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Islamic Mutual Funds


Title: Folie 1 Author: Besitzer Last modified by: sbbd083 Created Date: 10/27/2009 3:15:21 PM Document presentation format: On-screen Show Other titles – PowerPoint PPT presentation

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Title: Islamic Mutual Funds

Islamic Mutual Funds Financial Performance and
Investment StyleEvidence from 20 countries
  • Andreas G. F. Hoepnerab,Hussain G. Rammalc
    Michael Rezeca
  • a School of Management, University of St. Andrews
  • b Academic Fellow, United Nations Principles for
    Responsible Investment
  • c International Graduate School of Business,
    University of South Australia
  • Presenting Author
  • Tables with the papers statistical results are
    distributed before the presentation.

Summary (1)
  • First sophisticated, large scale analysis of
    Islamic equity funds financial performance and
    especially investment style
  • 262 funds from 20 countries for up to 20 years
  • Development of a three level Carhart model to
    simultaneously control for national, regional or
    global equity market and investment style
  • Modified versions to
  • allow for time varying factor exposure
  • Investigate performance during losing markets and

Summary (2)
  • Findings
  • Western Islamic equity funds significantly
  • Islamic equity funds seem to have a small cap
    preference given their restrictions on corporate
    revenues from haram activities
  • Islamic funds from the predominantly Muslim GCC
    countries and Malaysia neither significantly
    underperform nor have a clear small cap
  • This is theoretically intuitive given the more
    Shariah compliant economies.
  • Some evidence that Islamic funds exhibit a
    hedging function, as their universe is limited to
    low debt/equity ratio firms

  • Islamic Investment is a multibillion dollar
    industry with hundreds of funds and indices (Dow
    Jones, FTSE, MSCI, SP)
  • Islamic Funds are defined by their Shariah
  • Shariah law prohibits
  • Riba al Nasiah (receipt of interest on capital)
  • Prevents from bonds, warrants etc.
  • Maysir and Gharar (Gambling and uncertainty)
  • Prevents from leverage, short selling,
  • Haram (forbidden) products and services
  • Prevents from i.e. pork, (non-medical) alcohol or
  • Contemporary Shariah scholars tend to allow
    investment in stocks with tolerable proportions
    of revenues from prohibited activities under the
    condition of Haram purifcation (donation of
    impure distributions to charity)

Theoretical perspective on Islamic funds
performance and style
  • Shariah law
  • prevents a pure profit focus but might be good
    long term risk management
  • restricts market risk timing abilities, which, on
    average, do not generate value (e.g. Bollen
    Busse, 2001)
  • Islamic funds are less resticted in economies
    more affected by Shariah law due to a smaller
    degree of intolerable stocks
  • Shariah compliance of products and services is
    likely financially more beneficial in economies
    with a higher degree of Muslim consumers
  • Islamic funds investment style probably
  • exhibits under-proportional betas,
  • small cap exposures, as large, diversified
    companies more likely have intolerable
    proportions of revenues from prohibited activites

Previous research on Islamic funds financial
performance and investment style
  • Next to nothing
  • On financial performance the benchmarks are
  • CAPM for 59 funds for 5 years (Kraeussl Hayat,
  • CAPM for 14 Malaysian funds for 10 years
    (Abdullah et al., 2007)
  • On investment style, the reliable benchmark is
  • Investigation of size and value/growth exposure
    of 6 US funds over 5.7 years
  • Hence We claim to pursue the first
    sophisticated, large scale analysis of Islamic
    equity funds financial performance and
    investment style

Research Questions
  1. Does the financial performance of Islamic equity
    mutual funds significantly differ from the
    respective equity market benchmark?
  2. Which investment styles are preferred by Islamic
    equity mutual funds?
  3. Is Islamic mutual funds performance differential
    to their respective market benchmarks
    significantly better in losing markets and
    especially in (financial) crises?
  4. Do national differences exist in the answers to
    questions (1)-(3)?

  • Data shortage in Islamic equity fund studies
  • Survivorship bias adjusted sample of 262 Islamic
    equity funds from Eurekahedge starting with the
    launch for the first fund in 09/1990 and ending
    in 04/2009
  • We construct equal weighted national portfolios
  • Descriptive Stats (in Table 1) show
  • Asia-Pacific, GCC and Europe to be leading
  • Malaysia, Saudi-Arabia and UK (inclusive overseas
    Islands) to be leading countries
  • Attrition rates in line with conventional funds
  • Very diverse geographic foci require special
  • Carhart (1997) model variables from Style
    Research Limited based on Worldscope database
  • Risk free asset returns from Datastream

National financial performance and investment
  • Carhart (1997) model
  • Our results (in Table 2) show
  • Significant underperformance in 75 of cases
  • Half of the national portfolios to have a
    significant preference for small cap stocks
  • Effect much more pronounced for Western countries
  • A tendency to prefer growth over value stocks at
    national level
  • No tendency towards momentum or contrarian stocks

International financial performance and
investment style
  • To control for diverse geographic foci, we
    develop a three level Carhart (1997) model using
    Elton et al.s (1993) orthogonalization approach
  • Our results (in Table 3) show
  • In nearly all cases a substantially higher Adj.
  • Interesting picture of national, regional and
    global exposure
  • Model eliminates nearly 50 of the significant
  • Only 8, mostly Western, national portfolios
    significantly underperform
  • All GCC portfolios and Malaysia perform
    comparable or better
  • Supports theoretical perspective on relevance of
    Muslim economies
  • Small cap preference remains in contrast to
    growth stock preferences

Financial performance in losing markets and
(financial) crisis
  • To address 3rd question, we add dummies to
    previous model
  • Our results (in Table 4) show
  • Some evidence of a hedging function of Islamic
    funds in losing markets
  • No evidence of a specific, additional crisis
    hedging function of Islamic funds
  • gt

Conclusion (1)
  • Islamic equity funds, on average, trail their
  • Possible (complementing) explanations
  • Shariah law compliance
  • Active investment strategy
  • ? To be differentiated, once sufficient data
    becomes available
  • Islamic equity funds have small cap preference
  • Theoretically intuitive given limited tolerance
    to revenues from prohibited activities
  • The density of Muslim consumers in an economy
    appears positively related to Islamic funds
    financial performance and large cap exposure
  • Explanations A higher Shariah compliance in an
  • mitigates the restrictions on Islamic funds
  • increases the probability that Shariah
    compliance is financially beneficial for

Conclusion (2)
  • Islamic funds appear to have a bit of a hedging
    function in losing markets but are no additional
    hedge in crises
  • The hedging function theoretically intuitive, as
    Islamic funds are restricted to invest in
    companies with a low debt/equity ratio
  • Our three level Carhart model and its extensions
    appear very useful in the analysis of
    geographically diverse investment strategies like
    Islamic funds
  • It might hence be valuable for other analyses of
    asset pricing or investment performance

Appendix Slide(s)
Robustness test
  • We extend our three level Carhart model to allow
    for time varying factor exposure in line with
    Ferson and Schadt (1996) and Cortez et al.
  • Our results (in Table 5) show
  • Our results of Table 3 are robust to time
    variations in factor exposure, as only two alpha
    coefficients change their significance level in
    opposite directions in conditional model
  • Most Islamic fund managers do not seem to vary
    their exposure over time,
  • The few, which do, fail to generate alpha with it