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

  • C. Edward Chang
  • H. Doug Witte
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    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.

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    Article provided by Emerald Group Publishing in its journal American Journal of Business.

    Volume (Year): 25 (2010)
    Issue (Month): 1 ()
    Pages: 9-21

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    Handle: RePEc:eme:ajbpps:v:25:y:2010:i:1:p:9-21
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    1. Plantinga, Auke & Scholtens, Bert & Brunia, Nanne, 2002. "Exposure to socially responsible investing of mutual funds in the Euronext stock markets," Research Report 02E22, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    2. Zakri Y. Bello, 2005. "Socially Responsible Investing And Portfolio Diversification," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(1), pages 41-57.
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