Sustainable Investment and Corporate Governance Working Papers, Sustainable Investment Research Platform
No 2010/7:
Delegated Portfolio Management with Socially Responsible Investment Constraints
Annalisa Fabretti ()
and Stefano Herzel ()
Abstract: We consider the problem of how to set a compensation for a
portfolio manager who is required to restrict the investment set, as it
happens when applying socially responsible screening. This is a problem of
Delegated Portfolio Management where the reduction of the investment
opportunities to the subset of sustainable assets involves a loss in the
expected earnings for the portfolio manager, compensated by the investor
through an extra bonus on the realized return. Under simple assumptions on
the investor, the manager and the market, we compute the optimal bonus as a
function of the manager's risk aversion and his expertise, and of the
impact of the portfolio restriction on the Mean Variance efficient
frontier. We conclude by discussing the problem of selecting the best
managers when his ability is not directly observable by the investor.
Keywords: Delegated portfolio management; Socially responsible investment; Incentives; Extrinsic incentives; Intrinsic motives; (follow links to similar papers)
22 pages, June 10, 2010
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