Optimal portfolio of European sustainable investment funds based on mean-variance optimization model

Abstract

Cada vez resulta más imperativo para los inversores reconocer qué fondos de inversión se ajustan a los criterios ESG, así como seleccionar aquel o aquellos que logran el equilibrio adecuado entre riesgo y rentabilidad, considerando estos criterios. Por eso esta tesis se centra en la construcción de una cartera sostenible que optimiza riesgo y rentabilidad mediante el método de optimización de media-varianza. Los resultados demuestran que la composición óptima puede lograr una alta rentabilidad, manteniendo el riesgo por debajo del riesgo medio. La presencia de correlaciones muy positivas, especialmente las derivadas de las estrategias de asignación de renta variable "large-growth" y "large-blend", lo que demuestra que invertir en sostenibilidad implica invertir a largo plazo, son suficientes para crear una combinación óptima, pero no para reducir el riesgo en una gran proporción. Sin embargo, la cartera ofrece una diversificación que reparte el riesgo entre sectores y países, reduciendo el impacto del rendimiento más bajo que trae aparejado invertir en un solo fondo. Esta cartera ofrece la mejor rentabilidad ajustada al riesgo de cualquier cartera compuesta por los fondos sostenibles europeos de la muestra. Además, esta tesis llega a la conclusión de que los gestores de fondos deberían buscar otras alternativas para ganar diferenciación en las estrategias de asignación de renta variable, mientras que los responsables políticos europeos deben asegurarse de que la normativa en el ámbito sostenible no restringa la diversificación de los fondos sostenibles europeos.

It is becoming increasingly imperative for investors to recognise which investment funds are aligned with ESG criteria, as well as to select the one(s) that strike the right balance between risk and return, considering ESG features. Therefore, this thesis focuses on the construction of a sustainable portfolio that optimizes risk and return by means of the mean-variance optimization method. The findings demonstrate that the optimal composition can achieve a high return, while maintaining the risk below the average risk of all European sustainable funds of the sample. The presence of highly positive correlations, especially arising from large-growth and large-blend equity allocation strategies, demonstrating that investing in sustainability implies investing in the long-term, are sufficient to create an optimal mix, but not to reduce risk by a large proportion. However, the portfolio offers diversification that spreads risk across sectors and countries, reducing the impact of underperformance in any single fund. This portfolio provides the best risk-adjusted return of any portfolio consisting of the sample's European sustainable funds. Any type of investor can invest in it in different proportions, when combined with a risk-free asset, to obtain a volatility and return in accordance with the risk aversion. Apart from that, fund managers should seek further alternatives to gain differentiation in equity allocation strategies, while European policymakers must ensure that the regulations in the sustainable field do not re-strict the diversification of European sustainable funds.

It is becoming increasingly imperative for investors to recognise which investment funds are aligned with ESG criteria, as well as to select the one(s) that strike the right balance between risk and return, considering ESG features. Therefore, this thesis focuses on the construction of a sustainable portfolio that optimizes risk and return by means of the mean-variance optimization method. The findings demonstrate that the optimal composition can achieve a high return, while maintaining the risk below the average risk of all European sustainable funds of the sample. The presence of highly positive correlations, especially arising from large-growth and large-blend equity allocation strategies, demonstrating that investing in sustainability implies investing in the long-term, are sufficient to create an optimal mix, but not to reduce risk by a large proportion. However, the portfolio offers diversification that spreads risk across sectors and countries, reducing the impact of underperformance in any single fund. This portfolio provides the best risk-adjusted return of any portfolio consisting of the sample's European sustainable funds. Any type of investor can invest in it in different proportions, when combined with a risk-free asset, to obtain a volatility and return in accordance with the risk aversion. Apart from that, fund managers should seek further alternatives to gain differentiation in equity allocation strategies, while European policymakers must ensure that the regulations in the sustainable field do not re-strict the diversification of European sustainable funds.