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Frequently, socially responsible investing (SRI) is said to beat managed funds (see Ethical Funds Outperform - Sydney Morning Herald). This might be true or might just be SRI funds trying to promote themselves by selectively choosing statistics.

However, I cannot find any direct comparisons between performances of SRIs and market index funds.

I have tried to do some research myself. Here is the performance of 'Vanguard Index Australian Shares Fund'. Here is the performance of 'Australian Ethical Managed Funds'. Over 10 years, the balanced Australian Ethical fund has a 4.7% return compared to Vanguard's 4.39%. Similarly, Australian ethical beats Vanguard on returns over the past 1, 3 and 5 years.

Given that most people say that nothing beats the market (on average), I'm surprised by this. I also don't have much experience in this, so I think I might be missing something in my comparisons.

I have two questions: - is the above comparisons valid, or have I not accounted for something? - is there any other evidence that SRIs beat market index funds, or visa versa?

  • "Past performance is not a guarantee of future results." How far back can you test those funds? What's their best,/worst result during sliding 1/3/5/10-year windows? – keshlam Sep 10 '16 at 4:44
  • Vanguard Australian Shares Fund's inception was 1998 and Aus Ethical Balanced Fund 1989. – James Sep 10 '16 at 4:57
  • [Some suggestions for anyone willing to do the research to write an answer]. ① You have to be careful of survivorship bias when making comparisons. ② Also, see paragraph 6 of that article; that makes me wonder if they outperformed during the 10 years ending 2011, or 2010,…—or was it just the 10 ending 2012? – derobert Sep 10 '16 at 5:03
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Google Scholar can be a good place to get a number of comparisons. Academics are particularly interested in SRI as a number of universities employ some from of SRI for their endowments. I found your question interesting so I read through a number of the articles.

It is important to note that there are now many ways to do SRI and many of them do not have much of a performance history. Surprisingly, there were a number of articles attesting to the out-performance of SRIs compared to standard stock indicies over a similar period to the one you mentioned. It's worth noting though that the more careful papers mentioned that the results are noisy and could easily be due to chance and the particular time period and many of the early SRIs were fairly similar so many could have enjoyed the same out-performance.

My (initial) conclusion is that there wasn't enough good data to justify expecting long-term out-performance, but definitely look for yourself. It's worth mentioning also that some SRIs have significantly higher fees than index funds so if little out-performance is expected than the fees will eat away at the results.

  • I thought usually the returns are calculated net of administration and investment management fees. At least this is true for the data I gave on Australian Ethical Managed funds. – James Sep 11 '16 at 2:05
  • They can be and should be for comparisons given to potential investors. Sometimes academic literature will compare index to index to get a cleaner comparison and assume you can worry of the details of fees and tracking error. – rhaskett Sep 12 '16 at 19:11
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From 1967 to 1997, the Super Bowl Indicator correctly predicted the Dow Jones index to rise or fall 28 of 31 times. Does this mean that the Super Bowl winner has any real impact on the market?

Probably not. It's far more likely that this just means that the Dow Jones index usually goes up and that the old NFL teams usually won. As a result, most years both things occurred. As the old NFL's dominance ebbed, the indicator has been less "reliable".

Is there anything like that that could explain Socially Responsible Investing (SRI) doing better than average? Sure. All that it would take would be for the last ten years to be better than average for that particular SRI fund. That could happen because the last ten years have been bad for some traditional investments, e.g. oil prices have fallen over that time.

Over 10 years, the balanced Australian Ethical fund has a 4.7% return compared to Vanguard's 4.39%.

Pick a hundred random stocks that were for sale in Australia in 2006. Calculate the return. Now do that a thousand more times. By your thesis, that a 4.7% return is a statistically significant improvement over a 4.39% return, at least 95% (if not 97.5%) of the time, this should be less than 4.7%. I suspect that rather than the twenty-five or fifty examples of such divergence, you'll have at least a hundred.

A given managed fund can beat the market over a ten year period. They do so regularly. On average though, all the funds will lose money relative to the market.

It's possible that SRI funds will beat the market over the next ten years. They have a strategy. That strategy can have different performance over a ten year period. It might be better performance.

Fidelity breaks down performance by sector. The three best sectors over the last ten years were Consumer Discretionary, Information Technology, and Healthcare. The three worst were Financials, Energy, and Telecommunication Services. So if SRI looks down on traditional Energy investments, that alone could explain better results. Particularly such modestly better results.

An even better return could have been achieved by investing in only Consumer Discretionary. That's a US result, but presumably there is an Australian equivalent.

They may be right that SRI has been better since it has been introduced. But like with the Super Bowl Indicator, people should be careful not to rely on this too much. The Super Bowl Indicator was incorrect for three years in a row from 1998-2000. Energy was the second worst sector in the last ten years and the worst in the last five and three years. But in the last year it roughly tracked the market. The worst sector has been Healthcare.

  • Are you saying correlation does not equal causation? At least, not every time? Brilliant answer. – JoeTaxpayer Sep 10 '16 at 16:54

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