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Style Analysis of Japanese SRI funds: Looking for sustainable alpha

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Akihiro Tokuno, Research Centre for Financial Engineering - NomuraSecurities Co., Ltd - Japan.

Akihiro Tokuno, Research Centre for Financial Engineering - NomuraSecurities Co., Ltd - Japan.

Published in: Economy & Finance, Business

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  • 1. TOKUNO, Akihiro Financial & Economic Research Cent re , Nomura Securities, Co. , Ltd. E-mail: [email_address] nomura.co m May 200 7 Style Analysis of Japanese SRI funds Looking for sustainable alpha TBLI Asia 2007 : Fund Performance
  • 2. AUM of Japanese SRI Funds : increasing but still a small fraction
  • 3.
    • Style -adjusted performance of Japanese SRI Funds
    • ( open-end investment trust s)
    • Analysis based on Three-Factor Model by Fama and French (1992)
    • 22 SRI funds and 97 other “Active” funds examined
    • Calculated using daily data
    • Looking for “sustainable” alpha
    Can you find statistically significant alpha in Japanese SRI Funds? Return Spread: Small minus Large Return Spread: Value minus Growth
  • 4. Well, actually…bad news for Japanese SRI
  • 5.
    • After correction for style biases, alpha is not statistically significant
      • “ Sustainability” does NOT seem to create value-added
    • All funds are very similar to the market: market beta is nearly 1.0
    • (except for Eco7, a balanced fund)
      • Status quo: Differentiating strategy needed
    • Mostly large cap biased and growth oriented
      • Low risk and low return, in the long run
    • However, do these hold true only for Japanese SRI funds?
    • Among 97 funds whose name includes the word “active”, only four funds have statistically significant alpha, of which only one has positive alpha
    Style-adjusted performance of 22 Japanese SRI Funds
  • 6. “ Active” f unds in Japan also show the same style properties: Mostly l arge cap biased and growth oriented
  • 7. Even major SRI Indexe s shows the same style-adjusted performance: A stylised fact about SRI performance?
  • 8. Nikkei Opinion Poll on “Good/Bad Board” by Equity Fund Managers Note: (1) The impact of such things as changes of stock code and company name has been taken into account (Bank of Tokyo-Mitsubishi, Sanwa Bank, Mizuho Holdings, Daiwa Bank, Liquid Audio Japan, Nichiei) (2) The survey covers members of the Japan Securities Investment Advisers Association, and fund managers at companies authorized to conduct discretionary investment business, and at leading life and nonlife insurance companies. (3) The survey targets are asked to compile a list, from among all listed Japanese companies, of their top ten “good boards” and “bad boards”, based on criteria including: emphasis on shareholder interests, improvement of management transparency, introduction of external directors, strengthening of the board of auditors, establishment of supervisory committees such as advisory boards, drawing up of plans for successor officers, etc. Rankings are produced by awarding 10 points for the top place in a respondent’s list, nine points for the second place, and so on. Source: Nomura, from Nikkei Business Publications materials
  • 9. “ Good/Bad board ” companies’ subsequent ROE Source: Nomura, from Nikkei Business Publications materials
  • 10. “ Good/Bad board ” companies’ subsequent share price Source: Nomura, from Nikkei Business Publications materials
  • 11. Investment Style Characteristics : Property of “ G ood/ B ad boards ” portfolio is large-growth / small-value. Note: This graph illustrates the results of time series analysis of each portfolio using the “Style Manager”. Based on the Russell/Nomura index series. As of the end of August 2004. g, b, and TPX indicate “good board” portfolio, “bad board” portfolio, and TOPIX index, respectively. Y axis position is recalculated so as to locate TPX’s near the centre of graph. Source: Nomura, from Nikkei Business Publications materials
  • 12. If you invest in “ G ood/ B ad” companies … Biased in Large-Growth Financially sound Well-known, famous “ Good Boards” Portfolio “ Bad Boards” Portfolio Biased in Small-Value Financially unstable Unknown, infamous High-end accountability Low risk, low return Potential, possibility of change High risk, high return
  • 13. Why don't fund managers make use of ESG ? ( regardless of whether or not it matters ) I. UNIVERSE (Benchmark) Major Market Indices TOPIX S&P 500 Russell 1000 Index etc Status Quo Bias III. PORTFOLIO CONSTRUCTION
    • Select the top ranking companies for potential inclusion in the portfolio
