Geczy, Stambaugh, and Levin (2003)

Geczy, Christopher C., Robert F. Stambaugh, and David Levin. "Investing in Socially Responsible Mutual Funds." Wharton School, Working Paper, May 2003.

Compares the performance of 35 socially screened U.S. equity funds (those with 3-years' performance history through 12/01) with 859 unscreened funds for the 1963-2001 time period.

Finds 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.

Uses a Bayesian approach to estimate performance impact under multiple performance attribution models and investor behavior assumptions. Finds that "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 CAPM and maintain complete disbelief in manager skill [an indexing scenario - LK], or when their minimum allocation to SRI funds is small." Reports performance differences between optimized screened vs. optimized unscreened portfolios, with screened strategies underperforming unscreened ones " 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.

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 of the reported screened fund underperformance in the indexed scenario appears to be attributable to the screened funds' higher expense ratios.

LK comment:  This study received an Honorable Mention in the 2003 Moskowitz Prize competition.