Performance Evaluation of U.S. Socially Responsible Mutual Funds: Revisiting Doing Good and Doing Well

Abstract

Do socially responsible funds, as a whole, perform as well as the average of all mutual funds in their respective categories? This paper examines fund characteristics as well as risk and performance measures of all available socially responsible funds (SRFs) in the U.S. mutual fund industry over the last fifteen years. The contribution of this paper is two unique findings. First, although SRFs have had a relative advantage in terms of lower expense ratios, lower annual turnover rates, lower tax cost ratios, and lower risk, SRFs also exhibit lower returns, and two risk-adjusted return measures indicate SRFs have inferior reward-to-risk performance. In particular, domestic stock SRFs have not generated competitive returns relative to conventional funds in the same categories over the past ten to fifteen years. These results contrast those found in the extant SRI literature which suggest socially responsible investing has little or no cost. Second, a finer partitioning by fund type reveals not all SRFs have similar relative performance. SRFs in balanced fund and fixed-income fund categories, especially during the past three years, have performed better than the category averages with lower risk, higher returns, and higher risk-adjusted returns. This suggests the costs of socially responsible investing are not homogenous.

Constant and variable returns to scale DEA models for socially responsible investment funds

“…An analogous conclusion is obtained by Bauer et al (2007) Even, some empirical studies on the performance of socially responsible investments show evidence that SRI portfolios exhibit a better performance than unscreened conventional investments. Along this line, we may cite Derwall et al (2005) On the other hand, there exists also some empirical results supporting the opposite conclusion that SRI funds exhibit an inferior reward-to-risk performance; see the analysis of U.S. mutual funds in the period 1993-2008 presented in Chang and Witte (2010).…”

Is Socially Responsible Investing (SRI) in Stocks a Competitive Capital Investment? A Comparative Analysis Based on the Performance of Sustainable Stocks

“…Nevertheless, conventional investments show a better performance in the US market (Chang et al, 2012;Chang and Witte, 2010).…”

“…For instance, Kemp and Osthoff (2007), Bauer et al (2005Bauer et al ( , 2006 or Hamilton et al (1993) use Jensen´s Alpha to examine the performance of SR mutual funds. Furthermore, Chang and Witte (2010) use the Sharpe ratio for the comparison of US conventional and SR mutual funds and Schröder (2007) for the performance analysis of SR indices. Moreover, Sharpe ratio and Jensen´s Alpha have been used to analyse the SRI mutual funds market in Australia (Humphrey and Lee, 2005) and in the US (Sauer 1997, Bello 2005.…”

Multiple Criteria Decision Making in Finance, Insurance and Investment

“…Furthermore, the Australian and Canadian evidence (Bauer et al 2006(Bauer et al , 2007Humphrey and Lee 2011;Ayadi et al 2015) supports the no-effect hypothesis. Nevertheless, few studies confirm the underperformance or outperformance hypothesis, such as Chang and Witte (2010), whose findings show a significant underperformance of US SRI funds over 5-, 10-and 15-year periods, but not over the 3-year period.…”