PERFORMANCE OF SHARIAH VERSUS CONVENTIONAL FUNDS: LESSONS FROM EMERGING MARKETS

Abstract

This study compares the performance of Shariah and conventional mutual funds in emerging markets. The performance of 833 Shariah and conventional funds in 6 emerging markets from 2000 to 2015 was analyzed. We analyzed the Sharpe index, Treynor index, and Jensen’s alpha to compare the performance of Shariah and conventional funds. Jensen's alpha results conform to those of Sharpe’s in indicating that Shariah funds slightly outperform their conventional counterparts particularly in the case of Malaysia, Pakistan, and South Africa. Conventional funds perform exceptionally well in Egypt. Further investigation using the Henriksson–Merton model shows that fund managers’ performance relies nearly completely on their stock selection skills because they have either inferior or ineffective ability in timing the market. This study is the first cross-country attempt to compare the performance of Shariah and conventional funds in emerging markets in terms of risk-adjusted returns, security selectivity, and market timing capability. 
 
 Keywords: Emerging markets, Jensen’s alpha, mutual funds, risk-adjusted performances, Shariah mutual funds
 
 Cite as: Abdul-Rahim, R. Abdul-Rahman, A., & Ling, P-S. (2019). Performance of Shariah versus conventional funds: Lessons from emerging markets. Journal of Nusantara Studies, 4(2), 193-218. http://dx.doi.org/10.24200/jonus.vol4iss2pp193-218