Comparative Fund Flows for Malaysian Islamic and Conventional Domestic Managed Equity Funds

Abstract

Existing studies find that investors in socially responsible investments (SRI) (also known as sustainable, socially conscious, or ethical investment) exhibit different investment behaviour in comparison to conventional investors. This potentially also holds with Islamic investment, a unique form of SRI based on Shariah (Islamic law). This paper presents empirical evidence on the fund flow–performance relationship of Islamic equity fund (IEF) investors in comparison with conventional equity fund (CEF) investors. Using panel data on a large sample of Malaysian domestic equity funds from 2001 to 2009, the results provide evidence that IEF investors care about fund performance in much the same way as CEF investors. There is also weak evidence that IEF investors are more responsive towards poor performing funds by withdrawing money from these funds. When choosing funds based on other fund attributes, IEF investors again exhibit similar behaviour to CEF investors, investing more money into younger, larger, riskier funds as well as funds with higher expense ratios and turnover. We find that the market index has a negative influence in money flows such that investors consider market volatility as an opportunity and increase investment when market has not been doing well. The implications for Malaysian fund management are as follows. First, IEF investors appear to undertake rational investment decision making and thus fund managers managing IEF funds cannot expect a free ride because of the presence of Islamic principles in their construction. Second, bearish markets may be an opportunity for fund managers to increase funds under management as investors actively choose to invest funds in well-diversified