Socially Responsible Investments

Abstract

Using a database containing 117 U.S. socially responsible mutual funds (SRMFs), we review and extend previous research on ethical mutual fund managers' performance in terms of selectivity, net selectivity, diversification and market timing. By using appropriate style benchmarks, we solve the benchmark problem from which most prior ethical studies suffered. We find evidence of significant differences in net selectivity between ethical and conventional funds for the 1984-2003 period. Socially responsible mutual fund managers show poor selectivity, net selectivity and market timing ability as compared to Lippers active benchmark indices. Diversification is significantly different from zero, indicating that SRMFs bear a cost for their lack of diversification. We also find that the size of the fund has nothing to do with its performance. However, older funds tend to have worse selectivity, as well as the highest cost for a lack of diversification. Finally, we observe that SRMFs with the most ethical screens have the least selectivity and net selectivity.