Mutual funds efficiency measurement taking into account financial and socially responsible criteria

Abstract

Socially responsible investors have both, financial as well as non-financial goals in investment decision-making. But, while several methods have been developed for investment decision making based on financial criteria, decision making models including also socially responsible criteria are rather underdeveloped. This work proposes a new methodology based on Data Envelopment Analysis (DEA) consistent with second-order stochastic dominance (SSD) efficiency to compute a performance index for equity mutual funds which considers the expected financial return and an environmental responsibility all together. With this aim, a model is proposed which measures social environmental responsible performance at two levels: first, at the level of the companies invested in by the mutual funds (e.g. Corporate Social Performance, CSP) and then, at the level of socially responsible mutual funds’ management. Using Kinder, Lindberg and Domini Inc. (KLD-CSP) data from 1,353 companies invested in by 50 large cap equity U.S. mutual funds (both, socially responsible and conventional mutual funds) and other financial data from Morningstar Ltd., our study presents the first application of a DEA model for mutual funds performance measurement taking into account not only their financial performance but also their social environmental responsibility.