Classifying and Measuring the Performance of Socially Responsible Mutual Funds

Posted: 6 May 2015

See all articles by Denys Glushkov

Denys Glushkov

University of Pennsylvania - The Wharton School, Wharton Research Data Services (WRDS); Acadian Asset Management LLC

Meir Statman

Santa Clara University - Department of Finance

Date Written: May 5, 2015

Abstract

We offer a factor model for classifying socially responsible mutual funds and measuring their performance. Our factor model consists of six factors, the four widely used factors of market, small-large (SMB), value-growth (HML), and momentum, and two social responsibility factors, reflecting the criteria most widely-used by socially responsible funds. The first social responsibility factor is the 'top-bottom' factor (TMB), consisting of the difference between the returns of stocks of companies ranked in the top third and the bottom third by five social responsibility criteria: employee relations, community relations, environmental protection, diversity, and products. The second is the 'accepted-shunned' factor (AMS), consisting of the difference between the returns of stocks of companies commonly accepted by socially responsible investors and the returns of stocks of companies commonly shunned by them. Shunned stocks are stocks of companies in the alcohol, tobacco, gambling, firearms, military, and nuclear industries.

We know the coefficient of a factor as its loading, tilt, or beta. We will use the term beta. The betas of the TMB and AMS factors capture well the social responsibility features of indexes and mutual funds, and the TMB and AMS betas of indexes and mutual funds generally reflect the social responsibility scores of the companies whose stocks they contain. Classification of socially responsible mutual funds by betas and contents differs from classification by Morningstar and other classifying services. The measured performance of mutual funds when the TMB and AMS factors are considered differs from their measured performance when these factors are overlooked.

Keywords: Socially Responsible Investing, Mutual Funds, Performance Evaluation

JEL Classification: G11, G12, C11

Suggested Citation

Glushkov, Denys and Statman, Meir, Classifying and Measuring the Performance of Socially Responsible Mutual Funds (May 5, 2015). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2602913

Denys Glushkov

University of Pennsylvania - The Wharton School, Wharton Research Data Services (WRDS) ( email )

WRDS, St. Leonard's Court
3819 Chestnut St, suite 300
Philadelphia, PA 19104
United States
2158986705 (Phone)

HOME PAGE: http://ssrn.com/author=664253

Acadian Asset Management LLC ( email )

260 Franklin Street
Boston, MA 02110
United States

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

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