A Study on Management Skills in Equity Ethical Mutual Funds in Spain

Intenational Jounal of Business and Social Science Vol. 3 No. 21; Novembe 2012 A Study on Management Skills in Equity Ethical Mutual Funds in Spain D. Mohammad Ahmad Talalweh Associate Pofesso Quds Open Univesity in Palestine Faculty In Accountancy And Finance Palestine Abstact Social Responsible Investment (SRI) Funds ae a gowing sub-secto within the Euopean funds industy. At pesent, they seem to be unaffected by the cuent financial cises, howeve, some questions emain unansweed concening the management of SRI funds. Have investos made a financial sacifice so as to invest in SRI funds? Ae the SRI mutual fund manages skilled? If we accept the common concept of splitting fund manage skills into stock picking and maket timing, we find that manages of Spanish equity SRI funds ae not involved in stock picking activities, but that some changed the amount of equities in thei potfolios in accodance with the boad maket pefomance. Nevetheless, they did not show significant maket timing abilities. The use of an appopiate SRI index is impotant fo the accuate measuement of management skills in this type of fund. Keywods: Mutual Fund, Social Responsible Investment, Maket Timing and Selectivity. JEL-Code Classification: G-11, G-23. 1. Intoduction Accoding to Fiedman (1970) The social esponsibility of business is to incease its pofits. But ecent studies, such as the McKinsey Global Suvey of Business Executives (2005), have epoted that most business executives concu that a fim should play a lage ole in society. Moe than fou out of five espondents agee that geneating highe etuns to investos should also be accompanied by boade contibutions to the public good. These casual obsevations bing back an old debate: Is the aim of the fim to seve the geneal welfae of society o to incease its shaeholdes' pofits? Copoate Social Responsibility (CSR) has been in existence fo many yeas, howeve it was not widely ecognized until the last thity yeas. It is duing this peiod that the economical envionment changed and that many majo fims stated applying the CSR pinciples. Fo example, the Intenational Annual KPMG Repot (2005) shows that 52 pecent (129 companies) of the top 250 Global Fotune 500 companies and 33 pecent (525 companies) of the top 100 companies in 16 counties published CSR infomation in a sepaate epot. The CSR is a boad and complex concept which compises copoate govenance, impact in developing counties, community involvement, moal issues, human esouces management, envionmental and social management and sustainability epots. Geneally, CSR activities in fims ae examined by means of a code of good pactice which includes economical, envionmental and social aspects. CSR obsevations sometimes imply independent supevision fo institutions of the so-called thid secto (non govenmental oganizations). The incease of geen movements and the gowing impotance of wold economical sustainable development have tiggeed this tend. Futhemoe, in esponse to the accounting and financial scandals which took place in some fims in the 2000s, many investos aimed to incease thei stock of companies by applying CSR policies. Some pofessional investos have agued that these fims ae a safe bet and guaantee a highe pofit, in the boadest sense. The socially and envionmentally esponsible policies and methods put into pactice by copoations povide investos with a good indication of the development of intenal and extenal copoate management. Fo this eason, copoate social policies have become an impotant indication to many investos who, as a esult, set boade copoate goals than those mentioned in the Fiedman statement. 199

Cente fo Pomoting Ideas, USA www.ijbssnet.com A numbe of empiical studies have been undetaken to investigate the extent and natue of Copoate Social Responsible (CSR) pactices in developed nations (such as the UK, Austalia, Canada and Gemany), as epoted in the annual epots of the companies (see fo example Guthie and Pake, 1989 and Gay et al., 1995). Developing counties have also been included, although in a modeate way. CRS studies have been mainly concened with the extent of copoate social disclosue (see fo example Singh and Ahuja, 1983 and Teoh and Thong, 1984). Abu-Bake (2000) fo instance, found that copoate social esponsibility epoting and disclosue ae clealy not an impotant pat of the cuent copoate epoting and disclosue pactices in lage companies opeating in Jodan. The undelying philosophy behind the Social Responsible Investment (SRI) is that investment decisions take into account financial and non-financial consideations o moal concens in the latte. The standad pocedue when ceating a SRI potfolio is to establish an oveview of the investments and then applying a sceening pocess, using non-financial citeia, to detemine which investments ae acceptable in tems of the investo s ethical, social, eligious o othe pefeences. SRI has seen a significant gowth in ecent yeas. In the United States (U.S.), the assets managed with