Return differences not caused by ‘SRI effect’
January 30, 2008
Equity portfolios whose selection of securities is subject to social responsibility screening represent different sets of economic opportunities from, and hence generally produce different returns from, those of more broadly based market indices. Analysis with a fundamental factor model shows that the DSI’s industry exposures explain much of its relative performance, and has a non-significant residual, suggesting the absence of a social factor. Analyzing the data with an APT optimization model, the authors find that the risk profile of the DSI can be matched prospectively to that of the S&P 500. A backtest of the risk-matched social portfolio indicated returns of 1.49% per month for the period under review, similar to the S&P’s 1.55% per month.
This article was previously published on stristudies.org, January 30, 2008.
Lecturer of social investing, Haas School of Business
President and founder, Northfield Information Services