ID:JJF00309

Title:The influence of oversea investors on Japanese socially conscious
funds

Author:Naoya Takezawa

Pages:

47-65

Is Part Of:

Japan Journal of FinanceVol. 36 / No. 1.2
Dec. 2016

Publisher

Japan Finance Association

ISSN:

2186-3792

経営財務研究第 36 巻第 1・2 合併号■大会特集論文

The Influence of Oversea Investors on Japanese Socially
Conscious Funds ＊Naoya TAKEZAWA（NANZAN University）
Abstract

The purpose of this paper is to indirectly investigate the risk attributes of Socially Conscious
Funds that result from oversea investors in the Japanese market during the early 2000’
s. Therisk attributes are proxied with benchmarks such as the domestic market index and an overseas
apparel & luxury goods index. The apparel & luxury goods index is chosen as the benchmark
for speculative overseas investors because luxury consumption is known to have a correlation
with the investment activity of wealthy individuals with a high fraction of equity wealth. Suchoverseas investors tend to possess a relatively low level of risk aversion, and this paper identiﬁes
the impact of such speculative overseas investors (as approximated by the apparel & luxury goods
index) in comparison to Socially Conscious Funds investors (who are argued to pursue long term
goals with a buy-and-hold strategies). A rolling regression analysis also reveals the inﬂuence ofspeculative investors on various industries. A clear breakpoint is found around the ﬁnancial crisisof 2008, but the change in the influence of Apparel & Luxury goods index differs between theindustrial sectors.
Keyword：Socially Conscious Funds; Luxury Consumption; Fund Style Analysis, Japan, Risk*

The author appreciates Professor Takehara, Ibbotson Associates Japan,Inc. and the Waseda
Finance Research Center for providing access to the Morningstar Database. The author would
like to thank Professor Bremer, Professor Nagata (discussant) and the participants of the 2016
Japanese Finanacial Association annual meeting, and the anonymous referees for their comments
which has significantly improved the manuscript from its initial draft. However, the author is
responsible for all remaining errors. The research has been partially supported by the JSPS
KAKENHI Grants-in-Aid for Scientiﬁc Research (C) 26380410. The author acknowledges ﬁnancial
support from the Health Labour Sciences Research Grant(Research on Policy Planning and Evaluation). The author has no relevant or material ﬁnancial
interest that relates to the research described in this paper.

47

経営財務研究第 36 巻第 1・2 合併号

１

Introduction

This paper examines the risk return characteristics of the Japanese equity market by observingsocially conscious fund（SC fund）returns and U.S. market returns. The influence of overseas
investors increased rapidly during the early 2000ʼs, but suddenly decreased after the ﬁnancial crisis
that started in 2008. The speculative investments of such overseas investors are motivated by shortterm gains, as opposed to the aim of many SC funds that invest in ﬁrms that fulﬁll their socially
responsibility to the ﬁrmsʼ various stakeholders and seek sustainable long term gains. The analysisof the two types of investors becomes important in assessing the long term ﬁnancial risk. If thetwo types of investors truly do behave in these ways, it is natural to conjecture that the returns
generated by these investors can be decomposed into two distinct factors. Even though I only
consider two factors that may not span the entire market, it is still important to identify factorsthat may represent speculative and sustainable investment behaviors. The restrictions imposedon socially conscious investment forces fund managers to allocate funds in a smaller universe of
assets, which may consequentially yield a portfolio that is less efﬁcient in comparison to portfolios
comprised of a broader class of assets. If the goal of a socially conscious investment policy is not toachieve the most efﬁcient portfolio, what are SC funds pursuing? Such an investment policy may bejustiﬁed if the returns earned from SC funds are generated by “sustainable” ﬁrm activities that are
not affected by speculative investments chasing short term gains. This reasoning is in line with theﬁnding of Cox et al.（2004）, who claims that social performance accrues in the long run.
Bauer et al.（2005）show that socially conscious funds do not out/underperform conventional
mutual funds and El Ghoul et al.（2011）show that the cost of capital for ﬁrms with higher CSR
scores is lower. At a glance, it appears as if there is no difference（nor advantage）of investing ineither conventional or socially conscious mutual funds in the risk/return framework. This paper
shows that SC funds may not be superior, nor efficient in their financial performance, but still
have a role（at least in the Japanese equity market）in the sense that they reveal a priced factor
that is unaffected by speculative overseas investment. This conjecture is veriﬁed by decomposing
the stochastic factors of SC funds and the speculative investments of overseas investors（asapproximated by the U.S. marketʼs luxury sector）.
Shirasu（2011）has shown that SRI（Socially Responsible Investment）funds performed better
than conventional mutual funds, which tended to be better performing large ﬁrms. It is tempting
to claim that the ﬁrms selected by SC funds tend to be more “conservative,” i.e. possess a higher
risk aversion against speculative investments in the standard risk/return framework. This seems
to indicate that SC funds are simply focusing on “low beta” ﬁrms as opposed to “socially conscious”
ﬁrms. This issue is answered in subsequent analysis of the inter-temporal change in the relation
between the Japanese market, SC funds and the U.S. apparel & luxury goods index via a styleanalysis as proposed by Sharpe（1992）.
The analysis provides evidence that SC fund returns are less dependent on the apparel & luxury
48