SRI sceenings exceeded 2.7 billion of dollas in 2007 1 whilst in Euope it eached an amount of moe than 50 000 million euos 2 in 2009. In the academic field some eseaches have found economic evidence backing-up this tendency, while othes have pointed out the cost of its financial etun and its moe inefficient behaviou on financial makets. Authos such as Giad et al. (2007) epot, in a sample of 117 US SRI mutual funds, the existence of pefomance diffeential between conventional and SRI funds. Socially esponsible fund manages show pooe timing egading selectivity and maket than its conventional countepats. The ethical constaints of investing also imply a highe cost due to the lack of divesification. Geczy et al. (2005) build optimal potfolios fo each SRI mutual funds. They then compae these potfolios with those detemined by the boade univese of funds and find that imposing SRI constaints has a cost. Howeve, othe authos find that SRI funds do not epesent a financial sacifice. Fo instance, Abelaez et al. (2006) have epoted no diffeences between Euopean stocks with a high level of social pefomance and othe stocks. Moeove, Dewall and Koedijk (2005) have found stong evidence that SRI bond funds ae good, steady pefomes, yet insignificant pefomance diffeential is evealed between SRI funds and thei conventional pees duing the 1987-2003 peiod in the U.S. Accoding to papes elating to conventional Spanish mutual funds, Feuz et al. (2008) have found that the Spanish SRI funds do not have stock picking o timing abilities. In ode to measue pefomance they used models ecommended by Teyno and Mazuy (1966), hencefoth efeed to as TM, and Heniksson and Meton (1981), hencefoth efeed to as HM, fo example a significant numbe of fome studies on management skills of potfolio manages in the Spanish maket. A key component of the use of the TM and HM models is the equied selection of an assigned benchmak. Most pieces of eseach on SRI mutual fund pefomance have chosen a non-sri benchmak. Howeve, these studies expose them to citicism due to thei limited esults and implication. The limited esults and implications expose these studies to citicism due to the fact that non-sri benchmaks cannot compise the eal investment stategies a SRI potfolio manage can develop. Nevetheless, the choice of an appopiate benchmak, as is the case in conventional funds, is a complex matte. With egad to the choice of accuate indexes, some authos such as Ams (1999), Luck and Pilotte (1993) and Vemei and Coten (2001) used SRI indexes in thei eseach on pefomance. The emegence of financial indexes using the social esponsibility selection citeia such as the Dow Jones Sustainability Index o the FTSE4 Good Index, have been shown to boost the development of SRI. The main objective of this pape is to measue the management abilities of Spanish ethical equity mutual funds on thei self declaed benchmak o investment policy. In a study simila to Feuz et al. (2008), we apply taditional paametic models (TM and HM), but we use SRI indexes based on a moe ecent sample of Spanish equity ethical funds. We also use a new nonpaametic appoach suggested by Jiang (2003) to evaluate timing abilities. 1 Social Investment Foum: 2007 Repot on Socially Responsible Investing tends in the United States. 2 Vigeo: Geen, social and ethical funds in Euope. 2009 Review. Vigeo is a Fench fim that is one of most impotant Euopean CSR ating agency. 200

Intenational Jounal of Business and Social Science Vol. 3 No. 21; Novembe 2012 Islamic Economics and Finances induced us to publish this pape in an Aab county, as establishing ties between the apidly gowing Islamic financial and SRI/CSR communities who shae commitments to sustainability, pospeity, and justice could help ceate oppotunities fo mutual undestanding and collaboation. Futhemoe, this is a subject of geat impotance nowadays, as Islamic Economics and Finances have become vey simila to those of the Westen Wold SRI (Salman, 2004), whee ethics and social values ae insepaable fom economics and finance. The significance of this study is an attempt to fill the existing gap on SRI liteatue and advanced techniques fo measuing mutual fund management skills in Islamic counties. Ou empiical esults suggest that Spanish equity ethical funds do not paticipate in lage active management activities. Nevetheless, some of these funds use maket timing stategies although, oveall, Spanish ethical manages have poo timing skills. The findings have also povided favouable evidence elating to the use of ethical benchmaks and benchmaks in accodance with the self declaed investment policies on evaluating management skills in Spanish ethical funds. The emainde of the pape is oganised as follows: the next section featues the evolution of the SRI mutual funds in Euope and Spain and povides an oveview on how SRI mutual funds opeate. The intoduction to the models is in section 3. Section 4 descibes the data and section 5 pesents the main empiical esults and includes a obustness analysis fo measuing timing skills. The final section povides the summay. 