Performance of SFDR Article 6, 8 & 9 passive equity mutual funds relative to their benchmarks during COVID-19

Abstract

Over the recent years the sustainability trend has picked up exponentially with increasing urgency due to growing number of catastrophes and international conflicts, gaining attention from households to governments and spilling to the global financial markets. In addition to this also passive investing has been growing as a second trend for a while in the fund industry, starting to turn the popularity and the market split between active and passive fund management slowly in favor of the latter, especially in the sustainable fund context. The core purpose of this thesis is to cater for the pressing sustainability demand in the relevant fund setting and to contribute to the less researched passive mutual fund performance literature during the post-shock pandemic period. The aim is to test whether passive equity mutual funds with varying levels of sustainability as per the SFDR article classifications of 6, 8 and 9 achieve differing relative performance during the COVID-19 pandemic. The relative performance measurement used in this thesis is the information ratio (IR), which includes one of the single most used metrics in previous passive fund literature, the tracking error (TE). It is concluded that out of the three articles, the least sustainable article 6 achieves the most desirable TE on average. This is analyzed through utilizing both monthly and weekly return data frequencies. Also, the variance of the TE is observed but no meaningful differences is found across articles. When the used benchmarks are more strictly controlled, the conclusion shifts in favor of the most sustainable article 9. Hence a robustness test is conducted on the benchmarks to have a certain required minimum level of fit to be included in the final testing to assure the validity of the test results. Looking at the tracking difference (TD) and finally the IR measurement for the sample funds, article 6 manages to attain the best relative performance, with article 9 second and article 8 last. Furthermore, through testing the observed relative performance differences this thesis concludes that these findings are insignificant. Additionally testing for significant differences in the TE and TD components, between replication methods and performance during different subperiods, significant differences are found in the average TEs between articles 6 and 9 and in achieved performance during the subperiods between all three articles, with higher significance closer to the beginning of the pandemic in the spring of 2020. As per this thesis’ findings, passive investors do not currently seem to suffer nor benefit significantly from choosing the more sustainable passive mutual funds during these volatile market periods. But an investor choosing article 9 passive mutual fund might be more resilient to market downturns closer to the shock itself, as demonstrated. Furthermore, as a passive investor does not seem to suffer from owning more sustainable passive equity mutual funds now, the sustainable investors are likely to reap the benefits in the long run as the economy is clearly already experiencing a green transition. Hence the ones not already implementing ESG into their investing might be worse off in the future with the regulatory changes and market developments in favor of higher sustainability.