経営財務研究第 36 巻第 1・2 合併号

good subsector index（as a proxy for luxury consumption returns）in comparison to the overallmarket index return. Because this apparel & luxury goods index is a SP500 subsector index, theprice appreciations/depreciations are very likely to be associated with the equity ownership of theJapanese equity market due to the high correlation between the U.S. and Japanese equity market.
The ownership proportion by overseas investors（U.S. investors are the most dominant）has
Figure 1 Oversea Investment Flow to the Tokyo Stock Exchange
Value

18,000,000,000
16,000,000,000
14,000,000,000
12,000,000,000
10,000,000,000

North America

8,000,000,000

Europe6,000,000,000

Asia

4,000,000,000
2,000,000,000

20
05
/0
1/
01
20
05
/0
7/
01
20
06
/0
1/
01
20
06
/0
7/
01
20
07
/0
1/
01
20
07
/0
7/
01
20
08
/0
1/
01
20
08
/0
7/
01
20
09
/0
1/
01
20
09
/0
7/
01
20
10
/0
1/
01
20
10
/0
7/
01

0

Figure 2 OrthonormalLoadings biplots apparel & luxury goods index （LUXURY）,
SC funds（F2̲RET, F4̲RET, F5̲RET, F6̲RET, F9̲RET, F12̲RET, F14̲RET）is on the left.
The biplot of the apparel & luxury goods index（LUXURY）, the TOPIX index（T23）and its 33
sectors（T1 to T22 and T24 toT34）is on the right
12

20
15

8

Component 2（6.5%）

Component 2（8.7%）

10
4

0

-4

5
0
-5
-10

-8

-15

-12
-12

-8

-4

0

4

Component 1（83.4%）

8

12

-20

-20

-10

0

10

12

Component 1（60.8%）49

経営財務研究第 36 巻第 1・2 合併号

increased significantly during the early 2000ʼs followed by a rapid drop in the summer of 2008
（i.e. the financial crisis）as observed in Figure 1. If overseas speculative investment is wellapproximated by the apparel & luxury goods index, then principal component analysis（Figure
2, left）supports the conjecture that SC fund managers are successful in mimicking the market
component that is not linked to luxury consumption. Under this assumption, the SC funds appear
to successfully ﬁlter out the impact of short term speculative investments funded by excess wealthgenerated by equity market shocks. One point that should be noted is that this overseas speculative
investment component that is ﬁltered out by SC fund managers is correlated to the overall equity
market（as captured by the TOPIX representing 33 sectors）as depicted in Figure 2（right）. Figure
3 is the orthonormal biplot of the apparel & luxury goods index and the TOPIX composite index（T23）. Similar to the case of the SC funds, the two factors are nearly orthogonal to each other.
However, the two factors are both correlated with the ﬁrst component, and have offsetting impacts
on the second component. Because most of the SC funds are passive funds that are benchmarked
to the TOPIX, it is not surprising that the orthogonal property remains in the analysis of Figure 2.
The difference lies in the fact that the SC funds are successful in reducing their correlation withthe apparel & luxury goods index effect. Because it is hard to believe that SC fund managers are
trading against the apparel & luxury goods index, it is more likely that they are trading away
the volatility imposed by speculative overseas investment activity. The biplot of the TOPIX index（labeled T23）and its 33 sectors（labeled T1 to T22 and T24 to T34）differ to the SC fund factor
biplot in Figure 2（left and right respectively）. Table 2 Panel C tells us that most of the TOPIX
sectors are all positively correlated to the apparel & luxury goods index in the first principal
component, but differ in the second principal component. The electric power & gas sector（T7）and Air Transport（T1）are only marginally correlated to the apparel & luxury goods index, which
imply that such sectors may be the sectors favored by the SC funds.
Thus, it can be concluded that regardless of the performance and/or the risk-return
characteristics of the SC funds, these funds play a role in the Japanese market by providing abenchmark of returns that are unaffected by speculative short term investors.

1.1

Literature

Insurance effect of SC funds
Godfrey et al.（2005）find that Corporate Social Responsibility（CSR）provides an insurancelike property to stock market value at the ﬁrm speciﬁc level against negative events（idiosyncratic
shocks that are not at the industry or economy wide level）. Similarly, Peloza（2006）argues that
CSR can potentially serve as insurance for corporate ﬁnancial performance（CFP）by mitigating theeffects from negative events that could harm the CFP of ﬁrms. This situation is likely to be observed
as a win-win situation such as when CFP and CSR are “complimentary”（rather than “conﬂicting”）
and simultaneously when the time horizon of managers are “short-term”（rather than “long-term”）.
This suggests that SC funds are more resilient to adverse movements in the ﬁnancial market. If
50

