Abstract
We examine fund ratings of socially responsible investing (SRI) equity funds in emerging and developed markets by validating the assumptions of the equally weighted U.S. News mutual fund scorecard and the causal interrelations among its rating agencies—Morningstar, Lipper, Zacks, CFRA and TheStreet—for improvement priorities. In so doing, we apply a novel interdisciplinary methodology including cluster analysis, classification analysis, partial least squares structural equation modeling and importance performance analysis. We find evidence against the U.S. News assumptions, as individual rating agencies have unequal effects and exhibit the causal relationships among one another. We suggest emerging (developed) market fund managers allocate their resources—which are often limited—with the first priority to improving fund ratings of CFRA (Zacks), followed by Zacks (CFRA), TheStreet (Lipper), Lipper (Morningstar) and Morningstar (TheStreet). The positive causal relationships among rating agencies indicates that investors consider multiple rating agencies of the U.S. News for investment decisions, rather than simply use any single one of these rating agencies or their equally weighted aggregation. Interestingly, we find disagreement among rating agencies, with Zack (TheStreet) displaying rating deflation for emerging (developed) market funds. Disagreement among rating agencies may increase the monitoring effort of fund managers who usually “shop” for additional ratings in the hope of maximizing their average ratings.
Highlights
Responsible investing (SRI) is any general investing strategy that considers traditional measures of risk and return, but environmental, social and governance (ESG) factors as well
Summary statistics for fund ratings of emerging and developed market fund categories are presented in Panel A of Table 1
The average fund ratings are around 60 points or 3 notches (20 points = 1 notch) for all rating agencies, with the exception of Zacks (34.59 points) for emerging market funds and TheStreet (36.49 points) for developed market funds. This implies that Zacks (TheStreet) on average gives ratings to emerging market funds around one notch (20 points) lower than any other agency. Compared between both fund categories, emerging market funds tend to receive higher mean ratings than developed market funds for all rating agencies except for Zacks whose emerging market funds receive around 1.5 notches
Summary
Responsible investing (SRI) is any general investing strategy that considers traditional measures of risk and return, but environmental, social and governance (ESG) factors as well. SRI investors typically attempt to obtain financial returns whilst taking aspects of firms’ ESG records into account. SRI mutual funds have become increasingly popular and attracted ever-growing amount of fund flows over recent years. To select SRI mutual funds and earn profits on investments, many investors rely on fund ratings as their main signal for investment. Fund ratings help investors conveniently choose mutual funds suitable for investment and keep fund managers in check. To attract fund inflows from potential investors, fund managers attempt to climb the fund rankings and use social media to trumpet their mutual funds that have received the top-ranked ratings [1,2]. Though much of information used for fund ratings is from publicly available data, knowledge of fund ratings is frequently obscured by differences in conceptualization of fund ratings across several rating agencies [3]
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