Measuring the selectivity and market timing performance of Islamic mutual funds in the KSA

Habib Hasnaoui,Ibrahim Fatnassi

doi:10.5267/j.ac.2021.3.002

Abstract

This paper examines the selectivity and market timing abilities of Islamic fund managers in the Kingdom of Saudi Arabia (KSA), since the empirical research has yet to explore the profitability and investment risk factors involved. We use a uniquely large set of data for 134 Islamic funds for a period from June 2002 to December 2019, and this was free from any survival bias. We found that Islamic fund managers in the KSA demonstrated good selectivity skills but no market timing ability. We also found that Islamic fund managers in the KSA tend to select companies with aggressive investment patterns despite their low profitability.

Highlights

IntroductionMutual funds are an attractive investment since they are managed by professionals to accommodate a high level of diversification
We found that Islamic fund managers in the Kingdom of Saudi Arabia (KSA) demonstrated good selectivity skills but no market timing ability
This study investigated the performance of the Islamic fund managers of the KSA in terms of selectivity and market timing

Summary

Introduction

Mutual funds are an attractive investment since they are managed by professionals to accommodate a high level of diversification. The performance of these funds is a key factor in attracting investors by offering higher returns than other investments. Islamic finance is among these alternative forms of investments, and its financial products are in accordance with sharia rules, such as by excluding any involvement in gambling, entertainment, weapons trading, and alcohol products, among others. According to the IFSB’s 2019 stability report, in the second quarter of 2018, the Islamic Financial Services Industry was estimated at USD 2.19 trillion. According to the same source, the KSA and Malaysia are dominating the Islamic fund industry, with them together hosting 66% of all Islamic funds. Saudi Arabia alone manages 34% of all Islamic funds

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