Islamic Equity Funds Research Articles

Comparative analysis of Shari’ah-compliant portfolios: evidence from Pakistan

PurposeThis study aims to comparatively analyze the performance of Islamic and conventional income and equity funds using various performance evaluation methods.Design/methodology/approachThe authors comparatively analyze the performance of mutual funds using measures, such as tracking error, Sharpe ratio (1966), Treynor ratio (1965), M-square measure by Modigliani and Modigliani (1997) and information ratio. The authors also use market timing and selection measures, such as Treynor and Mazuy model (1966), Henriksson and Merton (1981) model and Fama’s decomposition approach (1973).FindingsThe authors find that Islamic equity funds are as much competitive as conventional equity funds. All Islamic equity funds have positive Sharpe ratio, Treynor ratio and net selectivity measure. Islamic equity funds are slightly less risky in general. Islamic equity and income funds generally have positive Jensen's Alpha and a positive market timing ability. However, the authors find that Islamic income funds generally underperform the market due to less Shari’ah-compliant investment class assets in the market.Practical implicationsIt will help the industry players to assess their strategic positioning with regard to the commercial competitiveness of Islamic investments.Originality/valueThe authors take considerably large sample of 60 funds in Pakistan as compared to previous studies and also cover recent period (2006-16). For income funds, the authors construct an original benchmark index based on price and dividend data and use that in performance assessment.

Studi Komparatif Kinerja Reksadana Saham Konvensional dan Syariah Di Indonesia

This study aims to compare the performance of conventional stock mutual funds and Islamic stock mutual funds with the Sharpe Index method, Treynor Index, and Jensen Index. This study aims to determine whether there are differences in performance between conventional mutual funds and Islamic mutual funds. The population in this study is mutual funds managed by Investment Managers who manage both subcategories of conventional and sharia mutual fund types of shares. This type of research is comparative research. The data used are secondary data obtained from published reports by the Financial Services Authority (OJK). The results of the study using Sharpe, Treynor and Jensen methods show that the performance of conventional and Islamic equity funds has a performance above risk-free investment performance. With these three results, the performance of conventional and Islamic stock mutual funds does not have a significant difference.

Comparing the determinants of fund flows in domestically managed Malaysian Islamic and conventional equity funds

PurposeThis paper aims to provide an empirical evidence on the fund flows-past return performance relationship by also considering the management expense ratio, the portfolio turnover, the fund size and the fund age of Islamic equity funds (IEF) investors in comparison with conventional equity funds (CEF) investors.Design/methodology/approachBy using panel data, the sample of Malaysian domestic managed equity funds is considered which comprises 20 individual funds from IEF and CEF from 2011 to 2013.FindingsThe results provide evidence that IEF investors have different factors when choosing funds in comparison with CEF investors. The study finds that the key factor influencing the fund flows of IEF is the management expense ratio, compared to the CEF which is fund size. This study also shows that all the fund characteristics of IEF and CEF are positively or negatively related to the fund flows.Research limitations/implicationsThe present study may be extended by considering other fund categories such as the money market fund, the balanced fund, the bond fund and the fixed income fund.Practical implicationsThe empirical findings of this paper clearly call for fund managers and investors to review their investment policy. The results could also provide better information and guidance for investors as well policy makers on the factors that affect the fund flow for Malaysian Islamic funds and CEF.Originality/valueThis paper is among the earliest empirical evidence studies on the fund flows-past return performance relationship by focusing in a comparative manner on IEF investors and CEF investors in Malaysia.

Is the Islamic Unit Trust Market Efficient? Empirical Evidence from Malaysia

Based on Malaysian data covering the period from April 2006 to December 2015, this article investigates the informational efficiency of the Islamic unit trust market. The study considers various types of Islamic unit trust funds and analyzes their relationship with selected macroeconomic variables. The authors apply the Engle and Granger [1987] and Granger [1969] causality tests to seven models comprising different types of Islamic unit trust funds. The results suggest that Islamic equity, balance, fixed, and feeder funds violate the efficient market hypothesis (EMH), while the Islamic bond, mixed, and money market funds hold for the weak form of EMH. These results provide empirical evidence to guide fund managers and unit-holders who are considering market efficiency in strategizing their trading proficiency in UTFs. The outcomes also enable authorities to take steps toward improving fund disclosure practices, so that prices immediately reflect relevant information.

The contribution of market movements, asset allocation and active management to Islamic equity funds’ performance

Where the performance of Islamic equity funds (IEFs) comes from? Is it from market movements, asset allocation policy or from active portfolio management? Our study is the first to tackle this question in the Islamic funds context. We use a database covering 281 IEFs for the period 2007-2016, and we test the role of each factor in explaining their returns. We find that market movements dominate the others components explaining nearly 50% of the monthly return variability and that, taking together, asset allocation policy and active management explain approximately the second half of IEFs returns. We argue that the IEFs underperformance observed by the existing literature could come from an inefficient and too important active portfolio management.

