The Impact of Social Screening on Portfolio Performance at the Nairobi Securities Exchange
Abstract
This study sought to determine whether applying social screens to a portfolio would
affect the portfolio's performance. Two portfolios were formulated each comprised of 20
firms. One comprised of the NSE 20-share index firms and the second comprised 20
firms that passed the negative screening criterion that was employed. The causal research
design approach was used. The target population was all the 58 firms listed at the NSE.
The risk and risk-free returns were computed using the Sharpe indices approach. Monthly
and annual returns were calculated for years 2007 - 2011. The standard deviation and
beta were the chosen risk measures. T-tests were used to determine whether there was
significant difference between the risk and returns of the two portfolios. In terms of
monthly and annual raw returns, the socially screened portfolio was seen to outperform
the conventional portfolio. The conventional portfolio had a higher average Sharpe ratio
than the socially screened portfolio hence it outperformed the socially screened portfolio
when compared in terms of returns and total risk. The findings of this study revealed
mixed results in the portfolio performance. The socially screened portfolio outperformed
the conventional portfolio in relation to total risk but in relation to systematic risk and
performance, the conventional portfolio outperformed the socially screened portfolio.
The results showed that social screening has no significant impact in influencing
investors' decision on which firm to invest in or not. The study recommends formulation
of an additional index to capture the periodic performance of socially screened top-20
companies; and utilization of alternate performance measures such as the Treynor and
Jensen portfolio performance measures to reinforce the findings of the present study.
Publisher
University of Nairobi