2. Chaacteistics of the SRI mutual funds in Euope and Spain. The fist SRI fund in Euope was launched in the United Kingdom fo the Fiends Povident Goup in 1984. It followed an Ameican tend that began in 1971 with the fist ethical funds: the Pax Wold Fund, which negatively sceened weapon companies. SRI constitutes the financial sub secto that has expeienced the geatest boom in ecent yeas in Euope. Figue 1 displays the ising numbe of ethical funds in Euope between Decembe 1984 and 2009. The dates mentioned ae those published by Vigeo 3 in 2008 and 2009. Figue 1 Numbe of Euopean SRI Funds. 2009 2008 2007 2006 2005 2004 2003 2001 1999 0 100 200 300 400 500 600 700 The numbe of Euopean ethical funds exceeded 680 in 2009 which accounts fo an impessive gowth ate of 27% in one yea (fom 537 to 683). This epesents the lagest pecentage of gowth since 2001. The histoical data shows that the most significant nt ise occued ove the 1999-2001 peiod, duing which the numbe of SRI funds inceased fom 159 to 280, hence a 76% gowth ate in two yeas. The amount of assets managed by Euopean SRI Funds is epoted in Figue 2. This figue shows that, afte a slight decease in 2008, the assets exceed 53.200 million Euos, ising by 9 pecent in 2009, which implies that the pesent financial cises could make SRI moe appealing. 3 Fo a fund to be consideed ethical, the following pinciples ae used: the use of ethical, social o envionmental sceening fo stock and bond issue selection, its maketing as a socially esponsible investment poduct and its availability to the public (etail funds). Vigeo does not account fo funds which simply donate a pat of thei commissions o pofits (solidaity funds), funds and othe investment poducts which ae only available to institutions o funds which apply one o multiple CSR sceening ng pocesses not maketed as socially esponsible poducts. 201

Cente fo Pomoting Ideas, USA www.ijbssnet.com Figue 2 Assets managed by Euopean SRI Funds (million of Euos) 60,000 50,000 40,000 30,000 20,000 10,000 0 1999 2001 2003 2004 2005 2006 2007 2008 2009 With egad to the size of SRI in Euope, Figue 3 displays the pecentage of SRI as compaed to the total assets of UCITS funds. 4 The pecentage in 2009 shows a vey significant incease. This tend has emained unchanged since 2004. As mentioned in the 2007 Vigeo epot, easons fo this tend have been influenced by the launch of new SRI poducts by key asset manages, o the e-design of existing taditional poducts, alteed to include a socially esponsible appoach in thei investment policies. Fome figues geneally show that the ise of SRI mutual funds in Euope has not been affected by the pesent financial cises as these funds had been suffeing fom financial touble since the stat of the 2000s (Feuz et al., 2008). On the contay, figues fom 2009 show that SRI funds seem to become a moe valuable option fo investos. In 2009, the most outstanding figues of assets pe county wee those of Fance, with 13.800 million euos, followed by the United Kingdom with 10.500 million euos, Belgium with 8.000 million euos and Switzeland and Gemany whose investment amounted to 6 200 and 4 400 million euos, espectively. 5 The fou lagest makets epesent 72% of Euopean assets. The county anking of total SRI assets managed by the Euopean mutual fund undewent some changes in 2009 as compaed with the esults in 2008. Fo instance, Fance ovetook England as the county with the lagest SRI amount and Gemany, by means of its emakable annual incease of 56% supassed Sweden as the fifth Euopean county with the lagest SRI funds, all these amounts being measued by assets. Howeve, when the total assets of all mutual funds wee compaed, Belgium held the lagest popotion of SRI funds (9.5% of total assets ae managed by Belgium SRI mutual funds). 1.2 1 0.8 0.6 0.4 Figue 3 Pecentages of SRI Funds in the Euopean Fund Maket. 1.11 0.87 0.75 0.62 0.52 0.43 0.47 0.35 0.2 0 2001 2003 2004 2005 2006 2007 2008 2009 4 UCITS funds can be sold in all Euopean counties. Diective 85/611/EEC: Undetaking fo Collective Investment in Tansfeable Secuities 5 Vigeo: Geen, social and ethical funds in Euope. 2009 Review. 202

Intenational Jounal of Business and Social Science Vol. 3 No. 21; Novembe 2012 In 2009, the most outstanding figues of assets pe county wee those of Fance, with 13.800 million euos, followed by the United Kingdom with 10.500 million euos, Belgium with 8.000 million euos and Switzeland and Gemany whose investment amounted to 6 200 and 4 400 million euos, espectively. 