Delegated Portfolio Management with Socially Responsible Investment Constraints

Annalisa Fabretti and Stefano Herzel

No 2010/7, Sustainable Investment and Corporate Governance Working Papers from Sustainable Investment Research Platform

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 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-06-10
New Economics Papers: this item is included in nep-cta and nep-ppm
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Citations: View citations in EconPapers (2)

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Journal Article: Delegated portfolio management with socially responsible investment constraints (2012)
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