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Doing Well while Doing Good? The Investment Performance of Socially Responsible Mutual Funds

Literature › Works

Sally Hamilton; Hoje Jo; Meir Statman (1993). Doing Well while Doing Good? The Investment Performance of Socially Responsible Mutual Funds. Financial Analysts Journal, Vol. 49, No. 6. CFA Institute.
Type journal article
Scope Comparative and methods
Method econometric
Period studied 1981–1990
Regions United States
Themes sanctions divestment, macro fiscal finance debt, methods data sources
Citation key hamilton1993

Argument

The article asks whether US 'socially responsible' mutual funds, many of which screen out companies with South African operations, earn different risk-adjusted returns from conventional funds. It sets out three hypotheses (equal, lower, or higher expected returns) and tests them using Jensen's alpha on monthly Lipper returns for 1981-90. Socially responsible funds show no statistically significant excess returns and do not differ significantly from randomly drawn conventional fund benchmarks. The authors conclude that the market does not price social responsibility characteristics, so such investors lose nothing and the cost of capital to 'responsible' companies is unaffected. South Africa is only one of several screening criteria, so the paper bears on divestment only indirectly.

Evidence and method

Lipper Analytical Services monthly returns (including dividends) for all equity mutual funds, Jan 1981-Dec 1990; 32 self-identified socially responsible funds (17 established by 1985, 15 later); randomly drawn conventional benchmarks of 170 and 150 funds; value-weighted NYSE index and 3-month T-bill rate; Table 1 screening criteria from Social Investment Services (1992).

Findings

  • Socially responsible funds screen on South Africa operations, among other criteria, so South Africa was a standard exclusion in US SRI practice. (p. 2)

    The Calvert Social Investment Fund, for example, does not invest in companies that have oper- ations in South Africa, that manufacture weapons, or that are engaged in nuclear power.

  • Most prior studies of SRI performance concerned South Africa-free portfolios. (p. 4)

    Most existing studies of the performance of socially responsible portfolios focus on portfolios that hold companies with operations in South Africa versus portfolios without such companies.

  • Rudd found that excluding South African-linked firms from the S&P 500 costs almost nothing in expected return. (p. 4)

    the extra market covariance induced by excluding companies with operations in South Africa is small, resulting in an expected annual return only 0.037% lower then the return on the S&P 500.

  • Grossman and Sharpe found a small outperformance by a South Africa-free portfolio, attributable to firm size. (p. 4)

    the risk-adjusted South Africa-free portfolio outperformed the NYSE portfolio by 0.187% per year over the 1960-83 period.

  • Almost all older SRI funds show no significant alpha against the NYSE. (p. 4)

    The excess retums of 15 of the 17 funds are not statistically different from zero.

  • The average alpha for the 17 older SRI funds is slightly negative. (p. 4)

    The average excess return for the 17 socially responsible mutual funds is a loss of approximately 6 basis points per month, or 0.76% per year.

  • SRI funds do not differ significantly from conventional fund benchmarks for the older cohort. (p. 6)

    That mean excess return is lower than but not statistically different from the mean -0.76% per year return of the corresponding group of 17 socially respon- sible mutual funds.

  • Newer SRI funds also show no significant difference from conventional funds. (p. 6)

    it is higher than but not statistically different from the mean excess return of -3.33% per year for the corresponding group of 15 socially respon- sible mutual funds.

  • The authors conclude that social responsibility is not priced and does not affect the cost of capital. (p. 6)

    Investors can expect to lose nothing by investing in socially responsible mutual funds; social responsibility factors have no effect on expected stock retums or companies' cost of capital.

  • Survivorship bias may affect the data. (p. 6)

    Because funds that go out of existence tend to be poor performers, our data are possibly subject to survivorship bias.