6 The fou lagest makets epesent 72% of Euopean assets. The county anking of total SRI assets managed by the Euopean mutual fund undewent some changes in 2009 as compaed with the esults in 2008. Fo instance, Fance ovetook England as the county with the lagest SRI amount and Gemany, by means of its emakable annual incease of 56% supassed Sweden as the fifth Euopean county with the lagest SRI funds, all these amounts being measued by assets. Howeve, when the total assets of all mutual funds wee compaed, Belgium held the lagest popotion of SRI funds (9.5% of total assets ae managed by Belgium SRI mutual funds). Despite the high level of CSR in Spanish businesses, the development of SRI mutual funds in Spain is vey insubstantial when compaed with its Euopean countepats. Spain is one of the Euopean counties with the lowest volume of capital invested in SRI mutual funds. Vigeo have epoted that the amount of assets managed by SRI mutual funds dopped to just ove 100 million Euos in 2009 and that thee wee 10 SRI funds in Spain when the epot came out. The fist SRI mutual fund appeaed on the Spanish etail maket in 1997. This was Ibe Fondo 2020 (Balague y Muñoz, 2002) which only invests in companies and sectos especting the Catholic moal code. That same yea, othe SRI funds appeaed: Ibe Fondo 2000 and BCH Hoizon, which wee sold in Spain though they wee incopoated in Luxembug, and Ahoo Copoación Acoiis, the fist envionmental o geen fund. On the Spanish financial maket, it is a cicula lette, issued by the Ethical Commission of INVERCO on Novembe 15th 1999 that enfoces SRI mutual funds egulations. 7 This pamphlet egulates the use, in the case of collective investments, of denominations such as ethical, envionmental and any othe tem with a beaing on aspects of social esponsibility. The egulations state that these ethical o envionmental funds ae fee to detemine the ethical, envionmental o social esponsibility citeia to be taken into account duing the sceening of thei investment potfolios. Geneally, the SRI funds apply two types of sceening pocesses. Fistly, a negative o exclusionay sceening is applied, which is designed to exclude fims involved in poducts o pocesses consideed undesiable. Examples include fims engaged in the poduction of amament, alcohol o tobacco, possessing a poo envionmental pefomance ecod, pataking in offensive advetising o involving cuelty towads animals. Then, positive o inclusionay sceenings can be applied, seeking to include fims with desiable poducts o pocesses. Examples include envionmentally awae companies, such as fims seeking to educe pollution, enfocing pogessive hiing policies, possessing a sound human ights ecod and pomoting good labou elations. A paticula chaacteistic of the Spanish SRI secto, which is cuently being defined, is that the concept of SRI funds also coves solidaity funds. These funds donate pat of thei management fees to a chosen chaitable o non-govenmental oganization (in some cases, like that of Santande Fondo Solidaio, investos can choose thei pefeed oganizations and the popotional gains ae assigned to them). Moeove, Lozano et al. (2006) have found that Spanish ethical funds tend to use negative sceening citeia. 3. The Models Most mutual fund eseach papes split pefomance into two components: maket timing and stock selection. Maket timing is the manages ability to anticipate maket movements and adjust the level of mutual fund isk accodingly. On the othe hand, stock selection involves the manages ability to include (emove) specific undevalued (ovevalued) stocks in (fom) the potfolio. Financial liteatue has used diffeent models when measuing the potfolio manage's ability to time the maket and select secuity. We found paametic models, such as those ecommended by Teyno and Mazuy (1966) and Heniksson and Meton (1981), nonpaametic appoaches, poposed by Jiang (2003) and Abevaya and Jiang (2005) fo instance, and potfolio holding methodologies, as used in Ippolito (1989) and Jiang et al. (2007). 6 Vigeo: Geen, social and ethical funds in Euope. 2009 Review. 7 INVERCO is the association of Collective Investment and Pension Funds Institutions, and is compised of, as associate membes, the majoity of Spanish Collective Institutions (Mutual Funds and Companies), Spanish Pension Funds and foeign Investment Collective Institutions. 203

Cente fo Pomoting Ideas, USA www.ijbssnet.com In this paticula case, we chose the models suggested by Teyno and Mazuy (1966) and Heniksson and Meton (1981) due to thei extensive use in academic eseach. We also conside that these models ae the foundation fo othe studies on pefomance in Spanish conventional and SRI funds, hence facilitating the compaison of ou esult with conclusion povided by studies using othe samples and benchmaks. Teyno and Mazuy (1966) popose a model with a dynamic beta as the sum of a constant, a long tem aveage beta and a γtm slope which measues maket timing ability, following a stategy which inceases (deceases) the beta when the excess maket etun is positive (negative). Consideing that a fund can anticipate the maket coectly, the space elation between the excess etun of a fund (etun of a fund minus the fee isk etun) and the excess etun of maket (etun of maket minus the fee isk etun) must be concave. Equation (1) shows the inclusion of a quadatic tem in the Capital Asset Picing Model (CAPM) (Shape, 1964) which is a pefeed facto when assessing potfolio manage skills: p,t+1 = α p + β p m,t+1 + γ tm [ m,t+1 ] 2 + µ p,t+1 (1) Whee: is the excess etun of fund p egading