Swedroe: When Vice Outperforms Virtue

March 03, 2017

TMB And AMS
The long side of the TMB factor is a value-weighted portfolio of stocks from firms that rank in the top third of companies sorted by industry-adjusted net scores in at least two of their five social responsibility criteria and not in the bottom third by any criterion.

The short side of the TMB factor is a value-weighted portfolio of stocks from firms ranked in the bottom third of companies sorted by industry-adjusted net scores in at least two of the five social responsibility criteria and not in the top third by any criterion.

Similarly, the long side of the AMS factor is a value-weighted portfolio of the accepted companies’ stocks, and its short side is a value-weighted portfolio of shunned companies' stocks. The authors constructed the TMB and AMS portfolios as of the end of each year. Following is a summary of their findings:

  • On average, the returns of the top social responsibility stocks exceeded those of the bottom social responsibility stocks. The TMB factor's mean annualized return was 2.8%.
  • On average, the returns of accepted stocks were lower than the returns of shunned stocks. The AMS factor’s mean annualized return was a negative 1.7%.
  • There was virtually no correlation of returns between the two factors.
  • The six-factor alpha for the TMB factor was 0.55%, implying that social responsibility improves performance when it’s in the form of high TMB. The incremental alpha due to high TMB was generally statistically significant.
  • The six-factor alpha for the AMS factor was -0.36%, implying that social responsibility detracts from performance when it’s in the form of high AMS. The negative alpha could be viewed as the price of avoiding “sin” stocks. However, the AMS score was not statistically significant.
  • The difference in alpha is most pronounced when comparing funds with high TMB and low AMS betas to funds with low TMB and high AMS betas. The first group has high alpha and the second has low alpha. The difference in annualized alphas was a statistically significant 0.91%.

Statman and Glushkov concluded: “A lack of statistically significant differences between the performances of socially responsible and conventional mutual funds is likely the outcome of socially responsible investors’ preference for stocks of companies with high TMB and high AMS. The first preference adds to their performance, whereas the second detracts from it, such that the sum of the two is small. A proper analysis of socially responsible mutual funds’ performance requires separate accounting for the effects of TMB and AMS on performance.”

Their finding that the AMS factor produces negative alpha is consistent with both the theory I mentioned previously and prior research.

 

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