The Disclosure Practices of Islamic Equity Funds

ABSTRACTWe investigate the disclosure practices of screening and compliance information of Islamic equity funds around the world. Disclosures on Sharia advisors and screening information are quite high, but they are lower for compliance information such as Sharia advisory report (SAR) and holdings data. The results show that younger funds with better Sharia advisory board (SAB) governance which are domiciled in countries belonging to an Islamic international standard-setter body have the highest disclosure levels. However, funds domiciled in countries with a central SAB and following common law disclose less Sharia-related information. These findings are important for the effectiveness of disclosure framework.

International Islamic funds

Internationally-investing Islamic equity funds from developed Islamic and non-Islamic markets perform in general similar to the market. However, analyzing different market conditions, we provide evidence that funds domiciled in Islamic markets outperform their peers and funds from non-Islamic markets during market turmoil, irrespective of the applied performance measurement model. We suggest that this outperformance is owed to the expertise of fund managers from developed Islamic markets who operate in a financial environment that is driven by Islamic principles. Our results are robust with respect to the standard Fama-French three-factor and four-factor models as well as to the novel five-factor model.

A comparative analysis of the smart money effect in Malaysian Islamic and conventional equity funds

ABSTRACTThis paper undertakes a comparative analysis of the ‘smart money’ effect—whereby investors are able to identify funds that subsequently perform well—among Malaysian Islamic and conventional domestic equity funds. We find that Islamic equity fund investors are unable to identify funds that will outperform benchmarks in the future. However, these same investors have some ability in identifying poorly performing funds. The key implications are as follows. First, Islamic equity investors naively chasing recently highly performing funds only incidentally benefit from mutual fund momentum strategies. Second, fund managers may be able to benefit from a contrary ‘dumb money’ effect found among Islamic equity fund investors in that they appear most concerned with only very poor performance in determining the flow of funds. Finally, we find high search costs may be one reason why investors naively chase past better performing funds.

International evidence on Islamic equity fund characteristics and performance persistence

This research examines the presence of performance persistence and the impact of fund-specific characteristics on Islamic equity fund (IEF) performance. We conduct an empirical study based on an extensive Database of 301 IEFs and for the period 1999–2013. Our results reveal that fund age, family size and management fees have a significant positive impact on IEF performance. On the other hand, other characteristics such as flows, minimum investment size, higher liquidity, and load fees have negative effect on fund performance, whereas fund size has no significant impact on IEF performance. Our study reveals that Islamic equity funds exhibit negative performance persistence. The paper provides relevant practical implications for managers, analysts and investors. To our knowledge, this empirical study is the first to investigate the intrinsic determinants of Islamic equity fund performance, with sufficient statistical power that is based on an effective sample size with international diversity.

Between Macroeconomic Variables and Net Asset Value (NAV) of Islamic Equity Funds: Evidence from Pakistan

between Macroeconomic Variables and Net Asset Value (NAV) of Islamic Equity Funds: Evidence from Pakistan

A Comparative Returns Performance Review of Islamic Equity Funds with Socially Responsible Equity Funds and the Broader Market Indices

Islamic mutual funds and socially responsible mutual funds are two similar asset classes that incorporate negative screens in their portfolio selection process to filter out stocks that fail to meet certain ethical, social, environmental, and/or religious standards. This study uses a single-factor capital asset pricing model and an adjusted sample consisting of 224 Islamic funds and 573 socially responsible funds to examine their excess risk-adjusted returns, market volatility, and systematic risk. It also gauges the market-timing abilities of the fund managers concerned in relation to both Islamic/socially responsible and conventional market indices. While there are some differences in the risk factors of Islamic funds and socially responsible funds, both are associated with lower risks and have the same market-timing ability.

A critical analysis of Islamic equity funds

Purpose – The purpose of this paper is to highlight the inconsistencies between the methodologies of Islamic funds and indices. Design/methodology/approach – The paper has reviewed the methodologies of the most prominent funds and indices (5) to apply their apparent screening features to the asset universe. In the analysis conducted, qualitative and quantitative screens are derived from each selected fund and index methodological approach to asset selection subject to Shari’ah constraints. Qualitative screens are applied first followed by quantitative screens. Findings – Few inconsistencies are evident between the chosen funds and indices when the qualitative screens are applied. However, the major inconsistencies are highlighted after analysis of the quantitative screens. Research limitations/implications – A number of companies within the asset universe are investment trusts, and such financial statement line item data were not found. However, this posed no difficulty, as these companies were investment trusts and would have been excluded in the qualitative screening process. Social implications – This paper will assist in the construction of a framework which thus leads to the development of a standardized methodological approach, ultimately benefiting investors. Originality/value – This paper is believed to be the first which analyzes the impact of Shari’ah screens on the Financial Times Stock Exchange (FTSE). Additionally, this paper also analyzes the impact of Shari’ah screens pre and post the financial crisis. The findings of this research paper will also aid in the construction of a different research methodological approach capable of selecting halal securities listed in the FTSE 250.

