According to the 2016 Report on US Sustainable, Responsible and Impact Investing Trends, published by the Social Investment Forum, an estimated $8.72 trillion is invested in socially responsible mutual funds. This is one fifth of all professionally managed assets. Why would an investor choose such a fund? It's likely this investor feels strongly that corporations choosing to act in a socially responsible manner are worth investing in. Alternatively, this investor may choose to omit corporations engaging in particular activities from his or her portfolio. In the end, many investors want to feel good about the activities undertaken by companies they hold in their portfolio. But the question remains, if social screening of the universe of investment choices diminishes alternatives, does a portfolio built around these screens generate returns that are distinctly superior or inferior on a risk-adjusted basis?

This is the central question addressed by Project 2. If you choose this project,

1. You will need to motivate the relevance of this topic by expanding on the discussion in the introduction above.
2. Search for prior research in the area of socially responsible investing. (This is your week 4 deliverable.)
3. Collect return data for 9 socially responsible funds from the CRSP Mutual Fund database.

The funds to be examined are:

CRSP Fund Identifier

Fund Name

NASDAQ Ticker

5488

Ariel Appreciation Fund

CAAPX

7026

Calvert Small Cap Fund; Class A Shares

CSIEX

7283

Sentenial Sustainable Mid-Cap Opportunities Fund; Class A Shares

CVALX

9201

Domini Social Equity Fund; Investor Shares

DSEFX

14029

Green Century Equity Fund

GCEQX

22031

Neuberger Berman Socially Responsive Fund; Investor Class Shares

NBSRX

23828

Parnassus Fund

PRBLX

29571

TIAA-CREF Social Choice Equity Institutional

TISCX

37368

Pax World Small Cap Fund; Individual Investor

PXSCX

Find and download 60 monthly returns for each of these funds. The period for analysis is April 2012 through March 2017. You will obtain this data using the WRDS portal. You want to choose CRSP, then Mutual Funds (Under Quarterly Update), then Monthly Returns. When asked for the format of your mutual fund codes, you should choose either Fund Identifier or NASDAQ Ticker. (Use one or the other, not both!) Input the nine codes in the box provided within the data request template. You will need two data items, Return per Share and Total Net Asset Value. We suggest you request your output file in comma-delimited text, or csv, format. Files in this format will open automatically in Excel. If you have requested data properly, your output file should have 540 total observations (9 funds times 60 months).

You will also need to download risk factors for the same 60-month period. At the top left portion of the page where you designed your data request, you will see "Select an available dataset." From the pull-down list, select Fama-French Portfolios and Factors, then Factors-Monthly Frequency. Again, you need monthly factors from April 2012 through March 2017. You will need to download all 5 factors to complete the analysis.

3. Once you have downloaded and organized your data, you will analyze your sample of 9 socially responsible mutual funds using the performance evaluation methodologies from week 3. This includes the calculation of alpha, beta, and other coefficients derived by estimating:

• the 1- factor model (CAPM, or Jensen's alpha),
• R_i - R_f = _i + _i (R_M - R_f)
• the 3-factor model (Fama-French alpha),
• R_i - R_f = _i + _i (R_M - R_f) + s_iSMB + h_iHML
• and the 4-factor model (FF plus Carhart),
• R_i - R_f = _i + _i (R_M - R_f) + s_iSMB + h_iHML + u_iUMD

You must estimate a total of 33 regressions, three for each of the nine firms, three for the set of equal weighted average monthly returns for your entire sample and three for the set of value weighted average monthly returns for your entire sample.

4. Add any additional analysis you think will enhance the insight of the project at this point. The analysis described in step 3 is mandatory and provides a base for evaluation and discussion. This is your opportunity to provide unique quantitative analysis to further address the major research question of the study.

5. Consolidate your results into a section of your report and draw conclusions based on your analysis.

Note: the report mentioned above and additional information regarding socially responsible mutual funds can be found on the US SIF website.