Abstract
This paper investigates the investment performance of Malaysian Islamic equity funds and a matching sample of conventional equity funds relative to their market benchmark. An integrated model is used to simultaneously capture the market timing and selectivity skills of fund managers. Our findings indicate that the Islamic funds do not match the performance of the conventional funds in terms of selectivity skill. However, Islamic funds perform no worse than their conventional counterparts in market timing, although neither outperform the market. These findings have crucial implications not only for fund managers’ investment decisions, but also for sensitive shariah-compliant investors and risk-seeking investors of Islamic equity funds in their investment portfolio preference.
Highlights
According to divine Islamic law or shariah, investors are permitted as well as urged to trade, invest, and share the direct level of risk through profit- and loss-sharing (PLS)
Average returns of Islamic funds vary from −0.5 percent to 2.13 percent, while average returns of conventional funds vary from 0.14 percent to 1.04 percent
Mean value of betas of Islamic and conventional funds are 0.7220 and 0.7717, respectively. These betas range from 0.3387 to 1.1012 for Islamic funds and from 0.4748 to 1.1914 for conventional funds. It appears that the sample Islamic funds have lower average returns, lower risk, and lower betas compared to their conventional counterparts
Summary
According to divine Islamic law or shariah, investors are permitted as well as urged to trade, invest, and share the direct level of risk through profit- and loss-sharing (PLS). Rahman et al (2017), (Aarif et al 2020 and Azmi et al (2020) compared the investment performance of ethical equity mutual funds and their traditional counterparts in the US, finding that the former perform no worse than the latter, and there is some evidence of superior security selection and/or market timing skills only among a few of them. Muhammad and Dawood (2019) examined the importance of assets allocation based on smart beta strategies (specific equity attributes) on fund performance rather than securities selection. They declared that these strategies need further verification. This article fills the gap in the literature by investigating the investment performance of selected Islamic equity funds in Malaysia utilizing the Bhattacharya–Pfleiderer model.
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