Jina Penn-Tracy, co-founder of Centered Wealth, discusses her new research suggesting that socially responsible investing can improve investor returns by changing investor behavior.

Morningstar’s 2018 "Mind the Gap" study, which measures the performance of the average dollar invested in a fund and estimates the effect investor behavior had on investment outcomes, reports a 0.26 percent gap between U.S. open-end funds’ returns and investor returns. The good news is that this is the lowest performance gap in a decade. But the gap widens in more volatile times—the 2014 "Mind the Gap” reports a 2.49 percent difference for the 10-year period ending with 2013. This means investors are missing out on additional savings in their retirement portfolios, a cause for concern for financial advisors.

So can a focus on sustainable and impact investing make a difference in closing this performance gap? Jina Penn-Tracy, co-founder of Centered Wealth in Minneapolis, says yes, and has the data to back it up: “In our latest study we find it makes a remarkable difference in returns: over 10 years the largest difference we see is between a traditional value fund investor and a socially responsible investor, with an improvement up to 1.23 percent in the return seen by the socially responsible investor—and this increase is due to investor behavior.”

I met Penn-Tracy two years ago at a sustainable and impact investing conference in New York when she was just starting the research project. I was intrigued because the study was using behavioral economics to look at the performance gap. Now that the study results are in, I asked Penn-Tracy to share some of the key findings and how they can help financial advisors close the gap for their clients.

The Study

Penn-Tracy’s focus on sustainable and impact investing began more than 15 years ago after a career in traditional financial services. In 2017, with co-founder Stuart Valentine, she started Centered Wealth in Minneapolis. Her interest in the performance gap came during the 2008 financial crisis when she noticed that her clients weren’t reacting the same way as those of her colleagues. “My clients tended to stay invested,” says Penn-Tracy. “We rebalanced, but they were willing to stay the course throughout the decline better than the average investor.”

Her clients’ behavior coupled with research from Morningstar on the performance gap led her to ask the questions: “Do people invested in sustainable, impact or ESG strategies behave differently than traditional investors? And does that difference affect returns?”

To answer those questions Penn-Tracy partnered with Derek Horstmeyer, assistant professor of finance for the School of Business, George Mason University, to crunch the numbers. Horstmeyer used investor data from Morningstar over a 10-year period (2007-2017). He compared the Return Gap on 864 mutual funds with stated SRI or impact focus to the Morningstar data set on traditional funds.

The Performance Gap: It’s All About Timing

As Penn-Tracy suspected when she asked her research questions, the study shows that the difference in returns between the two groups of investors came from timing: Sustainable and impact investors tended to hold steady during market fluctuations.

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