経営財務研究第 36 巻第 1・2 合併号

investing in SC funds signals ﬁnancial gains（i.e. provide a win-win relationship between CFP and
CSR）that are immune to adverse movements due to ﬁnancial turmoil, ﬁrms that are selected by
SC fund managers are expected to reduce the possibility that CSR activities will be in “conﬂict”
with CFP. With CSR insurance on hand, investors will be more likely to keep their money in the SC
funds especially in the case of ﬁnancial turmoil. But, this is only if the SC fund managers are really
successful in screening/selecting firms whose activities are sustainable. Under this hypothesis,
investors with long term goals will attempt to allocate their investment in SC funds to achievesustainable ﬁnancial gains instead of liquidating their investment to receive immediate gains. This
type of investor utility cannot be generated by short term equity gains because the excess gainfrom short-term investments is difﬁcult to maintain in volatile equity markets, and is thus often
liquidated quickly to capture immediate gains.
If the investorʼs wealth is generated by short term income gains, it is very tempting for suchan investor to liquidate her position immediately. Even if there is no consumption opportunity tocapture with the wealth shock, the investor cannot achieve a higher utility level by investing in SC
funds in comparison to the liquidation of wealth shock investment. Thus, such investors will seek
higher gains that match the utility gains achieved by the immediate consumption of excess wealth.
The two types of investors mentioned above, possess distinct characteristics in the sense that theformer investor will concentrate her assets in positions that provide long term sustainable gains,while the latter will pursue risky opportunities that promise high marginal gains that supersede
the marginal gains obtained from immediately liquidating her investments. The two types ofinvestors are complementary in their observed roles in ﬁnancial markets. The ﬁrst type of investor
will be more passive in her investment strategy, thus holding a portfolio with a lower risk return
proﬁle, and maintaining a buy and hold strategy due to the sustainability of the assets on hand.
The second type of investor will seek immediate ﬁnancial gains and quickly withdraw her assets
from any opportunity that seems to generate losses（and even gains that are inferior to the utility
obtained from the immediate consumption of wealth）. In a simpliﬁed world, this type of investor
will either consume luxury goods to obtain high marginal utility or invest in risky ﬁnancial assetsthat promise high gains in the short term that exceed the marginal utility gained by consuming
luxury goods. The two types of investment behavior will be examined later by approximating theirwealth with SC funds and apparel & luxury goods index returns.
Corporate Behavior and the Financial Performance of the SC funds
Although there are various motivations for corporations to be socially responsible, this paper
focuses on the inﬂuence of corporate performance based on the evaluation received from SC fundmanagers and speculative overseas investors. It is important to note that the aim is not to directly
associate the socially conscious behavior of corporations to their ﬁnancial performance, but rather
shed light on the selection criterion of social conscious funds that screen the socially conscious
behavior of firms that they consider for investment. The specific question of interest is whether
SC funds are successful in screening out ﬁrms that are likely to be targets of speculative overseas
51

経営財務研究第 36 巻第 1・2 合併号

investors. Because SC fund performance is highly correlated with the market, principal component
analysis is an effective tool to analyze these fundʼs characteristics. So, this task is achieved by
explicitly decomposing the movements of SC fund returns and speculative investment return
proxies to identify the stochastic components which are common among the SC funds but different
from speculative investment risk factors.
Margarita（2004）investigates ﬁnancial performance at the individual ﬁrm level. This is difﬁcult
to investigate because individual stock returns are comprised of various ﬁrm speciﬁc factors thatcause statistical problems in identifying the direct impact of being socially responsible. Some
evidence of overseas investors is found at the firm level. Suto and Takehara（2012）show that
foreign ownership structure is positively associated with socially responsible performance, whenrunning a two stage least square regression with an originally constructed index after controllingfor corporate characteristics. Papers such as Benson and Humphrey（2008）and two papers byRenneboog, Horst and Zhan（2008a and 2008b）focus on the performance of socially responsible
investment funds. They partially circumvent the firm specific effects problem and a similar
approach is used in this paper as well.
This paper takes the approach of extracting the impact of CSR activities by focusing on the
SC fund level（that are aggregate benchmarks of individual firm level activity）; this allows thedecomposition of the stochastic factors generated by SC funds and speculative overseas investors（that are assumed to consume luxury goods）. These two factors may not span the risk of the entire
market, but observing the relative inﬂuence of the two factors provides insights on how SC funds
are managed and what type of investors are attracted to such funds. Moreover, this analysis reveals
one potential role for SC funds in the ﬁnancial market, i.e. providing a benchmark for sustainable
long term investment. Because the sample period contains the ﬁnancial crisis of September 20081,
the analysis leads us to the conclusion that SC fund managers are successful in filtering out
investments that are short-term and speculative（as is approximated by individuals who consume/invest in the apparel & luxury items section of the market）.
The Luxury Consumption Hypothesis and The Equity premium
The luxury consumption hypothesis indicates that there is a positive relation between luxury
consumption of excess wealth generated by equity market shocks. Ait-Sahali, Yogo, and Parker（2004）construct a model that provides reasonable estimates of risk aversion under the hypothesisthat the equity premium is dominated by investors who possess low levels of risk aversion. Suchinvestors tend to consume their excess wealth with luxury goods that provide marginal utilities ata very high level. One example was given in Hiraki, Ito, Speith, Takezawa（2009）where ﬁne art
was considered as to be a luxury good. This paper is in line with the previous argument in the sense

152

Schnietz and Epstein（2005）investigate the value of corporate social responsibility during aﬁnancial crisis.

