It turns out that social idealists don't have to feel guilty about making money in the stock market .
According to a study published by finance professor Meir Statman, the Domini 400 Social index and the Citizens index produced higher average monthly returns than the Standard & Poor's 500 index between January 1995 and April 2004. Both the Domini and Citizens indexes screen out companies that do not practice human rights and that derive earnings from gambling, the production of firearms, weapons of mass destruction, nuclear power, alcohol and tobacco. The Citizens index, however, focuses more on corporate governance and diversity than the Domini index.
Mr. Statman is the Glenn Klimek professor of finance at the Leavey School of Finance at Santa Clara University, Santa Clara, Calif., and is widely credited for conducting much of the pioneering work in the area of behavioral finance. The study, "Socially Responsible Indexes: Composition, performance and tracking errors," is set to be published in the Journal of Portfolio Management in the fall.
Mr. Statman's findings could help to debunk the myth among institutional investors that in order to invest responsibly, they must give up returns. Between 1995 and 2004, the average, monthly return of the DS 400 was 1.13% with a standard deviation of 4.89%; for the Citizens index, the mean monthly return was 1.14% with a standard deviation of 5.71%; and for the S&P 500, the mean return 1.04% with a standard deviation of 4.64%.
The SRI indexes didn't outperform the S&P 500 in every subperiod, however. For example, the average monthly returns of the SRI indexes lagged the S&P 500 between 2000 to 2004 — the years following the bursting of the tech bubble.