9
Morningstar FundInvestor
February 2
013
through
2012
while outperforming their peers. That’s
a success ratio of
25%
, versus
22%
for non-
SRI
funds
for the same period. Thus, by this measure,
SRI
funds look slightly better than their peers over both
10
-year time frames, though not by enough to get
excited about.
Next, we considered average percentile rank over the
same
10
-year periods. Percentile rank is a good
way to compare performance by funds of widely
different types, because each fund is ranked relative
to its own category peers. Between year-end
1997
and year-end
2007
, the
SRI
funds in Morningstar’s
database had an average
10
-year percentile rank of
56
, meaning they performed slightly worse, on
average, than their peers. (Lower numbers are better
here, with
1
the best score and
100
the worst.)
Between
2002
and
2012
, the average percentile rank
for
SRI
funds was almost the same, at
57
.
At first glance, these numbers seem to support the
idea that social screening hurts fund returns, contrary
to what we saw with the success rate. However,
the results are less clear-cut when we look at indi-
vidual five-year periods. The underperformance of
SRI
funds during these periods came entirely between
2002
and
2007
, when their average percentile rank
was
58
. From
1997
through
2002
, these funds signifi-
cantly outperformed their peers with an average
percentile rank of
42
, and from
2007
through
2012
,
they had an average percentile rank of
49
, right
near the median. Those numbers reflect the fact that
(as we saw above)
SRI
fund performance can vary
in different market conditions, and they suggest that
these funds might have looked significantly better
over a different
10
-year period.
We also compared actively managed
SRI
funds with
passively managed ones such as those offered by
Vanguard and
TIAA
-
CREF
. The sample size of
18
pas-
sive funds at the beginning of the period means
we don’t want to read too much into it, but it is inter-
esting nonetheless. In this case, passive
SRI
funds
performed abysmally. Only
11%
survived and outper-
formed over the ensuing
10
-year period compared
with
26%
for actively managed
SRI
funds. In fact,
Vanguard FTSE Social Index
VFTSX
ranks second-
worst for
10
-year returns among Vanguard’s index-
fund lineup. One possible explanation is that the
passive
SRI
funds often had less of a cost advantage
than other index funds, although that wouldn’t account
for the Vanguard fund, which charges just
0
.
29%
.
Social Screening: Positive, Negative, or Neutral?
Taken together, these results don’t provide significant
support for the idea that social screening either
helps or hurts mutual fund returns. That’s consistent
with the many academic studies over the past
20
years that have looked for such effects and failed to
find them. Among the first of these was a
1993
study by Hamilton, Jo, and Statman in
Financial
Analyst Journal
, which found no significant difference
in the risk-adjusted returns of socially screened
versus unscreened mutual funds. Meir Statman came
to a similar conclusion in a
2000
follow-up study
in the same journal, as have numerous subsequent
authors since then.
Some of these studies have found minor ways in
which
SRI
funds collectively differ from the broader
market, but none of them is worth worrying about
for ordinary investors. In essence, these studies have
found that social screening is a “free good,” mean-
ing that it doesn’t affect long-term returns one way
or the other. If you’re considering a socially respon-
sible mutual fund, you should definitely make sure its
screening agrees with your principles, but it’s not
worth worrying too much about whether that screen-
ing itself will hurt your returns. Any effect from
such screening is going to be overshadowed by more
important factors that are useful in evaluating
any mutual fund, such as manager track record
and expenses.
œ
Contact David Kathman at
Socially Responsible Fund Performance, 1997-2012
Years
# of Funds at Start
10-Yr Success Rate Avg 10-Yr % Rank
SRI funds
1997-2007
86
30
56
2002-2012
170
25
57
Non-SRI funds
1997-2007
6,857
28
43
2002-2012
9,643
22
45
Passive SRI funds
2002-2012
18
11
62
Active SRI funds
2002-2012
152
26
56
