Enhancing the Returns of SRI Portfolios Using a Minimum Variance Small-Basket Strategy

The focus of this research is on enhancing the returns of socially responsible investment (SRI) portfolios by constructing minimum variance small-basket portfolios. The results suggest that individual investors and professional financial planners on behalf of their clients can realize enhanced performance relative to SRI funds that contain a large number of stocks by constructing minimum variance portfolios that generally contain fewer than 10 stocks. Over the 10-year period from 2002 through 2011, which is a function of the availability of SRI fund return data, the average annual excess returns for the minimum variance small-basket portfolios range from 2.59% to 6.99% relative to the larger SRI funds from which the small-basket funds are constructed. Measures of total risk and downside risk further support the enhanced performance of the minimum variance small-basket portfolio strategy. Perhaps most importantly, the minimum variance small-basket strategy that we describe can be easily implemented by individual investors or by professional financial planners on behalf of their clients