Large scale analysis of Islamic equity funds using a meta-frontier approach with data envelopment analysis

The paper aims to analyze the efficiency of Islamic equity funds (IEF) during crisis and growth periods and across six investment regions. To our best knowledge, our study uses for the first time the meta-frontier approach with data envelopment analysis (DEA) to compare the relative efficiency of Islamic equity funds. The paper uses a large scale set of data with a sample of 301 IEF for the period of 1993–2013 which enables us to reach conclusions across different investment regions and across different periods which cannot be made with a small size set of data. The paper provides empirical evidence about the improvement of the efficiency levels between 2002 and 2007. It shows that the average efficiency scores during recession periods are higher than the corresponding scores during growth periods. The paper also reveals that the Asia Pacific and Middle East/Africa investment regions exhibit the best technology for IEF. While North America, Europe, Emerging Markets and funds investing worldwide operate with almost the same scores and remain below the average showing a technology gap from “the best practice” for IEF. For funds investing worldwide and in North America, the meta-technology ratio is steadily increasing since 2009, indicating an improvement in their technologies. Our results suggest that although Islamic funds do not seem to be impacted by the financial crisis, they do need to improve their efficiency since the levels are far below the frontier.

Ethical Screening and Financial Performance: The Case of Islamic Equity Funds

Whether ethical screening affects portfolio performance is an important question that is yet to be settled in the literature. This paper aims to shed further light on this question by examining the performance of a large global sample of Islamic equity funds (IEFs) from 1984 to 2010. We find that IEFs underperform conventional funds by an average of 40 basis points per month, consistent with the underperformance hypothesis. In line with popular media claims that Islamic funds are a safer investment, IEFs outperformed conventional funds during the recent banking crisis. However, we find no such outperformance for other crises or high volatility periods. Based on fund holdings-based data, we provide evidence of a negative curvilinear relation between fund performance and ethical screening intensity, consistent with a return trade-off to being more ethical.

Does Shari’ah Screening Cause Abnormal Returns? Empirical Evidence from Islamic Equity Indices

Islamic equity funds are subject to the screening criteria for stock selection imposed by the principles of Islamic jurisprudence (Shari’ah). Equities must pass three basic screens: revenue source, business activity, and financial factors to be included in an Islamic fund. However, screening criteria are not universal especially for the financial factors. One can use financial ratios based on either the book-value of total assets or the market-value of equity for screening of stocks. This may not only result in a different portfolio composition but also entail diverse rebalancing and monitoring costs. The performance of 29 Islamic equity indices (IEIs) versus conventional indices from four major international index providers using different Shari’ah screening criteria are analyzed in a single as well as in a multi-equation framework. The use of a multi-equation framework has the added advantage of utilizing the information content of different screening criteria adopted by different index providers. The empirical findings suggest that the difference in screening criteria does not significantly affect the performance of IEIs. Returns deviation, if any, stems from the relative riskiness of the IEI as compared with the relevant benchmark. Work needs to done to streamline the quantitative screening criteria to avoid confusion among the investing public.

The Calendar Impact And Trading Behavior: An Empirical Evidence From Around The Globe

This paper is aimed to determine a change in the stock markets returns or its volatility from the globally selected Islamic mutual funds during the month of Ramadan, as all Muslims around the world eagerly and enthusiastically follow the rituals of the holy month of Ramadan. The paper uses monthly data of equity funds for those which are domiciled and those which operate globally within the period of January 2004 until December 2009. It is interesting to note that the empirical results provide no supporting evidence for the effect of the Ramadan month on the Islamic equity fund performance when examined using a dummy variable for the Ramadan month. Nevertheless, the evidence reveals that the volatility of stock returns remarkably decreases during this month. The reason for the decrease in volatility may be the result of the speed of economic activities during that month. Although, there is a decline in stock return volatility in the month of Ramadan, the return indicates no significant change.