経営財務研究第 36 巻第 1・2 合併号

Figure 3 Orhtonormal Loading Biplots for apparel & luxury goods index and the TOPIX composite index
（T23）

6

T23

Component 2（19.7%）

4

2

05M09
08M04

08M10

0

08M09
-2

08M08

-4

LUXYEN

-6
-6

-4

-2

0

2

4

6

Component 1（80.3%）

that wealthy individuals（who simultaneously consume luxury goods）are the dominant investors
in the stock market, but differ in the sense that the dominant investors are further decomposed into
two types when investing in the overseas market. The ﬁrst type of investor is assumed to invest/
divest in overseas markets when the investorʼs home country equity market receives positive/
negative equity shocks. This investor is wealthy and is known to allocate a higher fraction of
wealth to the equity market, which generates wealth shocks in conjunction with the equity market
ﬂuctuations. The quick cash generated by equity market shocks is quickly consumed because of thehigh marginal utility appreciated by this type of investor. Consequently, this type of investor will
aggressively pursue returns.（Because the wealth generated by these equity holders is conspicuous,
I assume that this type of investor will only invest overseas when the investor receives positive
income shocks generated in her home country market.）The second type of investor is a long term
investor that maintains a buy and hold strategy.

1.2

Model

The proposed model considers two types of investors that partially represent the overall
equity market. The first would be approximated by the returns of SC funds, and the second isapproximated by the apparel & luxury goods index（a sub-index of the SP500 composite）, where thelater type of investor is more susceptible to wealth shocks generated by equity market ﬂuctuations
due to their higher exposure.

53

経営財務研究第 36 巻第 1・2 合併号

Figure 4 Orhtonormal Loading Biplots for apparel & luxury goods index and the TOPIX composite index
（T23）

10.0
SP108YEN

7.5

SP77YEN
SP107YEN

SP105YEN

SP15YEN

5.0
Component 2（25.8%）

SP109YEN
2.5

F2̲RET
F12̲RET
F14̲RETF5̲RET
F4̲RET
F6̲RET

08M10
0.0
-2.5
08M01

09M04

-5.0
-7.5
-10
-10

-5

0

5

10

Component 1（49.9%）Type 1 （Representative Investor of the overall market）
This investor will consist of Banks, Pension funds and/or corporations that follow a passive
strategy and are reluctant to change（although they may increase）their equity position. This typeof investor is more interested in long term sustainable gains rather than chasing short term gains.
Such investment criteria are often observed in SC funds.
Type 2 （Representative Investor who possess high equity ownership that stimulates luxury
consumption）
This investor represents wealthy individuals that possess high fractions of equity in theirindividual portfolio, which in turn makes their exposure to equity price fluctuations higher. In
addition, such individuals gain high marginal utility when consuming luxury goods（i.e. they have
low risk aversion levels）. This characteristic of these investors leads to an investment strategy thatseeks high marginal utility in the stock market（higher than the marginal utility gain throughindividual consumption）and thus means that they keep a large part of their wealth in the equity
market. The high risk tolerance in their investment strategy allows for speculative overseas
investments to be conducted in the short term. As a consequence, it is assumed that the speculative
investment behavior of such investors is highly correlated with the consumption of luxury goods,
and aggressive investments that pursue short term returns, which are quickly reinvested and/or
consumed.
54

経営財務研究第 36 巻第 1・2 合併号

The inﬂuence of the two types of investors is measured against the Japanese stock market thatis represented by the TOPIX and its 33 industry sector classiﬁcation indices. This analysis not only
provides indirect evidence regarding the ﬂow of overseas speculative investment, but also clariﬁes
the sectors which have attracted investors with long term sustainable goals versus short term
speculative goals. Because the sample period of interest covers the ﬁnancial crisis of 2008, an intertemporal analysis（using rolling style regressions）allows identiﬁcation of the dynamic behavior ofthese investors. More speciﬁcally, the apparel & luxury goods index style may sustain, deteriorate
or strengthen its inﬂuence on the market index of interest during the crisis. This phenomenon will
be looked at carefully in the subsequent sections.
The Sharpe style weights2 were obtained with following model.
Y ＝ α1 X1 ＋ α2 X2 ＋ ε
1 ＝ α1 ＋ α2⑴

α1, α2 ≥ 0
where ε is the residual of the regression, Y is the SC fund index returns, X1 is the returns of theapparel & luxury goods index, X2 is the returns of the overall Japanese equity market approximatedby the TOPIX index, and α1, α2 are the weights associated with each of the independent variables.
The coefﬁcients are restricted to be between 0 and 1, and estimated by minimizing the sum squaredof errors. This regression is run with a rolling 24 month window for the period starting from 2005
Jan. to 2010 Dec. These results are reported in Figure 5. The two stylized investors are assumed torepresent the behavior of overseas investors and investors seeking long term sustainable growth.

Empirical Evidence and Results

2

Data Description

2.1

All of the fund returns were obtained from the Morningstar Direct database at a monthly
frequency for the period between January 2005 and December 2010. There were 15 SC funds
available at the end of the period in the Tokyo Stock Exchange. The complete list of fund names andmanagement companies is shown in Table 1. Among the 15 SC funds, only 7 funds had historical
data that could be tracked back to January 2005; they were used in the principal component
analysis（A list of the funds used in the principal component analysis are indicated with “included”
in the ﬁrst column of Table 1）. The luxury consumption of overseas investors was approximated2

Refer to Sharpe (1992) for a detailed discussion on the Sharpe style weights.

