Derwall, Jeroen, and Kees Koedijk. "Socially Responsible Fixed-Income Funds." Working Paper, Erasmus University, May 2006.

This strong study analyzes the returns of U.S. SRI fixed income and balanced mutual funds for the 1987-2003 time period. Each SRI fund is matched to five non-SRI funds selected for similarity in fund age, fund size, and 'investment scope.'

Returns are evaluated using a 4-factor model which takes into consideration broad market sensitivity, quality spreads, optionality, and an equity return measure (this last factor is important primarily for the balanced funds). Additional, more complex models are also used.

Results are presented separately for high-quality bond funds, high-yield funds, and balanced funds. Finds that alphas for both high-quality and high-yield SRI bond funds were statistically indistinguishable from those of their unscreened counterparts.

Balanced fund performance was notably superior for the SRI products, however, as they had an annual alpha of +1.36% better than that of the unscreened funds. This difference was significant at the 5% level.

Concludes that "as we do not find any indication that socially motivated constraints are binding on fund performance, our evidence supports the idea that SRI in the fixed-income industry is a financially viable approach."