In this webinar, dr. Paul Smeets will present his research on motivations of retail investors to buy socially responsible (SRI) mutual funds. He has been conducting research together with several national and international financial institutions including Robeco, Deutsche Bank and Triodos Bank. He will show that most retail investors expect lower financial returns on SRI funds than on conventional funds and this holds even for socially responsible investors. The main reason that investors buy SRI funds is because of their social preferences. These findings follow from a combination of administrative trading records, online experiments and surveys. Paul will also show how banks and mutual fund providers can develop financial products and marketing strategies that effectively target retail investors.
For more information see www.paulsmeets.eu
Why do many retail investors buy SRI funds and why do others stay away from SRI?
1. 2-10-2013
SRI: Return Expectations or Social
Preferences?
1
Why do many retail investors buy SRI
funds and why do others
stay away from SRI?
ECCE Webinar, October 2, 2013Paul Smeets
2. Overview of papers in this webinar
• Social Preferences and Portfolio Choice
(with Arno Riedl)
– Robeco
• Social Identification and Investment Decisions
(with Rob Bauer)
– ASN Bank
– Triodos Bank
www.corporate-engagement.com
www.paulsmeets.eu
2-10-2013 Paul Smeets 2
3. The Trust Game
Paul Smeets Social Preferences and Portfolio Choice 3
Investor 1 Investor 2
x 3
Experimental
Intervention
Endowment
Transfer
Return
+
?
4. The Trust Game
1. Invitation of all socially responsible investors
2. Random selection of conventional investors
3. Real money at stake
4. Internet experiments
5. Match to administrative investor data
6. Anonymous
The Procedure
Paul Smeets Social Preferences and Portfolio Choice 4
5. Intrinsic Social Preferences
Paul Smeets Social Preferences and Portfolio Choice 5
1.00
1.10
1.20
1.30
1.40
1.50
1.60
5 10 15 20 25 30 35 40 45 50
Returnratio
Amount sent by the 1st mover
Socially responsible investors Conventional investors Average
6. Intrinsic Social Preferences
Paul Smeets Social Preferences and Portfolio Choice 6
0
10203040
Percent
0 50 100 150
T_d2_exp_50
Amount sent back
Percent
7. Paul Smeets Social Preferences and Portfolio Choice 7
Avg. Return Ratio Max. Transfer of 50 Euro
Intrinsic social preferences
0.0405**
(0.0205)
0.0080**
(0.0040)
Lower expected returns on SRI
-0.0295
(0.0271)
-0.0295
(0.0271)
Lower perceived risk on SRI
-0.0257
(0.0267)
-0.0253
(0.0267)
Log total portfolio value
0.0431***
(0.0098)
0.0427***
(0.0098)
Investment knowledge
0.0189*
(0.0107)
0.0186*
(0.0107)
University degree
0.0390
(0.0281)
0.0383
(0.0281)
Risk preferences
-0.0003
(0.0003)
-0.0003
(0.0003)
Other control variables YES
N 764
Pseudo R squared 0.0522 0.0525
Likelihood to own a SRI Fund (probit)
8. Return Expectations &
Risk Perceptions
Paul Smeets Social Preferences and Portfolio Choice 8
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
1 2 3 4 5 6 7
Socially responsible investors Conventional investors
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
much lower a bit lower the same a bit higher much higher
Socially responsible investors Conventional investors
Average expected risk:
Socially responsible: 3.55
Conventional: 3.57
9. Contribution of this paper
Only heterogeneity in risk preferences and
expected returns matter for portfolio choices
Lower financial performance
– Hong and Kacperczyk (2009)
– Renneboog, Ter Horst and Zhang (2008)
Higher or similar financial performance
– Bauer, Otten and Koedijk (2005)
– Derwall et al. (2005)
– Edmans (2011)
Traditional finance theory
Mixed evidence on financial performance of SRI
Paul Smeets Social Preferences and Portfolio Choice 9
10. Contribution of this paper
First to explain portfolio choices with
direct measures of social preferences
Suggestive evidence that social preferences influence
investment decisions
– Hong and Kostovetsky (2012), JFE
– Kaustia and Torstila (2011), JFE
– Hong and Kacperczyk (2009), JFE
– Bollen (2007), JFQA
– Kumar and Page (forthcoming)
Our contribution
Recent evidence
Paul Smeets Social Preferences and Portfolio Choice 10
11. Individual-Level Data
1. Return expectations
2. Investment knowledge
1. Trust game
2. Risk preference task
Transaction data: January 1992 to August 2012
1. Monthly amounts invested in SRI funds and in all
other funds
2. Investor portfolio returns
3. Basic investor characteristics
Field behaviorA
Incentivized ExperimentB
SurveyC
Paul Smeets Social Preferences and Portfolio Choice 11
12. SRI Funds at Robeco
Paul Smeets Social Preferences and Portfolio Choice 12
