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Relative Importance of Sustainability Measures and Costs in Mutual Fund Selection

C. Edward Chang, Thomas M. Krueger and H. Doug Witte
The Journal of Wealth Management Summer 2020, 23 (1) 32-46; DOI: https://doi.org/10.3905/jwm.2020.1.103
C. Edward Chang
is a professor of finance in the Finance and General Business Department at Missouri State University in Springfield, MO
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Thomas M. Krueger
is the J. R. Manning Endowed Professor of Innovation in Business Education and Chair of the Accounting and Finance Department at Texas A&M University–Kingsville in Kingsville, TX
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H. Doug Witte
is an associate professor of finance at Missouri State University in Springfield, MO
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Abstract

Impact investing has become a mainstream investment practice, especially for millennial investors. More financially savvy than their Generation X predecessors and with an increased concern for environmental and social justice issues, Millennials are transforming socially responsible investing from unconventional to commonplace. This article examines the relationship between sustainability and mutual fund returns (both historical and anticipated) to identify beneficial information that socially responsible investors can use in making investment decisions. Using Morningstar sustainability ratings, star ratings, and analyst ratings, the authors find a very low correlation between sustainability and fund returns. Sustainability ratings do not vary across Morningstar star ratings or analyst ratings; nor do Morningstar star or analyst ratings vary within high or low sustainability groupings. The practical relevance of these findings is that socially responsible investors do not have to sacrifice financially when investing with a positive social inclination. However, the authors document the ability to enhance sustainable investment returns by limiting fund costs in the form of load charges and expense ratios. Low costs are associated with higher Morningstar star ratings and forward-looking analyst ratings. Hence, it is possible to “do well” financially by selecting less expensive funds with high sustainability ratings.

TOPICS: ESG investing, mutual fund performance

Key Findings

  • • The practical relevance of these findings is that socially responsible investors do not have to sacrifice financially when investing with a positive social inclination.

  • • The authors document the ability to enhance sustainable investment returns by limiting fund costs in the form of load charges and expense ratios.

  • • Hence, it is possible to “do well” financially by selecting less expensive funds with high sustainability ratings.

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The Journal of Wealth Management: 23 (1)
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Relative Importance of Sustainability Measures and Costs in Mutual Fund Selection
C. Edward Chang, Thomas M. Krueger, H. Doug Witte
The Journal of Wealth Management Apr 2020, 23 (1) 32-46; DOI: 10.3905/jwm.2020.1.103

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Relative Importance of Sustainability Measures and Costs in Mutual Fund Selection
C. Edward Chang, Thomas M. Krueger, H. Doug Witte
The Journal of Wealth Management Apr 2020, 23 (1) 32-46; DOI: 10.3905/jwm.2020.1.103
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