Socially Responsible Investment Funds: A Robust Test of Efficiency

Abstract

We test the efficiency of socially responsible investment (SRI) equity mutual funds using linear factor pricing models (LFPM) within the Large $N$ Test of Alpha framework. In this novel alpha testing approach, we analyze a dataset where the number of funds $(N)$ substantially exceeds the time dimension $(T)$, applying a robust test procedure against non-Gaussian distributions and weakly cross-correlated errors. This method circumvents traditional limitations, offering an efficient alternative to alpha testing. Our findings challenge both univariate and multivariate alpha testing models. Crucially, the method finds no significant performance difference between SRI mutual funds and the broader fund universe, debunking the myth of inherent financial compromise in socially responsible investments. This highlights the viability of including SRI funds in portfolios without financial trade-offs.

Keywords: Equity mutual funds, Linear factor pricing models, Socially responsible investment