers ‘irresponsible’ criteria implies some caution. The issue of whether socially screened portfolios generate a better performance comparatively to conventional portfolios remains unsolved and deserves further research.”


  1. Galema, R., A. Plantinga and B. Scholtens. “The Stocks at Stake: Return and Risk in Socially Responsible Investment.” Journal of Banking and Finance 32, no. 12 (2008): 2646–2654.
  2. Schnietz, K. E. and M. J. Epstein. “Exploring the financial value of a reputation for corporate social responsibility during a crisis.” Corporate Reputation Review 7, no. 4 (2005): 327-345.
  3. Jones, G. H., B. H. Jones, and P. Little. “Reputation as a reservoir: buffering against loss in times of economic crisis.” Corporate Reputation Review 3, no. 1 (2000): 21-29
  4. Abdymomunov, A. and J. C. Morley. “Time variation of CAPM betas across market volatility regimes.” Applied Financial Economics, no. 21 (2011): 1463–1478 (Note: Original reference was a 2009 working paper.)

This article may be reproduced according to our terms of use with attribution (and link, if online) to To be cited as: “Does it pay to be a saint or a sinner in times of crisis? “, Lloyd Kurtz and Ingrid Ramaan,, April 30, 2013.

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Research Paper: Investing in mutual funds


Lloyd Kurtz
Lecturer of social investing, Haas School of Business

Ingrid Ramaan
Administrative Editor FSinsight

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