    • Simultaneous Effect
    • Causation issues
    • Utilize a proprietary optimization to match the risk characteristics of the benchmark  
    • Neutralises, to the extent possible, the inherent biases introduced by a screened universe of securities
    • Incorporates risk factors (e.g., Barra ) to minimize tracking error
    • Nearly identical to the market
    • (Status Quo Bias)
    II. SCREENS Negative Eliminate companies with certain business operations or products Sector Bias (Growth oriented) Positive Rank the companies versus their sector peers on a range of environmental, social and governance (ESG) factors Research targeted mainly large companies Growth oriented Or may be irrelevant SRI Indices Morning Star SRI (Japan Equity) DJSI FTSE4Good etc Style Biases Mostly Large-Growth
  • 14.
    • Benchmarking and tracking error management leads to the status quo bias
    • (Market beta equals to 1.0)
    • More active and unconfined way of managing the portfolio
    • Research on ESG tends to ingenerate some style biases, mostly, large-growth
    • (Low risk low return, in the long run)
    • Discussion on the style-adjusted performance
    • Research results on ESG issues does not play a significant role
    • (Alpha is not statistically significant)
    • Revisiting materiality and relevance, simultaneous effect and causations
    • In general, these are also true in active fund management (e.g. investment trust)
    A study on Japanese SRI Funds : Implications
  • 15. This publication contains material that has been prepared by one or more of the following Nomura entities: Nomura Securities Co., Ltd. ("NSC") and Nomura Research Institute, Ltd., Tokyo, Japan; Nomura International plc and Nomura Research Institute Europe, Limited, United Kingdom; Nomura Securities International, Inc. ("NSI") and Nomura Research Institute America, Inc., New York, NY; Nomura International (Hong Kong) Ltd., Hong Kong; Nomura Singapore Ltd., Singapore; Capital Nomura Securities Public Co., Ltd., Bangkok, Thailand; Nomura Australia Ltd., Australia; P.T. Nomura Indonesia, Indonesia; Nomura Advisory Services (Malaysia) Sdn. Bhd., Malaysia; Nomura Securities Co., Ltd., Taipei, Taiwan; or Nomura Securities Co., Ltd., Seoul, Korea. This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal; and (iii) is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on this material only and the information, including the opinions contained herein are subject to change without notice. Affiliates and/or subsidiaries of Nomura Holdings, Inc. (collectively referred to as the “Nomura Group”) may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from, companies mentioned herein. The Nomura Group, its officers, directors and employees, including persons involved in the preparation or issuance of this material may, from time to time, have long or short positions in, and buy or sell (or make a market in), the securities, or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives. The Nomura Group may act as a market maker and is willing to buy and sell certain Japanese equities for its institutional clients. NSC and other non-US members of the Nomura Group, their officers, directors and employees may, to the extent it relates to non-US issuers and is permitted by applicable law, have acted upon or used this material, prior to or immediately following its publication. Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. The securities described herein may not have been registered under the U.S. Securities Act of 1933, and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been registered under such Act, or except in compliance with an exemption from the registration requirements of such Act. Unless governing law permits otherwise, you must contact a Nomura entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. This publication has been approved for distribution in the United Kingdom by Nomura International plc, which is regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange. It is intended only for investors who are “market counterparties” or “intermediate customers” as defined by FSA, and may not, therefore, be redistributed to other classes of investors. This publication has also been approved for distribution in Hong Kong by Nomura International (Hong Kong) Ltd. NSI accepts responsibility for the contents of this material when distributed in the United States. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without NSI's prior written consent. Further information on any of the securities mentioned herein may be obtained upon request. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version.