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data, showed that the Vice Fund (VICEX) didn’t have any alpha
during the past 5 years. Large management fees essentially captured all the alpha the strategy generated. An alternative to naughty investing is socially responsible investing
. This might be a sound investing strategy because environmentally conscious consumers usually don’t mind paying a premium for the goods and services they receive. As a result some of these companies might have higher profits.
One mutual fund
that invests in socially responsible stocks is the Ariel Fund (ARGFX).
We didn’t want to pick the largest socially responsible investing mutual funds because better performing funds usually get bigger. So by picking the largest ones, we could inadvertently pick the better performing mutual funds
. What we did was search for the best performing socially responsible mutual funds before 2005. Among those, we separated those that invests in US equities. Then we randomly chose the Ariel Fund (ARGFX). It's also one of the larger socially responsible mutual funds around. It has more than $2 billion under management, and has been around since 1986. Its expense ratio
is 1.06% and its annual turnover is 40% - which is quite low for mutual funds. So, Ariel seems to represent socially responsible mutual funds.
We obtained monthly returns from Yahoo! Finance and used Carhart’s four factor model
to calculate Ariel Fund’s alpha. Yahoo has returns starting from July 1996. Our regression for the entire 14 year period shows that the Ariel Fund had a 2.7 basis points alpha per month. This isn't really that different from zero. The fund’s market beta is 0.94, has a small cap tilt, and invests in value stocks
. Remember we picked this fund because of its spectacular performance before 2005. What we really are interested in is its performance over the past 5 years. We calculated Vice Fund’s (VICEX) alpha for the past 5 years, so we can compare those results to those of the Ariel Fund.
Unfortunately, the Ariel Fund (ARGFX) didn’t perform well during the past 5 years. Its monthly alpha was -23 basis points. Its market beta was 1.09 and the fund invested disproportionately in small value stocks
with negative momentum
. This means Ariel Funds investors underperformed by more than 2.5 percentage points per year
. Considering its expense ratio is around 1 percent, this investment style didn’t have any alpha even before