Investing in Socially Responsible Mutual Funds

Christopher C Geczy ◽  
Robert F Stambaugh ◽  
David Levin

Abstract We construct optimal portfolios of mutual funds whose objectives include socially responsible investment (SRI). Comparing portfolios of these funds to those constructed from the broader fund universe reveals the cost of imposing the SRI constraint on investors seeking the highest Sharpe ratio. This SRI cost crucially depends on the investor’s views about asset pricing models and stock-picking skill by fund managers. To an investor who strongly believes in the CAPM and rules out managerial skill, that is, a market index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainty-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, that is, investors who heavily rely on individual funds’ track records to predict future performance.

2016 ◽  
Vol 51 (3) ◽  
pp. 985-1011 ◽  
Francisco Peñaranda

AbstractI develop two new types of portfolio efficiency when returns are predictable. The first type maximizes the unconditional Sharpe ratio of excess returns and differs from unconditional efficiency unless the safe asset return is constant over time. The second type maximizes conditional mean-variance preferences and differs from unconditional efficiency unless, additionally, the maximum conditional Sharpe ratio is constant. Using stock data, I quantify and test their performance differences with respect to unconditionally and fixed-weight efficient returns. I also show the relevance of the two new portfolio strategies to test conditional asset pricing models.

2020 ◽  
Vol 11 (6) ◽  
pp. 1227-1244 ◽  
Esther Castro ◽  
M. Kabir Hassan ◽  
Jose Francisco Rubio ◽  
Zairihan Abdul Halim

Purpose This paper updates the literature regarding the performance of constrained US mutual funds by looking at the relative performance of Christian mutual funds, socially responsible funds and Islamic funds. This paper aims to rank the performance of religious and ethical investment funds. Design/methodology/approach This study uses monthly returns from 2005 to 2015 to perform traditional asset pricing models as well as data envelopment analysis to determine rank. Findings Islamic mutual funds outperform socially responsible funds, which then outperform Christian-based mutual funds; these results are also consistent during the latest 2007-2008 crisis period. The results are robust to different performance metrics and benchmarks. Moreover, this paper reports a significant amount of money “left on the table” by investing in constraint funds and disregarding the sin industry which shows an ethical dilemma for investors. Practical implications Investors who seek to invest morally/ethically can be informed of the cost of doing so. They can also compare portfolio with others that have similar holdings and constraints. Originality/value This paper not only includes Christian mutual funds in the research but also provides the performance of all constrained assets. It also compares religious funds with “SIN” industry, and thus quantifies the cost of “doing right.”

2016 ◽  
Vol 19 (04) ◽  
pp. 1650023 ◽  
Robert J. Bianchi ◽  
Michael E. Drew ◽  
Timothy Whittaker

This paper considers the accuracy (or otherwise) of cost of equity estimates provided by a range of Australian asset pricing models on industry returns. The results suggest that a simple, constant-benchmark approach (fixed excess return of five percent per annum) provides the best forecast for the cost of equity capital for the various industry segments of the Australian Securities Exchange examined across the observation window. Our results from Australia corroborate U.S. findings regarding the disconnect between asset pricing models that provide the best ex-post explanation of asset returns and models that produce superior ex-ante predictions of the cost of capital.

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