The performance of socially responsible mutual funds: a volatility‐match approach

Purpose – The purpose of this paper is to examine the performance of a sample of socially responsible mutual funds (SRMFs) and a matched sample of conventional funds during the 1997‐2005 time period. Design/methodology/approach – Risk‐adjusted performance is examined using several methodologies, including a measure that compares the performance of a fund with that of an efficient and volatility‐match benchmark portfolio. Findings – On the basis of the raw returns, socially responsible funds performed better than some market indexes but this evidence of outperformance disappears once risk is incorporated into the analysis. Consistent with previous studies, no evidence was found of out performance by socially responsible funds. Also, the difference between the performance of SRMFs and conventional mutual funds is not statistically significant. This result is robust to the use of two additional measures of risk‐adjusted performance. Originality/value – To measure risk‐adjusted performance, a measure first introduced by Graham and Harvey was employed. Similar to the Jensen's alpha of a single factor model, the Graham and Harvey measure evaluates fund performance relative to a volatility‐match benchmark but does not depend on a linear model specification and thus is free from the potential biases presented by linear models.