Measuring the overall efficiency of SRI and conventional mutual funds by a diversification-consistent DEA model

This paper presents an application of data envelopment analysis (DEA) based approaches to assess the relative financial and nonfinancial efficiency of mutual funds (MFs). Our approach measures corporate sustainability (CS) of the MFs from the rating process carried out by social agencies on the constituent firms. We have modified the raw scores of the firms invested in by the MFs in order to overcome the compensatory effect when the MFs invested in both "good" and "bad" firms. For this purpose, we have used prospect theory in such a manner that the original scores awarded to the firms are modified by applying a value function. Three extensions of Branda's model are formulated. The first model measures financial efficiency, the second model measures CS efficiency and is an output-oriented DEA model, and, the third is a DEA model for measuring overall efficiency of the MFs. In the last step of the proposed methodology, the set of overall-efficient MFs is ranked applying technique for order of preference by similarity to ideal solution to the two DEA scores corresponding to the two partial DEA models. The risk and return measures have been chosen so that the proposed models are consistent with the second-order stochastic dominance relation. Therefore, under a finite number of equiprobable scenarios for the rates of return, a set of conditional value at risk for several confidence levels are used as inputs of the models that consider the financial performance. The proposed approach is illustrated with real data on a set of 144 French MFs, 31 marketed as socially responsible investment MFs.