Two types of SRI funds
– SRI equity funds without tax incentives
– SRI bond funds with tax incentives
Classification of SRI fund in accordance to tax code or Robeco
13. SRI Funds at Robeco
Paul Smeets Social Preferences and Portfolio Choice 13
• SRI funds without tax benefits
– Fund managers are not influenced by the government in
the selection of companies
• SRI funds with tax incentives
– Meet certain criteria of the government
– Fund managers are restricted in their selection of
companies by the government
– Tax benefits of up to 2.2% in June 2011 when investors
participated in the experiments
14. Administrative Data
Paul Smeets Social Preferences and Portfolio Choice 14
Conditional on
owning a SRI fund
Percentage SRI in total portfolio 14.9%
Only with tax benefits 19.5%
Only without tax benefits 68.4%
Hold both 12.1%
15. SRI Funds with & without Tax Benefits
(multinomial logit)
Paul Smeets Social Preferences and Portfolio Choice 15
SRI funds: tax benefits with without with & without
Intrinsic social preferences
(average return ratio)
0.8089
(0.2717)
1.4791**
(0.2626)
1.9400
(1.0638)
Lower expected returns on
SRI
1.4309
(0.7585)
0.7319
(0.1612)
0.5519
(0.3549)
Lower perceived risk on SRI
1.5537
(0.7548)
0.6964
(0.1571)
1.2696
(0.8042)
Log total portfolio value
1.6691**
(0.3661)
1.2953***
(0.1078)
2.2811***
(0.7337)
Investment knowledge
1.8387***
(0.4252)
1.0812
(0.0942)
1.1280
(0.2629)
University degree
0.4103
(0.2275)
1.4316
(0.3346)
4.6472*
(3.8557)
Other control variables YES
N 764
Pseudo R squared 0.0916
17. ASN Bank and Triodos Bank
• The only two exclusively socially responsible
banks in the Netherlands
• Offer a wide variety of SRI mutual funds and
savings accounts
2-10-2013 Social Identification and Investment Decisions 17
18. Social Identification
• Individuals often identify with a group or
company that shares their personal values
– Tajfel and Turner (1979)
– Mael and Ashfort (1992)
– Akerlof and Kranton (2000, 2005)
• How does social identification affect investment
decisions?
2-10-2013 Social Identification and Investment Decisions 18
19. Measure of Social Identification
• I can identify myself well with socially responsible
investments (1-7)
• I feel good about owning socially responsible
mutual funds
• Socially responsible investments fit me well
• I feel attached to socially responsible investments
• Scale adapted from Mael and Ashfort (1992) and
Homburg, Wieseke and Hoyer (2009)
Cronbach’s alpha = 0.916
2-10-2013 Social Identification and Investment Decisions 19
20. Main Results
2-10-2013 Social Identification and Investment Decisions 20
Percentage
at the Bank
Amount Invested
at the Bank (log)
No of Conventional Investments
Accounts (non-SRI)
No of Savings
Accounts
Social Identification 4.829***
[0.819]
0.635***
[0.07]
-0.128***
[0.017]
-0.177***
[0.022]
Lower Expect Returns SRI -2.98
[1.975]
-0.424***
[0.157]
0.004
[0.047]
0.083
[0.064]
Higher Expect Returns SRI 0.181
[1.908]
-0.02
[0.142]
-0.039
[0.043]
-0.134**
[0.056]
Not Know Return Expect -9.691
[6.055]
-0.097
[0.616]
0.008
[0.099]
0.149
[0.166]
Lower Perceived Risk SRI 3.314*
[1.702]
0.083
[0.138]
0.047
[0.039]
-0.015
[0.052]
Higher Perceived Risk SRI 1.866
[2.912]
0.156
[0.239]
0.02
[0.063]
0.027
[0.087]
Not Know Risk Perceptions 7.851
[6.668]
-0.418
[0.762]
-0.054
[0.107]
-0.157
[0.175]
Other Control Variables Yes Yes Yes Yes
Adjusted-R2 0.095 0.272 0.175 0.168
n obs. 1,157 895 2,763 2,766
21. Main Results
• Social identification
important driver of allocations to
socially responsible banks
investment in familiar companies,
employer stocks, etc
• Expected returns and perceived risk on SRI
small influence on allocations to
socially responsible banks
2-10-2013 Social Identification and Investment Decisions 21
23. Intrinsic social preferences investments in SRI mutual
funds without tax benefits
Conclusion
Paul Smeets Social Preferences and Portfolio Choice 23
1
Tax incentives crowd out the intrinsic motivation of
socially responsible investors
2
Social identification larger allocations to socially
responsible banks
3
24. Implications for Practice
Paul Smeets Social Preferences and Portfolio Choice 24
1
2
3 Government gives tax incentives:
Changes the clientele for SRI
Reducing tax incentives likely scares away selfish investors
Carefully consider whether to stress financial returns or
social responsibility in advertisements/when giving
advice
Many investors care about more than risk and return
long run effects on asset prices
25. Which type of investor are you?
More information
www.paulsmeets.eu
Paul Smeets Social Preferences and Portfolio Choice 25
