Performance of low volatility shariah equities in Malaysia

Abstract

Underperformance of Islamic equity investment encourages investors to look for new strategies such as low-volatility investing. The most popular advantage in low-volatility stocks picking approach claimed by global players, is the ability of volatile or bear market as a tool to reduce losses. The main objective of this paper is to investigate the performance of low-volatility Shariah stocks in Malaysia by using FTSE Bursa Malaysia Emas Shariah Index as the universe. The performance is evaluated using risk adjusted ratio, Sharpe and Treynor ratio over a 10-year period from 2006 to 2016. The results show that the low-volatility shariah stocks in Malaysia outperformed the conventional stock market in medium and long-term period. However the low-volatility Shariah stocks underperformed the FBM Emas Shariah Index for all period of study. The analysis also suggest that in long-term period, Sharpe Ratio of low-volatility equity has a significant lower unsystematic risk. The Sharp Ratio for long-term period is the highest among the quintile portfolio. Sharpe Ratio of 0.01 indicates that the low-volatility has earned an excess return over the risk free rate 0.01 the level of risk that it adds. However, short-term and medium-term show negative Sharpe Ratio for all quintile portfolio indicate that these portfolios earn a negative excess return over the risk free rate of every 1% of risk that it adds.