55

経営財務研究第 36 巻第 1・2 合併号

Figure 5 Panel A Rolling Style Analysis: Japanese SC funds（Fund 2, 4, 5, 6 12, 14）
as the dependent variable, the apparel & luxury goods index（vertical axis in percentage）and
TOPIX sectors（Financing 8, Real Estate 26 and Securities 29）as independent variables.
1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2005
2006
2007
2008
2009
F2̲8
F6̲8
F14̲8

F4̲8
F9̲8

F5̲8
F12̲8

0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2009
2005
2006
2007
2008
F2̲26
F6̲26
F14̲29

F4̲26
F9̲26

F5̲26
F12̲26

1.0
0.8
0.6
0.4
0.2
0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2005
2006
2007
2008
2009
F2̲29
F6̲29
F14̲29

F4̲29
F9̲29

F5̲29
F12̲29by the apparel & luxury goods index that was later converted into Japanese yen returns.3 For adetailed explanation of the apparel & luxury goods index, refer to Appendix A. In addition to the SC
fund data, I have also used the 33 industrial subsectors of the TOPIX market index and 108 SP500
subsector indices for comparative purposes.
Basic Statistics and Motivation of Analysis
The SP500 apparel & luxury goods index return（LUXYEN）is moderately correlated with the SC
fund（Japan All Equity）returns, but the SC funds are mutually correlated at a rather high level.
This is veriﬁed by the correlation analysis in Panel A Table 2（ordinary correlations）. It should be
noted that the TOPIX index is marginally correlated with both the SC fund indices and the apparel
3

56

The U.S. dollar / Japanese yen foreign exchange rate was obtained from the Bank of Japan website.

経営財務研究第 36 巻第 1・2 合併号

Figure 5 Panel B Rolling Style Analysis for TOPIX sectors Fishery Agriculture & Forest 9, Mining 18.
1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2005
2006
2007
2008
2009
F2̲9
F6̲9
F14̲9

F4̲9
F9̲9

0.0

F5̲9
F12̲9

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2009
2005
2006
2007
2008
F2̲18
F6̲18
F14̲18

F4̲18
F9̲18

F5̲18
F12̲18Figure 5 Panel C Rolling Style Analysis for TOPIX sectors Communications 4, Electric Power & Gas
7 and Other Products 21.
1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2005
2006
2007
2008
2009
F2̲4
F6̲4
F14̲4

F4̲4
F9̲4

F5̲4
F12̲4

0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2009
2005
2006
2007
2008
F2̲7
F6̲7
F14̲7

F4̲7
F9̲7

F5̲7
F12̲7

1.0
0.8
0.6
0.4
0.2
0.0

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ
2005
2006
2007
2008
2009
F2̲21
F6̲21
F14̲21

F4̲21
F9̲21

F5̲21
F12̲2157

経営財務研究第 36 巻第 1・2 合併号

Table 1 SC Fund Data
PCA

Fund Number Fund NameManagement Company

F1

Daiwa ShigaBank SRI 3 Asset

Daiwa Asset Management Co.,

Included F2

AsahiLife SRI

Ltd.Asahi Life Asset Management Co., Ltd.

F3
Included F4

Chuomitsui SRI
Daiwa DC SRI

Chuo Mitsui Asset Management Co., Ltd.
Daiwa Asset Management Co., Ltd.

Included F5

Daiwa SRI

Daiwa Asset Management Co., Ltd.

Included F6

MitsubishiUFJ SRI

Mitsubishi UFJ Asset Management Co.,Ltd.

F7

Nippon SRI OpenOkasan Asset Management Co., Ltd.

F8
Included F9PineBridge Japan Equity SRI DC PineBridge Investments Japan Co., Ltd.
Shinkin Fukoku SRI
Shinkin Asset Management Co., Ltd.

F10

Shinkin SRI Japan Equity

F11

SompoJapan SRI OpenSOMPO JAPAN NIPPONKOA ASSET MGMT CO.,LTD

Included F12

STAM DC Good Company SRISTB Asset Management Co., Ltd.

F13
Included F14

STAM SRI Japan Equity
STAM SRI Japan OpenSTB Asset Management Co., Ltd.
STB Asset Management Co., Ltd.

STAM SRI Japan Open SMA

STB Asset Management Co., Ltd.

F15

Shinkin Asset Management Co., Ltd.