fee isk etun; α measues the stock picking ability of fund p; β is the volatility of fund p with espect to the maket etun;, is the maket etun minus the fee isk etun; γ is the paamete that eflects the shape of the elation between the maket excess etun and the fund excess etun, consequently, it collects the timing abilities of a potfolio manage and a positive coefficient eveals timing skills and µ, is the eo tem in peiod t+1with E µ, =0. The Heniksson and Meton (1981) appoach assumes that a fund manage foecasts the sign of the excess of maket etun, and buys (sells) equities befoe positive (negative) excess. The appopiate algebaic expession fo this appoach is: p,t+1 = α p + β p m,t+1 + γ hm [ m,t+1 ] + + µ p,t+1 (2) Whee: while the maket excess etun is positive, =Max 0,, and γ is the Heniksson and Meton (1981) timing coefficient. 4. The Data We used a sample of SRI equity funds that wee alive fo a cetain peiod of time duing thei analysis (fom Januay 2002 to Decembe 2009). The mutual funds examined met the equiements of the afoe-mentioned pamphlet issued by the Ethical Commission of INVERCO. Having examined all the Spanish ethical mutual funds alive at any given time between 2002 and 2009, ou sample is fee of suvivoship bias. We only selected funds investing in equities and then compiled etuns on a monthly basis, exclusively duing thei ethical mutual fund lifespan. In addition, as a isk-fee asset, we took into account the 1 month Euibo ate acquied though the Banco de España. This ate is used by Feuz et al. (2008) in thei study of the SRI Spanish funds using the intenational equity investment style. Table 1 featues the Spanish SRI funds studied in ou eseach. We also list the National Secuities Maket Commission (CNMV) fund egistation numbe, the peiod analysed, the fund's investment policies o self declaed ethical benchmak and comments on the changes undewent by each fund thoughout its life-cycle. Although some of the funds wee ceated befoe, the fist data taken into account is that of Januay 2002, as ou analysis peiod coves Januay 2002 to Decembe 2009. Fo each SRI equity fund, we considee thei self declaed benchmak o chosen investment policies an appopiate index. We used the Dow Jones Sustainability Index fo funds that adopted this index as thei benchmak o that wee listed as global funds, and the Dow Jones Sustainability Index STOXX fo ethical funds that adopted it as thei benchmak o that wee designated as Euopean equity funds in thei investment policies. Both indexes ae based on the Euo cuency, thei oiginal vesions. The souce is the Dow Jones Sustainability Goup. 8 8 The Dow Jones Sustainability Goup is a joint ventue of the index supplie, The Dow Jones Company, and the Swiss sustainability consultant fim SAM. 204

Intenational Jounal of Business and Social Science Vol. 3 No. 21; Novembe 2012 Some funds, such as Mogan Stanley Fondo Activo Ético, Compomiso Fondo Ético, Foncaixa Coopeación, Cam Fondo Solidaio and Uquijo Invesión Ética y Solidaia have investment policies which allow them to invest a bigge amount in debt. It can each up to 50%. In these cases we mainly focussed on timing abilities as ou benchmaks do not entiely compise thei investment styles. Table 2 lists seveal statistics descibing ou Spanish ethical mutual funds sample. We deem it necessay to daw attention to the high standad deviation in ou sample of funds. This volatility is also obseved in the maximum and minimum yealy etuns. This situation displays the substantial diffeences between investment policies in ou sample. We suggest contolling this issue though the use of moe accuate benchmaks. Table 1: Analysis of SRI Mutual Funds. Fund Designation Registatio n Numbe (CNMV) Peiod Analyzed Investment policies o self declaed Benchmak Comments BBVA Bolsa Desaollo Sostenible 1172 Octobe 2004- Decembe 2009 Global fund Has adopted ethical pocedues since 2004. Renta 4 Ecofondo Januay 2002-2004 Intenational Equity Fund Meged in 2004. FONCAIXA Coopeación 1787 Januay 2002- Decembe 2007 Spanish and Intenational Equity, developing counties excluded Meged with Foncaixa 133 in ealy 2008. Mogan Stanley Fondo Activo Ético 1783 Januay 2002- Decembe 2009 Spanish and Intenational Equity Named Foncaixa Pivada Fondo Activo Etico since 2008. Ahoo Copoación Acoiis 1289 Januay 2002- Octobe 2003 Global Fund Meged in Octobe 2003. Uquijo Invesión Ética y Solidaia Caixa Catalunya Euopa Valo 2871 Januay 2004- Decembe 2009 1993 Apil 2004- Novembe 2008 Global Fund DJ Stoxx Sustainability Meged with Caixa Catalunya Bosa Euopea (Non-SRI fund) in Novembe 2008 CAM Fondo Solidaio 3222 Octobe 2005- Novembe 2009 Global Fund Meged in Novembe 2009 FONCAIXA 133 Socialmente Responsable 3269 Octobe 2005- Decembe 2009 FTSE4GOOD Euope Santande Dividendo Solidaio 1836 Decembe 2005- Decembe 2009 Euopean Equity Fund It switched to equity investment in May 2005 Compomiso Fondo Etico 3385 Apil 2006- Decembe 2009 Global Fund 205

