Ethical Investment Constraints And Fund Performance

Abstract

This study evaluates the risk-adjusted performance of two author-defined categories of socially responsible mutual funds during the period of September 1999 to September 2004, using objective statistical measures grounded in modern portfolio theory. A socially responsible mutual fund is defined as one which employs "social screens" in stock selection. In this study, one category favors politically progressive, secular criteria and the second favors conservative religious values. The main objective of this study is to provide empirical documentation on the risk-adjusted returns of these mutual funds, to stimulate interest in further study of the political aspects of the screens that underlie them. This is one of the first, if not the first, academic studies to delineate socially responsible funds into such categories. The study results based on 30 funds indicate that funds favoring politically progressive secular criteria outperform the S&P 500 Index during the study period, while funds favoring conservative religious views overall do not outperform the S&P 500 Index.