Table 2 Panel A Principal Component Analysis of SC funds and the apparel & luxury goods index（JPY）.
Data Period from January 2005 to December 2010.
Eigenvalues:
Number
1
2
3

Value
6.76
0.61
0.35

Cumulative Cumulative
Value
Proportion
6.76
0.85
7.37
0.92
7.72
0.96

Diﬀerence

Proportion

6.16
0.26
0.22

0.85
0.08
0.04

PC 2
0.95
-0.14
-0.13
-0.17
-0.10
-0.09
-0.11
0.08

PC 3
-0.17
-0.05
-0.16
-0.18
-0.09
-0.15
-0.04
0.93

F2̲RET

F4̲RET

F5̲RET

F6̲RET

1.00
0.92
0.88
0.89

1.00
0.96
0.95

1.00
0.91

1.00

0.93
0.92
0.75

0.99
0.99
0.76

0.95
0.94
0.73

0.95
0.94
0.76

Eigenvectors (loadings):
Variable
LUXYENF2̲RET
F4̲RET
F5̲RET
F6̲RET
F9̲RET
F12̲RET
F14̲RET

PC 1
0.26
0.36
0.38
0.37
0.37
0.38
0.38
0.32

Ordinary correlations:
LUXYENF2̲RET
F4̲RET
F5̲RET
F6̲RET
F9̲RET
F12̲RET
F14̲RET58

LUXYEN
1.00
0.55
0.59
0.55
0.59
0.62
0.60
0.55

F9̲RET

F12̲RET

F14̲RET

1.00
0.99
0.76

1.00
0.80

1.00

経営財務研究第 36 巻第 1・2 合併号

Table 2 Panel B First 11 eigenvalues, explained proportion of variance of the principal component analysis
on the Apparel & Luxury goods index（yen base）and the 33 sectors of TOPIX
Number
1
2
3
4
5
6
7
8
9
10
11

Value
21.32
2.28
1.59
1.29
1.17
0.83
0.78
0.70
0.62
0.49
0.43

Diﬀerence
19.03
0.69
0.30
0.12
0.33
0.06
0.08
0.08
0.12
0.06
0.02

Proportion
0.61
0.07
0.05
0.04
0.03
0.02
0.02
0.02
0.02
0.01
0.01

Table 2 Panel C First three principal components for returns on the apparel & luxury goods index（yen base）
and the 33 sectors of TOPIX
Variable
T1
T10
T11
T12
T13
T14
T15
T16
T17
T18
T19
T2
T20
T21
T22
T23
T24
T25

PC 1
0.05
0.16
0.19
0.16
0.18
0.15
0.20
0.17
0.19
0.15
0.19
0.17
0.16
0.16
0.16
0.21
0.18
0.13

PC 2
0.22
0.15
-0.16
-0.01
-0.12
0.32
-0.11
-0.08
0.06
-0.07
-0.14
0.05
-0.12
-0.09
0.11
-0.04
-0.18
0.24

PC 3
-0.28
0.17
-0.01
-0.18
0.08
0.02
0.06
0.18
-0.03
0.34
0.09
-0.18
0.17
0.13
0.27
0.00
0.08
0.15

PC 4
-0.47
0.17
-0.06
0.06
0.10
-0.04
-0.06
-0.18
0.04
-0.37
-0.13
0.02
-0.24
-0.18
0.28
0.04
0.10
-0.08

Variable
T26
T27
T28
T29
T3
T30
T31
T32
T33
T34
T4
T5
T6
T7
T8
T9
LUXURY

PC 1
0.18
0.19
0.13
0.18
0.21
0.19
0.19
0.16
0.17
0.18
0.16
0.19
0.19
0.04
0.17
0.14
0.12

PC 2
0.08
0.19
-0.16
0.02
-0.08
0.17
0.03
-0.27
0.25
-0.19
0.27
0.09
-0.19
0.44
0.03
0.06
-0.18

PC 3
-0.29
-0.11
-0.10
-0.21
0.03
0.04
-0.10
0.02
-0.18
0.09
0.20
-0.17
0.02
0.32
-0.35
-0.05
-0.12

PC 4
0.02
-0.02
0.19
0.02
-0.01
-0.05
-0.03
0.17
-0.09
-0.15
0.01
-0.04
0.10
0.29
0.07
0.25
0.31

& luxury goods index. This observation motivates the principal component analysis of the SC funds
and the apparel & luxury goods index, in order to decompose the overall market index（TOPIX）
into two distinct stochastic factors that represent the two types of investors under consideration.
The choice of the apparel & luxury goods index to be used as a proxy for the oversea speculative
investors may appear to be rather arbitrary. Thus, although the results are not reported in detail,I have conducted a robustness check on other SP500 sub-indices that possessed a high correlation
with the apparel & luxury goods index. The correlations among all of the SP 500 subsectors（108in total）were calculated, and only those indices with a correlation higher than 0.69 are shown in
Table 3. A principal component analysis was run against a subset of these indices（those with acorrelation higher than 0.69）with the SC fund returns. This is presented in Figure 4. The analysis
59経営財務研究第 36 巻第 1・2 合併号

Table 3 Correlation Analysis of S&P500 sub-indices and the apparel & luxury goods index
Number
S&P 500 Sub/Apparel Access & Lux TR
S&P 500 Sub/Biotechnology TR
S&P 500 Sub/Movies & Entertainment TR
S&P 500 Sub/Thrifts & Mort Finance TR
S&P 500 Sub/Tobacco TR
S&P 500 Sub/Trading Coms & Distributors TR
S&P 500 Sub/Wireless Telecom Svcs TR

S&P 500 Sub/
Apparel Access&Lux TR
1.00
0.69
0.69
0.81
0.76
0.76
0.82

yields a result that is comparable to the apparel & luxury goods factor. The high correlation with
Tobacco, Movies is reasonable and Entertainment may be considered similar to sectors where
excess wealth is consumed. However, the interpretation of the other sectors was not clear. Thus, I
have decided to focus the analysis on only the apparel & luxury goods sub-index in the following
sections.

