Investing in Socially Responsible Mutual Funds

56 Pages Posted: 22 Jul 2003  

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

David Levin

University of Pennsylvania - The Wharton School

Date Written: October 2005

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 depends crucially on the investor's views about asset pricing models and stock-picking skill by fund managers. To an investor who believes strongly in the CAPM and rules out managerial skill, i.e. a market-index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainly-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, i.e., investors who rely heavily on individual funds' track records to predict future performance.

Keywords: socially responsible investing, mutual funds, portfolio selection

JEL Classification: G11, G12, C11

Suggested Citation

Geczy, Christopher and Stambaugh, Robert F. and Levin, David, Investing in Socially Responsible Mutual Funds (October 2005). Available at SSRN: https://ssrn.com/abstract=416380 or http://dx.doi.org/10.2139/ssrn.416380

Christopher Charles Geczy (Contact Author)

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Levin

University of Pennsylvania - The Wharton School ( email )

3620 Locust Walk
Philadelphia, PA 19104-6365
United States

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