Abstract
PurposeThis paper empirically investigates the performance of Islamic funds, which have been praised for weathering the 2008 financial storm relatively well and compares it to a European product designed to protect the most vulnerable of investors, UCITS funds.Design/methodology/approachThis paper builds on 128 time-series regressions using various factor models to analyse the risk-return relationship of 242 Islamic and UCITS funds relative to a market benchmark, over a 10-year period starting January 2006, to capture severe bear and bull market conditions.FindingsIslamic funds do not face a competitive disadvantage arising from their strict compliance with Sharīʿah principles, and their performance and investment style is relatively similar to UCITS schemes.Practical implicationsIslamic funds represent a low risk investment due to their very mild betas. Therefore, when forming part of a diversified portfolio, they can act as a hedging tool against adverse market movements.Social implicationsMuslim investors are not punished relative to conventional retail investors when following their own beliefs. Other investors can consider Islamic funds in their portfolio allocation, especially those who seek socially and ethically responsible investments.Originality/valueThis paper fills a lacuna in the existing literature, because the sample is made up of Islamic funds established worldwide and includes not only equity, but also fixed income and mixed allocation funds.
Highlights
The one exception to this rule is evidenced in the Undertakings for Collective Investment in Transferable Securities (UCITS) mixed allocation funds portfolio during the post-crisis period, which had a significant negative alpha value
The global financial crisis revealed the weakness of the global financial architecture on one side and provided an opportunity for Islamic finance to show the inherent strengths and qualities on the other. (Haneef and Smolo, 2014)
In order to gauge their resilience to diverse market conditions, their performance was compared to two different benchmarks, firstly to the general market as proxied by the MSCI ACWI and secondly to a category of conventional collective investment schemes (CIS) which is synonymous for its conservative investment approach, namely UCITS schemes
Summary
Islamic Economic Studies Vol 29 No 2, 2022 pp. The quote which Sir Isaac Newton used to define the law of gravity could be applied to the modern financial markets. The severity of the 2008 financial crisis brought the world to its knees, and for such reason, it has been labelled as the worst financial crisis since the Great Depression. Albeit its JEL Classification — C12, C32, G11. KAUJIE Classification — I73, L31, V12 © Joseph Falzon and Elaine Bonnici.
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