Ranking Socially Responsible Mutual Funds

Ranking Socially Responsible Mutual Funds

Blanca Pérez-Gladish, Paz Méndez, Bouchra M’Zali
Copyright: © 2012 |Pages: 26
DOI: 10.4018/ijeoe.2012040104
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Socially Responsible Investing (SRI), also known as sustainable or ethical investing, corresponds to an investment practice that takes into account not only the usual return-risk criteria, but also other non-financial dimensions, namely in terms of environmental, social and governance concerns. Recently, given the causes of the 2008 financial crisis, these concerns became even more relevant. However, while a diverse set of models have been developed to support investment decision-making based on financial criteria, models including also socially responsible criteria are rather scarce. The main objective of this paper is to contribute to try fulfilling this gap on the financial literature, suggesting a Multicriteria Decision Making tool which allows individual investors to analyze and rank socially responsible mutual funds based on their environmental, social and governance performance and taking into account the individual, subjective, personal preferences of each investor.
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Socially Responsible Investing (SRI), frequently called Ethical Investing, is broadly defined as an investment process that integrates not only financial but also social, environmental, and ethical (SEE) considerations into investment decision making. SRI has grown rapidly around the world in the last decades. As informed by the Social Investment Forum in its last bi-annual report (SIF, 2007): “Near eleven percent of assets under professional management in the U.S. are now involved in SRI. SRI assets rose more than 324 percent from $639 billion in 1995 to $2.71 trillion in 2007. During the same period, the broader universe of assets under professional management increased less than 260 percent from $7 trillion to $25.1 trillion. From 2005-2007 alone, SRI assets increased more than 18 percent while the broader universe of professionally managed assets increased less than 3 percent.”

Social Responsible mutual funds, also known as invested funds, are one of the main instruments of SRI. The term “fund”, a kind of collective investment, is used to refer to a ready-made financial product where investor’s money is pooled into a portfolio and a fund/investment manager decides which shares to buy. As reported by the Social Investment Forum (SIF, 2010), during 2009 funds topped their benchmarks across nearly all asset classes, including balanced, large cap, small cap and global funds, as well as bonds1 (Table 1).

Table 1.
SIF member mutual fund performance by benchmark
Average Annual Returns
U.S. Large Cap
Benchmark: S&P 50026.46%-5.63%0.41%-0.95%
# SRI funds analyzed73564132
SRI fund performance32.67%-4.92%-0.24%0.03%
% SRI funds beating benchmark average72.6%50.0%36.6%62.5%
U.S. Mid Cap
Benchmark: S&P 400 Mid Cap37.38%-1.83%3.27%6.36%
# SRI funds analyzed9964
SRI fund performance36.24%-4.00%-0.15%0.77%
% SRI funds beating benchmark average33.3%33.3%0.0%25.0%
U.S. Small Cap
Benchmark: Russell 200027.17%-6.07%0.51%3.51%
# SRI funds analyzed161065
SRI fund performance32.37%-7.65%-4.70%1.46%
% SRI funds beating benchmark average62.5%20.0%0.0%20.0%
U.S. Balanced
Benchmark: Blend 60% S&P 500, 40% Barclays Capital U.S. Aggregate18.40%-0.67%2.52%2.25%
# SRI funds analyzed9777
SRI fund performance20.54%-2.70%0.78%1.12%
% SRI funds beating benchmark average77.8%14.3%0.0%28.6%
U.S. Fixed Income Bond
Benchmark: Barclays Capital U.S. Aggregate5.93%6.04%4.97%6.33%
# SRI funds analyzed15141310
SRI fund performance8.04%4.86%4.13%5.40%
% SRI funds beating benchmark average66.7%14.3%7.7%0.0%
International Equity- EAFE
Benchmark: MSCI-EAFE32.46%-5.57%4.02%1.58%
# SRI funds analyzed161255
SRI fund performance28.11%-10.45%-1.16%-2.94%
% SRI funds beating benchmark average31.3%0.0%0.0%0.0%
Percent of SRI funds (all asset classes) beating benchmark65.0%32.7%21.5%37.5%

Source: Benchmarks selected by and data from Thomson Reteurs; Analysis by Social Investment Forum, 2010, Washington, DC.

Note: data within parenthesis are negative numbers.

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