Socially conscious investment funds and home country institutions

Abstract

We delve into performance and riskiness of socially conscious (SC) investment funds while considering the salient role of home country institutions as proxied by freedom indicators – namely, economic freedom with its five underlying component areas – in addition to the personal and overall human freedom of countries/regions as related to the home base currency of those funds. From a global perspective and including nonlinear considerations, evidence shows that advances in economic freedom and its constituent areas, as well as differences in personal freedom, have a consistent sizeable positive impact on the performance of SC funds but also a slight positive effect on their riskiness, attested to by various robustness tests. We articulate the added financial benefits to be gained when both socially responsible features and freedom infrastructure are present, confirming that freedom indicators matter. There is subtle evidence that changes in legal structure and security of property rights, as well as sound money, show a statistically and economically significant positive effect on performance across various specifications. In accord with widespread support for the importance of private property and the rule of law, this study shows that without sound money, a functioning legal system, and entrenched property rights, the performance of SC funds is stalled.