What’s the price for “doing good” via investments?
January 30, 2008
The authors Christopher Geczy, Robert Stambaugh David Levin (all from University of Pennsylvania) find important differences between the screened and unscreened funds:
- Screened funds had an average expense ratio of 1.3% vs. 1.1% for unscreened ones.
- Screened funds had lower turnover, 81.5% average vs. 175.4%.
- Screened funds tended to be smaller, $150 mm average assets vs. $260 mm.
They use a Bayesian approach to estimate performance impact under multiple performance attribution models and investor behavior assumptions. The authors find “that the costs of the SRI constraint can be as little as 1 or 2 basis points per month in certainty equivalent terms, but only when investors adhere rather strongly to a belief in the Capital Asset Pricing Model (CAPM) and maintain complete disbelief in manager skills [an indexing scenario], or when their minimum allocation to SRI funds is small.” They report performance differences between optimized screened vs. optimized unscreened portfolios, with screened strategies underperforming unscreened ones “typically... at least 30 bps/month” under more aggressive strategies, e.g., when investors try to select outperforming managers on the basis of past risk-adjusted performance.
The study does not provide a breakdown of performance differences over sub-periods — there were very few screened funds prior to 1985 — or quantify the impact of differences in fund size. Much or all of the reported screened fund underperformance in the indexed scenario appears to be attributable to the screened funds' higher expense ratios.
This paper received an Honorable Mention the 2003 Moskowitz Prize competition, awarded by the Social Investment Forum. The Moskowitz Prize, which in 2004 became an initiative of the Center for Responsible Business at the University of California, Berkeley, promotes the concept, practice, and growth of socially responsible investing.