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December 03, 2002
Moskowitz Prize Pays Tribute to Evidence of SRI Funds' Competitive Performance
    by William Baue

A Dutch paper documenting no significant difference between returns from SRI funds and conventional mutual funds wins this year's coveted Moskowitz Prize.

The body of evidence showing SRI's competitive financial performance continues to grow. This year's Moskowitz Prize was awarded to yet another paper that documents the competitive returns of SRI mutual funds. The Moskowitz Prize, which was established by the Social Investment Forum (SIF) in 1996, recognizes outstanding research related to social investing. The paper that won this year's prize found no statistically significant difference between returns of international SRI mutual funds and returns of conventional funds.

The prize-winning paper, entitled International Evidence on Ethical Mutual Fund Performance and Investment Style, extends the existing research on SRI mutual fund performance by applying a more sophisticated analytical method. The paper was written by Rob Bauer and Roger Otten of the Limburg Institute of Financial Economics (LIFE) at the University of Maastricht and Kees C. G. Koadijk of the Centre for Economic Policy Research (CEPR) at Erasmus University Rotterdam.

"The reason we chose [to study] ethical investment fund performance is that we would very much like to know whether investing based on social [and] environmental criteria actually costs performance," said Professor Bauer. "We read some articles that showed that it does not necessarily have to be the case, but then again we argue that the underlying empirical studies were not always performed with modern performance measurement techniques. In our paper, we collect funds for three countries simultaneously and we investigate the performance with up-to-date evaluation methodology."

The research examined 103 ethical mutual funds in Germany, the United States, and the United Kingdom over the period between 1990 and 2001. The researchers applied the multi-factor Carhart model, which was first used in 1997. The Carhart model is the cutting edge of diagnostic tools for comparative analysis of fund performance.

"[The paper's] most important finding is that, after adjusting for risk and controlling for investment style, there seems to be no statistically significant difference in returns between SRI funds and conventional funds," Prof. Bauer told "Apparently, SRI investors do not need to be too afraid of losing return versus conventional funds, on average." Prof. Bauer added that "the SRI funds seem to be a little bit less risky than conventional funds."

A jury of scholars and investment professionals evaluate submissions for the Moskowitz Prize based on the papers' practical significance to practitioners of socially responsible investing. Submissions are also evaluated based on the appropriateness and rigor of the quantitative methods used and on the novelty of the results. This year's winners received a $2,500 prize at the SRI in the Rockies conference, which took place this year in Colorado Springs. International Evidence on Ethical Mutual Performance and Investment Style was also published in The Journal of Investing as part of the award.

Prof. Bauer advocates for the continuation of research comparing the performances of SRI and conventional mutual funds.

"In my opinion, the most important direction is to provide a lot of empirical evidence on the added value of SRI by expanding the number of countries [studied] and making the database richer," said Prof. Bauer.
He and his colleagues intend to add to the body of knowledge themselves with a follow-up study.

"We are indeed planning to write a new article on how these funds behave during bear markets and the impact of the screening methodology (positive, negative and best-in-class) on return, risks and styles," Prof. Bauer said.


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