Empirical Evidence and Results

2.2

Principal Component Analysis
Principal component analysis is conducted for all of the SC funds that existed over the sample
period starting from January 2005 and ending in December 2010（This period includes thefinancial crisis of September 2008）. Although there exists15 SC funds, only 7 were used in theanalysis due to data availability. These SC funds represent the investors that choose long term
sustainability over high risk/return proﬁle portfolios. In addition to the SC funds, the returns（in4Japanese yen terms）
of the apparel & luxury index are added to the principal component analysis

to represent the speculative investment behavior generated by investors who seek short term gains.
After decomposing the stochastic components of the SC funds and apparel & luxury goods index as
described in Table 2, there are at least two distinctive components whose eigenvalues, proportionof variability, and cumulative proportion of variability appear to be interesting. From Table 2
Panel A, it can be seen that the ﬁrst component has an eigenvalue of 6.76, which explains 85% of
the variance. This stochastic factor is highly correlated with the SC fund returns and marginallycorrelated with the apparel & luxury goods index returns. The second component has a rather small
eigenvalue of 0.61; it explains 8% of the variance. The second factor is not a dominant factor, but ishighly correlated with the apparel & luxury goods index and is almost orthogonal to the SC fundreturns as can be observed in the orthonormal biplot depicted in Figure 2（left）. A complete list of
eigenvalues is reported in Table 2 Panel B, and a complete list of the corresponding eigenvectors isreported in Table 2 Panel C.

460

The results are relatively robust against the change of currency.

経営財務研究第 36 巻第 1・2 合併号

Table 4 TOPIX index（no. 23 ）and its 33 Sectors
1

Topix Air Transport PR JPY

18Topix Mining PR JPY

2Topix Banks PR JPY

19Topix NonFerrous Metals PR JPY

3
4Topix Chemicals PR JPY
Topix Communication PR JPY

20
21

Topix Oil & Coal Products PR JPY
Topix Other Products PR JPY

5Topix Construction PR JPY

22Topix Pharmaceutical PR JPY

6Topix Electronic Appliances PR JPY

23Topix PR JPY

7Topix Electronic Power & Gas PR JPY

24Topix Precision Instruments PR JPY

8Topix Financing Business PR JPY

25Topix Pulp & Paper PR JPY

9Topix Fishery Agricul&Forest PR JPY

26Topix Real Estate PR JPY

10
11

Topix Foods PR JPY
Topix Glass & Ceramics PR JPY

27
28

Topix Retail Trade PR JPY
Topix Rubber Products PR JPY

12Topix Insurance PR JPY

29Topix Securities PR JPY

13Topix Iron & Steel PR JPY

30

Topix Services PR JPY

14
15

Topix Land Transport PR JPY
Topix Machinery PR JPY

31
32

Topix Textiles & Apparels PR JPY
Topix Transport Equipment PR JPY

16
17

Topix Marine Transport PR JPY
Topix Metal Products PR JPY

33
34

Topix Warehousing PR JPY
Topix Wholesale Trade PR JPY

The ﬁrst component（PC1）is the most dominant factor; it explains nearly 85% of the variability;
the second factor（PC2）explains about 8% of the total variability. The interesting part of theanalysis lies in the fact that the apparel & luxury goods index returns are more or less orthogonal
to the SC fund returns when spanned by the first two stochastic components. This evidence
supports the conjecture that SC funds are successful in filtering out the speculative investment
behavior of overseas investors（when approximated by the apparel & luxury goods index）. If thefund returns are decomposed into two factors, one would be related to the SC fund and the otherwould be related to the apparel & luxury goods index. This static analysis suggests that there arepotentially two factors that inﬂuence the overall equity market. The following section investigates
the inter-temporal change of these two factors by using a Sharpe style regression with a 24 monthrolling window.
Sharpe Style Analysis with a Rolling window
A rolling style regression was run with a moving window of 24 months for the period starting in2005 Jan. and ending in 2009 Jan. This includes observations within the range of 2005 Jan. to 2010
Dec. The dependent variable of the style regression is the TOPIX market index and its 33 sectors asclassiﬁed by the Tokyo Stock Exchange. The full list of market indices used is provided in Table 4.
The style factors are the SC funds listed on the Japanese market whose complete list is provided inTable 1（i.e. Fund 2, 4, 5, 6, 9, 12 and 14）and the apparel & luxury goods index returns converted
into Japanese yen. The results are presented in Figure 5 Panel A through Panel C where thevertical axis represents the coefﬁcient for the apparel & luxury index. This means that the verticalaxis can be interpreted as the inﬂuence of overseas speculative investors. Although the behavior of
the SC funds differ moderately, the overall trend of all of the funds are more or less the same.
Several interesting observations can be made from Figure 5. The most prominent point is that61

