Exploring the Cost of Investing in Socially Responsible Mutual Funds: An Empirical Study

Abstract

Socially Responsible Investing (SRI), also known as sustainable, socially conscious, or ethical investing, describes an investment strategy that seeks to maximize both financial return and social good for an investor. While SRI may be good from a moral perspective, it is less clear how well SRI portfolios performance against their non-SRI peers, both on a pure-return and risk-adjusted basis. This article explores that topic through an analysis of those actively managed mutual funds categorized as “Socially Conscious” from 1990 to 2008 (19 calendar years) and finds that while SRI funds tend to slightly underperform their non-SRI peers (-17 bps per year), they tend to slightly outperform on a risk-adjusted basis (+1 bps year), but the results were neither statistically nor economically significant. Perhaps the most important issue to be aware of with SRI is that the relative performance of SRI investments can vary materially against their non-SRI peers, even over extended periods (5+ years). This means an investor must take a long-term perspective towards SRI and that it may be difficult to apply the same type of investment monitoring screens against style peers for SRI funds as for non-SRI funds.

TOPICS: Mutual fund performance, factor-based models, statistical methods