Islamic and Conventional Equity Fund Rating Performance withalReturn, Sharpe, Modified Snail Trail, and Morningstar Rating Groundwork

This research aims to assess the performance of equity fund in Indonesia, Islamic and Conventional, whether they can outperform the market. The samples used in this research are 36 equity funds which have been established prior to January 2008. The performance measurement methods are rating based on return, Sharpe index, Modified Snail Trail, and Morningstar. This research finds that the performance of Islamic equity fund does not differ significantly compared to market and conventional equity fund based on return and Sharpe Index. The finding in high rating portfolio is quite obvious, high return and Sharpe Index rating portfolios produce the highest expected return of 1.09% in 5 years. Meanwhile, modified snail trail method shows 1% expected return, and the lastly, Morningstar rating indicates 0.64% return. These portfolios, except for Morningstar rating, outperform to benchmark portfolios namely, equally weighted portfolio and minimizing risk portfolio in all of three categories.

Heads we win, tails you lose: Is there equity in Islamic equity funds?

We made the first estimate of the proportion of fund alpha statistically attributable to luck rather than skill for a sample of Malaysian Islamic equity funds. Broadly, the funds do not outperform market benchmarks. In the limited instances where performance is superior, based on a contemporary methodology, as much as 47% of the observed positive fund alpha is statistically attributable to luck. Thus, at 5% significance level, we find only 1.95% of our funds to be genuinely skilled. Our findings raise questions regarding the equitability of these funds levying fixed fees, making a case for potential innovation in fund remuneration structure.

Shariah-Compliant Portfolio Management: A More Suitable And Balanced Risk-Return Matrix?

The subject study requires the screening of FTSE100 constituents for Shariah compatibility in qualitative as well as quantitative criteria, constructing synthetic portfolios basis outlines provided and mapping past three years performance of such portfolios versus those of the FTSE100 and FTSE Islamic indexes. The FTSE, Dow Jones and MSCI Islamic indexes were formed not long ago to cater to a growing Muslim investor segment that seeks to invest in Shariah-compliant investments (FTSE-MENA 2008, Dow Jones, FTSE and MSCI). Banks and financial institutions otherwise have been recognised to have much earlier created investment avenues for the Muslim population (Sole, J, 2007). As such, Shariah-compliant, or Islamic, finance and investment have developed tremendously in past many years. According to several research studies and surveys by many organisations and individuals, some of which include Novethic (2009) and RREEF (2008), the industry has grown by an annual average of 18%-20% in the past decade itself. These studies provide the estimated current size of the Islamic finance industry close to USD One Trillion, and growing; expected to touch USD 1.1 Trillion by the end of the year (Standard Chartered, 2012). A survey by BDO (2009) suggests similar levels of growth continuing over the coming years as expected by industry professionals, which could very well take its scope beyond the trillion dollar mark within a short period of time.At the same time however, and unsurprisingly enough, the Islamic finance industry comes with its own set of issues currently being grappled with as identified by McMillen, M (2011), inter alia. While these issues are being tackled, it seems worthwhile to validate the various claims that Islamic investment makes as a safer and more feasible investment alternative as opposed to its conventional contemporaries. Hussein, K (2004) undertook one such study and successfully highlighted this phenomenon to be true, at least in one straightforward technical measure. On the other hand Kraussl, R and Hayat, R (2008) found that “…Islamic Equity Funds (IEF) are underperformers compared to Islamic as well as to conventional equity benchmarks”; and that “...IEF managers are bad market timers”. We undertake this study to validate whether Shariah-compliant methods in finance truly provide a more conducive and balanced risk-return sketch on the global investment canvas, as opposed to that witnessed with the conventional counterpart. While the scope of the study is limited to a marginal sample size of only three years financial data, we do in fact find that from a risk-adjusted perspective Shariah-compliant investment appears to be a better investment alternative. Following that, underlying questions to the coursework are attempted to be answered in parts throughout the paper, and summarised in conclusion.

Smart Money in Malaysian Islamic and Conventional Equity Funds

This paper undertakes a comparative analysis of the smart money effect in mutual funds - whereby investors are able to identify funds that subsequently perform well - in Malaysian Islamic and conventional domestic equity funds. We find that Islamic equity fund investors are unable to identify funds that will outperform benchmarks in the future. However, these same investors have some ability to identify poorly performing funds and relocate their funds accordingly. This contradicts our findings regarding their conventional counterparts, such that conventional equity fund investors are generally able to identify better performing funds and modify their investments in light of this information. The main key implications are as follows. First, Islamic equity investors naively chasing recently highly performing funds only incidentally benefit from mutual fund momentum strategies. Second, fund managers may be able to take advantage of a ‘dumb money’ effect found among Islamic equity fund investors in that they appear most concerned with only very poor performance in determining the flow of funds, not so much a lack of superior performance. Finally, high search costs may be one reason why investors naively chase past better performing funds.