Cente fo Pomoting Ideas, USA www.ijbssnet.com The Dow Jones Sustainability Index Wold (DJSI Wold) and Dow Jones Sustainability Index STOXX (DJSI STOXX) have a negative aveage etun duing the peiod analysed, but these esults ae influenced by thei deadful pefomance in 2002 and 2008. 206 Table 2 Summay of the statistic of funds, benchmaks and fee isk ates (1). # funds Mean Retun Maximum Retun Minimum Retun Standad Deviation Mean DJSI Wold Mean DJSI STOXX Mean 1 month EURIBOR 2002 4-2.5 10.2-14.9 5.4-3.8-3.7 0.3 2003 4 0.6 9.2-6.9 3.0 0.8 0.8 0.2 2004 4 0.4 2.9-2.9 1.2 0.2 0.5 0.2 2005 5 0.8 5.4-7.4 2.1 1.7 1.7 0.2 2006 8 0.7 4.1-6.5 1.7 0.6 1.1 0.2 2007 8-0.2 3.8-5.8 1.9-0.2-0.05 0.3 2008 8-3.2 7.8-15.4 4.9-4.8-5.4 0.3 2009 7 1.1 11.1-10.6 3.9 1.9 1.85 0.1 2002-2009 11-0.3 11.1-15.4 3.6-0.45-0.40 0.23 (1) The table pesents coss-sectional statistics on ou mutual fund sample and the selected equity benchmak on a yealy basis. 5. Empiical Results In annex 1, we epot ou findings. We display the esults of applying the TM and HM models with the two selected benchmaks, but highlight, in each fund, the benchmak linked with the self declaed investment style. The R-squaed adjustment is high fo almost the entie sample. CAM Fondo Solidaio and Compomiso Fondo Ético ae the only two funds with an R-squaed adjustment fa below 0.8. Both the latte and the study of egession esiduals confim the eliability of ou models. A total of five funds have a beta coefficient below 0.5: Mogan Stanley Fondo Activo Ético, Compomiso Fondo Ético, Foncaixa Coopeación, CAM Fondo Solidaio and Uquijo Invesión Ética y Solidaia. The above-stated funds ae the same as those which decided to use a lage scale of debt in thei investment. The poo significance of alphas demonstates that ou sample of Spanish ethical funds does not engage in extensive selectivity stategies. The aveage esults display the poo selectivity and lage negative timing abilities of ou funds when compaed with ethical benchmaks. Thee ae thee significant funds below the 0.1 p.value in the timing paamete and one, Uquijo Invesión Ética y Solidaia, with positive coefficients in compaison with its self declaed benchmak. CAM Fondo Solidaio and Compomiso Fondo Ético both eveal negative and significant coefficients but these funds also display a lowe value of thei R-squaed adjustment, which may denote the use of inadequate models. Robustness Test In ou sample, we study the maket timing skills using a nonpaametic model suggested by Jiang (2003). Consideing that some funds in the sample (five in total) use a lage scale of debt, the alpha paamete is not highly eliable. Indeed, selection activities ae possible when in debt and the equities benchmak can be ielevant when measuing stock picking skills. Howeve, potfolio manages with elatively low betas can engage in timing activities and change thei position in debt when an incease in the stock maket is foecast. We also deemed it elevant to compae the timing esults of both low R-squaed adjustment funds with anothe model. The nonpaametic method assumes that an infomed maket time will maintain, fo any tiplet of maket etun obsevations {,,,,, }sampled fom any thee time peiods with {, <, <, }, a highe exposue to the maket in the [,,, ] ange than in the [,,, ] ange. We define the paamete υ as follow (all etuns ae expessed in excess of the isk-fee ate):

Intenational Jounal of Business and Social Science Vol. 3 No. 21; Novembe 2012 υ = 2 P (β > β, >, ) 1 (3) Nonpaametic beta estimates fo both time anges ae β = (,, ) / (,, ) and β = (,, ) / (,, ). E (υ) = 0 when manages do not have supeio infomation, seeing as the pobability (P) of a coect foecast is equal to the pobability of an incoect foecast. υ Є 1,1 whee the two exteme values epesent pefect negative and pefect positive maket timings, espectively. The poposed sample statistic of a fund timing ability is: 1 n i, t 3 i, t 2 i, t 2 i, t1 (4) = Sign > 3 < <, 1, 2, 3 m, t 3 m, t 2 m, t m t m t m t 2 m, t1 Whee Sign ( ) = (1, 1, 0) fo positive, negative and zeo maket timing espectively. θ is the aveage sign acoss all tiplets taken fom n obsevations. θ can be shown to be n consistent and asymptotically nomal (see Abevaya and Jiang, 2005) with vaiance: σ 2 = 9 1 n n 1 h ( z, z ) t, z ˆ 2 t θ 3 n t 1 θˆ n n t 2 1 t 2, t 3 Whee: h,, )=,, >,,,,,, (5), <, <, ) (6) 2 Unde the null hypothesis of no maket timing ~ θ n θˆ σ θˆ n n d N ( 0,1 ) The nonpaametic statistic can be intepeted as the pobability of a manage taking elatively moe systematic isks in a high etun peiod than in a low one, which has many advantages when it comes to measuing timing skills in ou sample. Jiang (2003) points out that the nonpaametic method has less stingent assumptions than the TM and HM models as taditional models assume that manages have a linea o binay esponse function. This can be impotant fo measuing timing skills in funds with low betas. The eason why the nonpaametic model focuses on how often a manage coectly foecasts a maket movement is because the sign function in (4) assigns a value of 1 ( 1) if the agument is positive (negative) egadless of the size of the agument. This