Dimson, Marsh and Staunton found 14 countries that posted a poor score, 12 that were acceptable, 12 that were good and 11 with excellent scores. Post-2000 returns for the last three groups were between 5.3% and 7.7%. In contrast, the markets with poor control of corruption had an average return of 11.0%.
Interestingly, realized returns were higher for equity investments in jurisdictions that were more likely to be characterized by corrupt behaviors. As the authors note, the time period is short and the result might just be a lucky outcome.
On the other hand, it’s also logical to consider that investors will price for corruption risk and demand a premium for taking it. But it may also be a result of the same exclusionary factors found with sin stocks (investors boycott countries with high corruption scores, driving prices down, raising expected returns).
Socially Responsible Factors
Meir Statman and Denys Glushkov contributed to the literature on SRI with their study, “Classifying and Measuring the Performance of Socially Responsible Mutual Funds,” which was published in the Winter 2016 issue of The Journal of Portfolio Management. Their contribution was to add two social responsibility factors to the commonly used four-factor model (beta, size, value and momentum).
The first social responsibility factor they propose is the top-minus-bottom factor (TMB), consisting of employee and customer relations, environmental protection, diversity and products. The second factor is the accepted-minus-shunned factor (AMS), consisting of the difference between the returns of stocks of companies commonly accepted by socially responsible investors and the returns of stocks of companies they commonly shun. Shunned stocks included those of companies in the alcohol, tobacco, gambling, firearms, military and nuclear industries.
Statman and Glushkov built their social responsibility factors with data from the MSCI ESG KLD STATS database and note: “The two social responsibility factor betas capture well the social responsibility features of indices and mutual funds. For example, TMB and AMS betas are higher in the socially responsible KLD 400 Index than in the conventional S&P 500 Index.”
The authors’ study covered the period January 1992 (when data first becomes available) through June 2012. To construct their two social responsibility factors, they calculated each company’s TMB-related score (total strengths minus total concerns) at the end of each year based on their set of five social responsibility criteria (employee relations, community relations, environmental protection, diversity and products) and its AMS-related score, based on whether it is “shunned” or accepted. They then matched the year-end scores with returns in the subsequent 12 months.