Common screens aim to avoid companies involved in the alcohol, tobacco, gambling or military industries, or companies that pollute the environment or mistreat workers.
MUTUAL funds that call themselves socially responsible have had striking growth in assets over the last decade, fueled in part by the perception that they can more than hold their own with the rest of the fund industry. A new study, however, calls that idea into doubt.
Such funds screen potential investments according to many social or ethical criteria. Common screens aim to avoid companies involved in the alcohol, tobacco, gambling or military industries, or companies that pollute the environment or mistreat workers.
The new study conflicts with many previous ones, which found that socially responsible funds, on average, outperformed other stock mutual funds in the 1990's. But many of those studies were conducted before the technology bubble burst in early 2000. The typical socially responsible fund has an outsized allocation to tech stocks, so its strong performance in the 90's might have reflected no more than that sector's strength.
Unless you believe that technology stocks will always beat the market, you shouldn't make long-term bets that socially responsible funds will outperform other funds.
Many socially responsible funds are partial to the technology sector because tech companies often score well on the funds' screens. In the five years through May, according to Shannon Zimmerman, fund analyst at Morningstar Inc., the average socially responsible equity fund allocated 23 percent of its portfolio to the tech and telecommunications sectors, versus an average of 14.5 percent for all other equity funds.
The heavy allocation to technology may also help to explain the socially responsible stock funds' recent relative strength. According to Lipper Inc., such funds produced an average gain of 15.5 percent in the second quarter, slightly better than the 15.4 percent total return for the S.& P. 500-stock index.
Three researchers at the Wharton School of the University of Pennsylvania have found a way to analyze socially responsible funds that is less influenced by the performance of the tech sector. The study, by Christopher C. Geczy and Robert F. Stambaugh, both finance professors, and David Levin, one of their graduate students, can be found at http://finance.wharton.upenn.edu
/~stambaug/sri.pdf.
The researchers analyzed socially responsible funds in light of market factors that historically have been most correlated with fund performance, like the average market capitalization of a fund's stock holdings or where its stocks fall on the value-growth spectrum. Within the universe of socially responsible funds, they found that there is a smaller range of meaningful choices among these factors. Over time, they say, that reduces returns for investors who build a portfolio of such funds.
Because socially responsible funds are more oriented toward growth stocks than value stocks, for example, investors may find that their portfolios will suffer over time. According to separate research by Eugene F. Fama of the University of Chicago and Kenneth R. French of Dartmouth, the average value stock outperformed the average growth stock by 3.5 percentage points a year, annualized, over the last 77 years.
F course, you may not believe that this pattern will continue, but the Wharton researchers also tested other assumptions about market performance. In each case, they found that the smaller range of meaningful choices among socially responsible funds reduced investors' likely returns, often by several points a year.
Recently, some advocates of socially responsible investing have suggested that companies be avoided if they severely restrict shareholder rights. Screening companies this way might well bolster expected returns, because one academic study has found that, during the 1990's, companies with the fewest such restrictions outperformed those with the most. But because few socially responsible funds have added corporate governance criteria to their social screens, the Wharton study sheds no light on this strategy's profitability.
Even if you accept the study's conclusion that your returns will suffer if you invest in socially responsible mutual funds, you should not automatically avoid them. But investors in these funds need to be willing to bear an additional cost.
http://www.nytimes.com/2003/07/20/business/yourmoney/20STRA.html?ex=1059278400&en=36ed381d8f5d1e0b&ei=5062&partner=GOOGLE
MUTUAL funds that call themselves socially responsible have had striking growth in assets over the last decade, fueled in part by the perception that they can more than hold their own with the rest of the fund industry. A new study, however, calls that idea into doubt.
Such funds screen potential investments according to many social or ethical criteria. Common screens aim to avoid companies involved in the alcohol, tobacco, gambling or military industries, or companies that pollute the environment or mistreat workers.
The new study conflicts with many previous ones, which found that socially responsible funds, on average, outperformed other stock mutual funds in the 1990's. But many of those studies were conducted before the technology bubble burst in early 2000. The typical socially responsible fund has an outsized allocation to tech stocks, so its strong performance in the 90's might have reflected no more than that sector's strength.
Unless you believe that technology stocks will always beat the market, you shouldn't make long-term bets that socially responsible funds will outperform other funds.
Many socially responsible funds are partial to the technology sector because tech companies often score well on the funds' screens. In the five years through May, according to Shannon Zimmerman, fund analyst at Morningstar Inc., the average socially responsible equity fund allocated 23 percent of its portfolio to the tech and telecommunications sectors, versus an average of 14.5 percent for all other equity funds.
The heavy allocation to technology may also help to explain the socially responsible stock funds' recent relative strength. According to Lipper Inc., such funds produced an average gain of 15.5 percent in the second quarter, slightly better than the 15.4 percent total return for the S.& P. 500-stock index.
Three researchers at the Wharton School of the University of Pennsylvania have found a way to analyze socially responsible funds that is less influenced by the performance of the tech sector. The study, by Christopher C. Geczy and Robert F. Stambaugh, both finance professors, and David Levin, one of their graduate students, can be found at http://finance.wharton.upenn.edu
/~stambaug/sri.pdf.
The researchers analyzed socially responsible funds in light of market factors that historically have been most correlated with fund performance, like the average market capitalization of a fund's stock holdings or where its stocks fall on the value-growth spectrum. Within the universe of socially responsible funds, they found that there is a smaller range of meaningful choices among these factors. Over time, they say, that reduces returns for investors who build a portfolio of such funds.
Because socially responsible funds are more oriented toward growth stocks than value stocks, for example, investors may find that their portfolios will suffer over time. According to separate research by Eugene F. Fama of the University of Chicago and Kenneth R. French of Dartmouth, the average value stock outperformed the average growth stock by 3.5 percentage points a year, annualized, over the last 77 years.
F course, you may not believe that this pattern will continue, but the Wharton researchers also tested other assumptions about market performance. In each case, they found that the smaller range of meaningful choices among socially responsible funds reduced investors' likely returns, often by several points a year.
Recently, some advocates of socially responsible investing have suggested that companies be avoided if they severely restrict shareholder rights. Screening companies this way might well bolster expected returns, because one academic study has found that, during the 1990's, companies with the fewest such restrictions outperformed those with the most. But because few socially responsible funds have added corporate governance criteria to their social screens, the Wharton study sheds no light on this strategy's profitability.
Even if you accept the study's conclusion that your returns will suffer if you invest in socially responsible mutual funds, you should not automatically avoid them. But investors in these funds need to be willing to bear an additional cost.
http://www.nytimes.com/2003/07/20/business/yourmoney/20STRA.html?ex=1059278400&en=36ed381d8f5d1e0b&ei=5062&partner=GOOGLE