appoach pevents aggessiveness fom affecting the nonpaametic statistic and mainly eflects the pefomance s quality of infomation component. Suppoted by simulation esults, Jiang (2003) shows that the nonpaametic measue is obust when it comes to testing timing skills among manages whose timing fequency may diffe fom the fequency of the sample data and/o whose timing fequency may not be unifom. The statistic in (5) investigates timing ove all tiplets of fund etuns athe than just consecutive obsevations and, consequently, incopoates moe infomation than paametic tests. Simulations caied out by this autho also display the accuacy of the nonpaametic measue behaviou when facing the possibility of spuious coelations between selectivity and timing coefficients in TM and HM models. Moeove, Abevaya and Jiang (2005) point out that, in most cases, the statistical powe of the nonpaametic test is indistinguishable fom that of the paametic one, and futhemoe, is supeio to the taditional models when heteoscedasticity is pesent and heteoscedasticity-consistent standad eos ae used. 207

Cente fo Pomoting Ideas, USA www.ijbssnet.com Table 3 Summay of the nonpaametic appoach with DJSI WORLD as a benchmak (1). Fund Designation # of data ecods Nonpaametic Statistics Significance BBVA Bolsa Desaollo Sostenible (2) 63-0.01785 0.38 Renta 4 Ecofondo (2) 30-0.00936 0.46 FONCAIXA Coopeación (2) 72-0.05718 0.16 Mogan Stanley Fondo Activo Ético (2) 96 0.00054 0.49 Ahoo Copoación Acoiis (2) 22-0.08701 0.30 Uquijo Invesión Ética y Solidaia 68 0.03173 0.31 Caixa Catalunya Euopa Valo 57-0.06890 0.14 CAM Fondo Solidaio (2) 50-0.15551 0.06 FONCAIXA 133 Socialmente Responsable 51-0.00706 0.46 Santande Dividendo Solidaio 48-0.02266 0.36 Compomiso Fondo Etico (2) 46-0.18076 0.07 Aveage 54-0.05218 0.29 (1) This table epots the maket timing coefficients fo ou sample of Spanish domestic equity funds 1 when the nonpaametic appoach is used. n i, t 3 i, t 2 i, t 2 i, t 1 = Sign > 3 < < Significance in a two-tailed test., 1, 2, 3 m, t 3 m, t 2 m, t m t m t m t 2 m, t 1 (2) The asteisks efe to benchmaks in accodance with the self declaed investment policies in the fund pospectus. Table 4 Summay of the nonpaametic appoach with DJSI STOXX as a benchmak (1). Fund Designation # of data ecods Nonpaametic Statistics Significance BBVA Bolsa Desaollo Sostenible 63 0.01967 0.37 Renta 4 Ecofondo 30-0.03054 0.36 FONCAIXA Coopeación 72-0.00382 0.47 Mogan Stanley Fondo Activo Ético 96-0.02260 0.29 Ahoo Copoación Acoiis 22-0.11429 0.25 Uquijo Invesión Ética y Solidaia (2) 68 0.04414 0.24 Caixa Catalunya Euopa Valo (2) 57 0.07430 0.15 CAM Fondo Solidaio 50-0.13041 0.08 FONCAIXA 133 Socialmente Responsable (2) 51 0.06074 0.22 Santande Dividendo Solidaio (2) 48 0.04984 0.20 Compomiso Fondo Etico 46-0.19038 0.05 Aveage 54-0.02212 0.24 208

Intenational Jounal of Business and Social Science Vol. 3 No. 21; Novembe 2012 (1) This table epots the maket timing coefficients fo ou sample of Spanish domestic equity funds 1 when the nonpaametic appoach is used. n i, t 3 i, t 2 i, t 2 i, t 1 = Sign > 3 < < Significance in a two-tailed test., 1, 2, 3 m, t 3 m, t 2 m, t m t m t m t 2 m, t 1 (2) The asteisks efe to benchmaks in accodance with the self declaed investment policies in the fund pospectus. Tables 3 and 4 display the maket timing esult of ou sample Spanish ethical funds using the nonpaametic measue. The table 3 fund adopted DJSI Wold as its benchmak and that of table 4 adopted DJSI STOXX. Similaly to taditional models esults, we obtained negative and statistically insignificant timing abilities in ou ethical funds sample. Two funds, CAM Fondo Solidaio and Compomiso Fondo Ético, eveal negative and significant coefficients. This finding is in accodance with fome esults obtained by these funds when using taditional models. The thid fund that displays a significant coefficient when using taditional models loses its statistical significance but the paamete maintains its positive sign. Funds 7, 9 and 10, which adopted an investment policy focused on Euopean stocks, see the sign of thei paametes change when assessed by diffeent benchmaks. Signs ae positive when they ae evaluated with the Euopean ethical benchmak and negative when they ae assessed with the wold benchmak. These sign changes infe that analysing with diffeent benchmaks could be vey impotant fo these funds. 