経営財務研究第 36 巻第 1・2 合併号

many sectors dramatically reduce their exposure to the apparel & luxury goods index after the
ﬁnancial crisis of September 2008. The declining trend is observed as early as the summer of 2006
because the regression estimation is run on a 24 month（forward looking）window. Some of thesectors that reduced their exposure to overseas speculative investors, recovered their exposure
eventually, but even if these sectors are included, 25 out of the 33 sectors fall in this category. Three
sectors depicted in Figure 5 Panel A（such as Financing, Real Estate, and Securities）maintained
a relatively high exposure with a signiﬁcant decrease in exposure to the speculative benchmark
after the 2008 ﬁnancial crisis with no sign of recovery. The sectors were probably hit hard during
the ﬁnancial crisis. And the two sectors depicted in Figure 5 Panel B maintained almost no change
in their exposure to speculative overseas investors（these sectors include Fishery Agriculture &Forest, and Mining）, indicating a stable interest from oversea investors. The most interestingobservation is that the three sectors depicted in Figure 5 Panel C increased their exposure during
the sample period. The three sectors were Communications, Electric Power & Gas and Other
Products.
Figure 6 shows the fraction of breakpoints identiﬁed by the Quandt-Andrews break point testwith a 30% cutoff level. The breakpoints were calculated based on the weight for the apparel &luxury goods index for the rolling style regression run on the 33 TOPIX sectors（and TOPIX）
against the 7 SC funds. A clear trend can be observed that a majority of the break points areconcentrated at the 2008 August financial crisis. There are a number of breakpoints after the
ﬁnancial crisis as well. These points are either indicating the recovery of the style weight given
to the apparel & luxury goods index or an increase of indexʼs inﬂuence after the ﬁnancial crisis.
Figure 6 Break Point of Style Based on Wald F-statistic

20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%

62

2010M12

2010M09

2010M06

2010M032009M12

2009M09

2009M06

2009M03

2008M12

2008M09

2008M06

2008M03

2007M12

2007M09

2007M06

2007M03

2006M12

2006M09

2006M06

2006M032005M120.0%

経営財務研究第 36 巻第 1・2 合併号

Table 5 Standard Deviation of Fund Flow（2009 Sept. ‒ 2012 May）
standard deviation
SRI

0.51

small cap

1.62

large cap

2.22

middle cap

1.02

Figure 7 Average of R-square of coeﬃcient estimates for the 33 sectors
0.60

0.50

0.40

0.30

0.20

0.10

2008M12

2008M10

2008M08

2008M06

2008M04

2008M02

2007M12

2007M10

2007M08

2007M06

2007M04

2007M02

2006M12

2006M10

2006M08

2006M06

2006M04

2006M02

2005M12

2005M10

2005M08

2005M06

2005M04

2005M02

0.00

Similarly, there is a substantial number of breakpoints around 2006 June and 2007 October which
are likely capturing the increase in oversea investment. The Quandt-Andrews test is a Chowtest run for various windows over the sample period. The Wald test statistic is used to test theassumption that the residual variance is identical before and after the break point.
Table 5 shows the average standard deviation of the fund of ﬂows for all equity Japanese mutual
funds for the period from 2009 Sept. to 2012 May The standard deviation of SRI fund of ﬂows（inyen value）is much smaller than the small cap, large cap and middle cap mutual funds.
Figure 7 depicts the average R-square of the OLS regressions for the 33 sectors of TOPIX. The
steady increase in the R-square values reinforces the argument that the two types of hypotheticalinvestors have become the dominating investors in the Japanese equity market in the sample
period.
63

経営財務研究第 36 巻第 1・2 合併号

Conclusion and Implications

3

This paper has documented socially conscious fund（SC Fund）behavior and its potential
role to reveal sustainable growth in Japanese financial markets. The level of each firmʼs social
responsibility is measured in terms of the market assessment which is approximated by the SC
fund managersʼ stock selection policy. The portfolio approach（i.e. using the SC fund data insteadof individual stock data）enabled the extraction of a stochastic component that appears to beorthogonal to the apparel & luxury goods index, it can be used to measure the overseas speculative
investment influence on the various Japanese market index returns. A general trend can beobserved that most of the market subsectors reduced their exposure signiﬁcantly after the ﬁnancial
crisis, but a handful of sectors were insulated from this investment behavior. The influence ofspeculative overseas investors was small on the Communications and Electric Power & Gas, andOther Products sector. Such industries were not only attractive enough to be considered as a longterm investment for SC funds, but also provided sufficient short term capital gains to overseas
investors.
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Appendix A
Description of Apparel & luxury goods Index
The index is a sub-index of the SP500 index with an industry code 252030 under the name “Textiles,
Apparel & Luxury Goods”. This index is comprised of the following 3 sub-industries.
Table 625203010 Apparel, Accessories & Luxury Goods
Manufacturers of apparel, accessories & luxury goods. Includes companies primarily producing designer handbags,
wallets, luggage, jewelry and watches. Excludes shoes classiﬁed in the Footwear Sub-Industry.
25203020 Footwear
Manufacturers of footwear. Includes sport and leather shoes.
25203030 Textiles
Manufacturers of textile and related products not classiﬁed in the Apparel, Accessories & Luxury Goods, Footwear orHome Furnishings Sub-Industries.

The Industry group is 2520 Consumer Durables & Apparel, and industry sector is 25 Consumer
Discretionary.

65