Sustainable and conventional mutual funds compared as an investment for retail investors : Performance and fees
Year: 2024
Type: dissertation
Abstract: This thesis explores the differences in sustainable and conventional fund’s performance and fees. Sustainable investing has been increasingly popular as themes around ESG have become increasingly important. This thesis concentrates on actively managed mutual funds. In addition, this thesis concentrates on funds targeted at retail investors. Most research on the topic has been on passive funds targeted to institutional investors. This thesis addresses the gap in the literature. As there is no unanimous consensus on the topic, there is still a need for further research. This thesis aims to see how a retail investor can utilize sustainability in their investments. Also, the aim is to see how portfolio managers use sustainability and whether it favors the investor. This thesis utilizes the data from Morningstar, using the Morningstar Sustainability Rating. Morningstar is a popular database for investments, especially mutual funds. The simplicity of the Morningstar Sustainability Rating attracts retail investors which makes it the perfect database. The data will be used to show performance, risk, and fees which all impact the profitability of the investment decision. Based on previous research the hypotheses are that sustainable funds have worse performance and higher fees than conventional funds. To examine the differences in performance for the sustainable and conventional funds there is a 1-factor model and a 3-factor model used. In addition, a novel approach is presented to investigate the effect of whether the fund is sustainable on Morningstar-provided risk figures, different categories of fees, and overall fee level. The findings of this thesis indicate several noteworthy findings. Firstly, sustainable mutual funds have exhibited worsened performance over recent years, proving the notion that sustainable funds underperform their conventional counterparts. This finding contradicts some previous research and underscores the evolving environment of sustainable investing, where factors beyond financial returns play a significant role in investor decision-making. Moreover, conventional mutual funds have been found to have lower fees compared to sustainable funds, which can make them an attractive investment option for retail investors. Thus, if an investor wants to invest in sustainable options, the investor does miss out on returns. Furthermore, the analysis of fund flow dynamics in previous literature has revealed a trend of more positive net flows into sustainable mutual funds compared to conventional funds, particularly over the past couple of years. This trend underscores the growing investor appetite for sustainable investment opportunities and suggests a shift in investor preferences towards aligning their investments with ESG considerations.
Source: Osuva (University of Vaasa)
Author: Leppänen, Aura
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7052590167