Active versus passive investing in sustainable and conventional funds: A comparison of U.S. sustainable and conventional equity funds in terms of active and passive management

Abstract

This thesis examines whether it is possible to create an excess return in equity funds by following an active management strategy rather than a passive strategy. In addition, we compare sustainable and conventional funds in relation to both management styles. To study whether they create an excess return in relation to the market, we use the CAPM model and multi-factor models that control for various risk factors. To expand our understanding of the funds’ performance and behaviour, we analyse a sub-sample period that excludes the recession period of 2020. First, the regression results conclude that the majority of the funds underperform in relation to the market. The significant alpha values are exclusively negative. The passive funds perform better than their active counterparties, and the sustainable funds do better than the conventional funds. Despite these results, the differences are not statistically significant, and we can therefore not come to a clear conclusion. Second, when examining the sub-sample period, we find that the funds still underperform in relation to the market, but there is a positive change in the alpha values for all the funds. The findings imply that sustainable funds tend to outperform their conventional fund peers during the crisis period. Hence conventional funds are more sensitive and more exposed to market fluctuations during crises. Our findings indicate that only a few American ETFs are skilled enough to generate abnormal returns compared to the market. However, the majority generate negative alpha values during both the entire time and sub-sample periods, suggesting that American markets are somewhat efficient.