6. Conclusion The analysis of ecent tends in financial makets displays the gowing weight of SRI investment in the Euopean aea, yet many questions emain unsolved concening the effects of SRI constaints in the yield of a potfolio. Many studies have found that, in the long tem, SRI mutual fund investos have a highe yield than conventional ones. Authos link these esults due to the fact that companies which ae copoate social esponsible in a moe extensive manne have a bette administation as thei executives focus less on shot tem gain. Howeve, othe studies highlight that SRI constaints limit the investment univese which then affects the systematic isk in SRI potfolios and thus obliges manages to choose between vaious suboptimal potfolios. Futhemoe, they state that investos ae awae of the financial sacifice implied when investing in SRI mutual funds which may consequently discouage potfolio manages fom impoving thei ecods. This is why it is impotant to assess the abilities of SRI potfolio manages in a moe accuate way. We analysed management skills in Spanish SRI mutual equity funds by applying taditional models used in conventional fund samples. Howeve, we used SRI equities benchmaks instead conventional indexes. We also applied a obustness test to measue maket timing skills as taditional ones ae allegedly biased and as it impoves accuacy when funds have lage investments in debt. Nevetheless, we found in ou sample of Spanish ethical funds that potfolio manages do not have any stock picking o timing skills. Since the selectivity coefficient is vey small in compaison with conventional fund esults, some ethical funds appea as not involved in stock picking activities. This pomotes beliefs that SRI may encouage potfolio mismanagement. Aside fom that, ou esults ae in accodance with most conclusions on conventional fund samples, yet a geat numbe of these funds state that thei aim is to beat the maket. Appendix 1 The following table gives an oveview of the esult obtained by ou sample Spanish SRI funds when applying the models suggested by Teyno and Mazuy (1966) and Heniksson and Meton (1981). Both models use two benchmaks: the Dow Jones Sustainability Index Wold and the Dow Jones Sustainability Index STOXX. The diffeent models ae listed in the fist column. We indicate which model suits each fund should thei stated investment policies be consideed. The second column lists the alpha paamete measuing the stock picking skills in ou sample and its statistical significance is displayed in the thid. The fund s beta is listed in the fouth column and its statistical significance in the fifth. The sixth column pesents the timing coefficients and the seventh its statistical significance. The last column shows the adjusted R squae fo each model. 209

Cente fo Pomoting Ideas, USA www.ijbssnet.com 210 Models Alpha Sig. Beta Sig. Timing Sig. R adjusted Fund # 1 BBVA Bolsa Desaollo Sostenible TMWORLD(1) -0.0017 0.23 0.98 0.0 0.4448 0.30 0.96 HMWORLD(1) -0.0018 0.35 0.94 0.0 0.0596 0.49 0.96 TMEURO -0.0026 0.16 0.90 0.0 0.5521 0.33 0.93 HMEURO -0.0027 0.28 0.85 0.0 0.0825 0.48 0.93 Fund #2 Renta 4 Ecofondo TMWORLD(1) 0.0006 0.90 0.84 0.0-0.5089 0.66 0.84 HMWORLD(1) -0.0003 0.96 0.88 0.0-0.0181 0.95 0.84 TMEURO 0.0006 0.90 0.78 0.0-0.3916 0.67 0.84 HMEURO 0.0000 0.99 0.84 0.0-0.08300 0.75 0.84 Fund #3 Foncaixa Coopeación TMWORLD(1) -0.0017 0.20 0.49 0.0 0.5161 0.28 0.80 HMWORLD(1) -0.0011 0.51 0.45 0.0 0.0128 0.89 0.80 TMEURO -0.0021 0.08 0.44 0.0 0.1808 0.72 0.82 HMEURO -0.0014 0.47 0.44 0.0-0.0282 0.82 0.83 Fund #4 Mogan Stanley Fondo Activo TMWORLD(1) 0.0000 0.90 0.26 0.0 0.0957 0.65 0.79 HMWORLD(1) 0.0000 0.99 0.25 0.0 0.0178 0.71 0.79 TMEURO -0.0001 0.84 0.24 0.0 0.0889 0.59 0.82 HMEURO 0.0000 0.97 0.24 0.0 0.0060 0.89 0.82 Fund #5 Ahoo Copoación Acoiis TMWORLD(1) 0.0001 0.98 0.84 0.0-0.6086 0.56 0.82 HMWORLD(1) 0.0056 0.57 0.98 0.0-0.3132 0.27 0.82 TMEURO -0.0016 0.85 0.76 0.0-0.4012 0.73 0.73 HMEURO 0.0101 0.43 0.96 0.0-0.5125 0.18 0.75 Fund #6 Uquijo Invesión Ética y Solidaia TMWORLD 0.0000 0.94 0.48 0.0 0.7666 0.19 0.82 HMWORLD -0.0014 0.42 0.39 0.0 0.1775 0.17 0.82 TMEURO(1) -0.0005 0.60 0.46 0.0 0.7676 0.04 0.86 HMEURO(1) -0.0024 0.12 0.35 0.0 0.2106 0.04 0.86 Fund #7 Caixa Catalunya Euopa Valo TMWORLD 0.0011 0.58 0.89 0.0-1.5108 0.04 0.89 HMWORLD 0.0020 0.41 1.04 0.0-0.2122 0.13 0.89 TMEURO(1) -0.0024 0.17 0.99 0.0 0.4987 0.42 0.93 HMEURO(1) -0.0034 0.12 0.92 0.0 0.1274 0.31 0.93 Fund #8 CAM Fondo Solidaio TMWORLD(1) 0.0023 0.32 0.20 0.0-2.4283 0.00 0.61 HMWORLD(1) 0.0055 0.07 0.47 0.0-0.4966 0.0 0.58 TMEURO 0.0021 0.31 0.19 0.0-2.0067 0.0 0.69 HMEURO 0.0059 0.02 0.45 0.0-0.4852 0.0 0.64 Fund #9 Foncaixa 133 Socialmente Responsable TMWORLD -0.0023 0.41 0.97 0.0-0.6879 0.29 0.91 HMWORLD -0.0027 0.44 1.02 0.0-0.0607 0.70 0.91 TMEURO(1) -0.0026 0.32 0.90 0.0-0.5276 0.32 0.91 HMEURO(1) -0.0029 0.43 0.95 0.0-0.0607 0.71 0.91 Fund #10 Santande Dividendo Solidaio TMWORLD 0.0014 0.63 0.97 0.0 0.3667 0.42 0.90 HMWORLD -0.0002 0.96 0.90 0.0 0.1403 0.22 0.90 TMEURO(1) 0.0012 0.58 0.91 0.0 0.34 0.25 0.94 HMEURO(1) -0.0002 0.95 0.85 0.0 0.1217 0.23 0.94 Fund #11 Compomiso Fondo Ético TMWORLD(1) 0.0012 0.47 0.22 0.0-1.8191 0.02 0.65 HMWORLD(1) 0.0031 0.17 0.41 0.0-0.3454 0.02 0.61 TMEURO 0.0012 0.47 0.20 0.0-1.5604 0.00 0.72 HMEURO 0.0038 0.097 0.40 0.0-0.3577 0.01 0.68 Aveage TMWORLD 0.0000 0.60 0.65 0.0-0.4885 0.31 0.82 HMWORLD 0.0008 0.53 0.70 0.0-0.0944 0.42 0.81 TMEURO -0.0007 0.48 0.62 0.0-0.2236 0.37 0.84 HMEURO 0.0006 0.44 0.66 0.0-0.0890 0.40 0.83 (1) The asteisks efe to benchmaks in compliance with the self declaed investment policies in the fund pospectus.

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