Performance evaluation of socially responsible mutual funds using style analysis

Abstract

Purpose

The purpose of this paper is to evaluate the performance of socially responsible funds by closely examining funds' investment styles.

Design/methodology/approach

The authors apply William Sharpe's method of style analysis to evaluate the performance of 94 US socially responsible mutual funds. By using the fund style as a benchmark, the authors are able to separate the performance attributed to style and selection.

Findings

The authors observe that underperformance of socially responsible funds is more pronounced and common than identified in the previous literature. Proponents of socially responsible investing argue that screening process provides an opportunity to fund managers to identify best companies in terms of future financial performance. The paper finds that active management of mutual funds is an important determinant of their performance in socially responsible investing industry. This paper provides evidence supporting that active management of socially responsible funds add value.

Originality/value

This study will help investors in allocating their portfolios among many of the available SR funds. The result – actively managed SR funds outperform their passive counterparts – will be valuable for those investors who are willing to invest in socially responsible funds but are concerned about the financial performance.

Citation

Das, P.K. and Uma Rao, S.P. (2013), "Performance evaluation of socially responsible mutual funds using style analysis", Social Responsibility Journal, Vol. 9 No. 1, pp. 109-123. https://doi.org/10.1108/17471111311307840