Social Responsibility and Portfolio Performance

For example, one investment publication, Pensions and Investments, has published over twenty articles on the subject in the last year. The President's Commission on Pension Policy and the Department of Labor are also studying the issue.

A survey of money managers and sponsors conducted by the author suggested that the issue would largely remain the fascination of the media. A similar result, obtained from a more formal survey, was reported in “How Pension Offices View Social Responsibility,” Institutional Investor (April 1979), pp. 85–89.

For a review of some of the issues see Mares Judith , “The Use of Pension Fund Capital: Its Social and Economic Implications—Some Background Issues,” Working Paper, President's Commission on Pension Policy (November 1979).

Control Data Corporation is reported as stating their guidelines as, “We are not going to tell them [the portfolio managers] what constitutes ‘social responsibility’ criteria… . We merely want them to consider certain criteria and we want them to make the determination as to which companies to invest in.” Scott Maria Crawford , “Control Data Instructs Managers to Use ‘Socially Responsible’ Criteria,” Pensions and Investments (13 August 1979), p. 1.

For discussions of proxy voting see Purcell Theodore , “Management and the ‘Ethical’ Investors,” Harvard Business Review (September-October 1979), pp. 24–44; and Heard Jamie , “Investor Responsibility: An Idea Whose Time Has Come?” Journal of Portfolio Management (Spring 1978). pp. 12–14.

Of course, excluding certain assets implies targeting the remaining investment opportunities so the two issues are related. Because the actual decision is different in the two cases, the distinction is useful and is retained here.

See Sharpe William F. , Investments (Englewood Cliffs, New Jersey: Prentice-Hall, 1978).

The most common method for obtaining the normal portfolio is by computer simulation. For one description of this procedure see Tepper Irwin , “Risk vs. Return in Pension Fund Investment,” Harvard Business Review (March-April 1977), pp. 100–107.

Segmentation effects similar to that described here do exist. For instance, there is an effect caused by differential taxation between income and capital gains, hence, justifying a “yield-tilt” strategy for tax exempt funds.

See also Rosenberg Barr , “Extra-Market Components of Covariance in Security Returns,” Journal of Financial and Quantitative Analysis (March 1974), pp. 263–274.

There may also be a small cost component from one-time custodial charges.

Most major endowment funds have made computations similar to these with regard to divestment of companies operating in South Africa.

One large index fund manager reported to the author that their transactions costs, including market impact, ranged between 0 and 20 cents per share, and had averaged 3 cents per share over an eighteen month period.

See, for instance. Malkiel Burton Quandt Richard , “Moral Issues in Investment Policy,” Harvard Business Review (March-April 1971), pp. 37–47; “Social Investing Could Hurt Fund Performance,” study by Computer Directions Advisors, Inc. reported in Pensions and Investments (19 November 1979) p. 35. Note: Neither of these studies used risk-adjusted rates of return to correct for the different risk levels.

Rudd Andrew , “Divestment of South Africa Equities: How Risky?” Journal of Portfolio Management (Spring 1979), pp. 5–10

“A Study of Investment Practices and Opportunities, State of California Retirement Systems,” prepared by the Council on Economic Priorities, New York City (1980).