An Explanatory Study on the Performance of Socially Responsible Funds in Korea

This is an explanatory study which examines the performance of socially responsible funds in Korea. Recently, various stakeholders of corporations have higher standards for responsible business practices. Not only shareholders, but also consumers, employees, creditors, business partners, the authorities, and non-profit or non-government organizations demand that companies take responsibility for the consequences of the actions taken in their operations. The socially responsible investment is the outcome of such movements. Particularly, in Korea, there has been great interest in funds which aims the investment in socially responsible firms (or investments to improve firms to be socially responsible). These funds are called socially responsible investment funds. We compare the performance of the 18 socially responsible investment funds in terms of fund return with benchmark indexes in the Korean stock market. The empirical results reveal that there are no consistent differences in returns for funds compared with benchmark indexes. We find a piece of evidence that the fund performance exceeds one of the index used for a sample period examined. However, considering that the significance differences disappear afterwards, it seems that the evidence is weak at best. These findings are consistent with those in prior studies performed in other countries which yield inconsistent results on the out- or under-performance of SRI funds. In subsequent tests, we investigates the portfolio selection criteria for the SRI funds. We find that firms with large size and firms with less controlling shareholder ownership. These determinants are generally consistent with the investment criteria used by many institutional investors. Considering that there are significant inflows of money into SRI funds recently in Korea, this finding suggests that investors need to be careful when investing in these funds blindly because the fund does not guarantee outstanding performance. However, because the sample size used in this study is relatively small, the generalizability of this conclusion could be limited. Further study on this issue is recommended in the future when the sample size increases and history of the SRI funds become longer.