Thu, Oct 19, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Islamic Finance Intelligence

Industry Snapshot: Islamic Mutual Funds: Reviewing their Financial Performance and Investment Style Around the World by Andreas G. F. Hoepner, Hussain G. Rammal & Michael Rezec

Tuesday, October 27, 2009

Since it's commercialisation in the 1970's, Islamic finance has rapidly gained acceptance worldwide. In particular, the Islamic investment sector has experienced exceptional growth with Dow Jones, FTSE, MSCI and S&P jointly offering hundreds of Islamic equity indices. The collapse of several conventional financial institutions during the infamous Global Financial Crisis has placed the spotlight on the Islamic financial sector which was able to demonstrate stability during the crisis. To better understand the reasons for performance differences between conventional and Islamic assets, one needs to understand the expectation of Islamic investments. Islamic funds managers are expected to invest in assets that comply with Shari'ah principles and are therefore halal. Islamic law prohibits investment in businesses that deal with interest-bearing financing organisations, produce or sell alcohol or pork-related products, and ammunition. Therefore, like socially responsible investment, Shari'ah compliant investment refuses to only pursue profits.

Very recently, a study by Hoepner, Rammal and Rezec (2009, see reference link) analysed the financial performance and investment style of Islamic equity funds from 20 countries in five regions (Africa, Asia-Pacific, Europe, Gulf Cooperation Council, and North America). The study sampled a period of two decades and is based on the performance of 262 equity funds, which makes it, by far, the largest analysis of Islamic funds to date. (Previous studies had at most investigated 60 funds). Specifically for the purpose of investigating and comparing the performance of Islamic funds around the world, the authors extend Carhart's famous four factor model (1997, Journal of Finance) and developed a three level Cahart model (12 factors). This model simultaneously assesses the financial performance of assets at the national, regional and global level and thereby allows to compare Islamic funds from different nations (e.g. Saudi Arabia and US) and different regions (e.g. GCC countries, North America) in their ability to deliver abnormal risk adjusted financial returns.

The findings of Hoepner et al 's (2009) study reveal that, in Western markets, Islamic equity funds appear to trail their equity market benchmark returns on average. Furthermore, Western Islamic funds are significantly exposed to a small stock preference. In contrast, Islamic funds from countries with a significant Muslim population neither underperform their equity market benchmarks nor experience a small cap preference. These results has some economic intuition for two reasons: First, Muslim countries have more Shari'ah compliant business activities and hence Islamic fund managers have fewer restrictions in terms of companies and industries they can invest in. Second, larger, more diversified companies have a higher risk of receiving intolerable degrees of revenue from prohibited activities especially in Western countries. This second explanation can fairly be expected to drive Islamic funds' preference for small cap stocks.

Finally, the study also finds some evidence that the pattern of investment in assets with a low debt to equity ratio may help explain the strong performance of the Islamic financial sectorduring economic downturns. As Islamic funds tend to avoid investing in high risk assets (due to uncertainty or gharar) they tend to be less affected during economic crises than investments in high risk/high return assets. This evidence is not only important for Islamic fund managers but also points conventional fund managers to the opportunities to hedge their portfolios against crises by investing in Islamic funds.

In summary, Hoepner et al. (2009) find evidence supporting the view that Islamic investors from predominantly Muslim countries (i.e. GCC countries and Malaysia) do not sacrifice financial returns by investing actively in line with their religious principles. Even more, they find some evidence that Islamic investors in some countries (e.g. Bahrain, Saudi Arabia) experience a superior protection against overall equity market losses.

Acknowledgements:

We welcome questions, comments, or general enquiries regarding our study or this short review. You can contact the authors contact the author via email.

We are very thankful to Eurekahedge and Style Research Limited for provision of the data, on which our study is based. The views expressed in our study and this short review are not necessarily shared by the Principles for Responsible Investment.

References:

Carhart, M. M. (1997) "On persistence in Mutual Fund Performance." Journal of Finance, 52 (1): 57-82.
Hoepner, A. G. F., Rammal, H. G. and Rezec, M. (2009) "Islamic Mutual Funds' Financial Performance and Investment Style: Evidence from 20 Countries", Working Paper, School of Management, University of St. Andrews (Available at SSRN: http://ssrn.com/abstract=1475037)



Article Link

<< Go Back to Archive

Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Regulatory - David Stockman: Trump tax reform overhaul is a pipe dream, stocks are heading for 40-70% plunge, Carried interest tax: How much does it matter?, Odey sees 'terrifying' mix in MiFID, tapering, asset values, Hedge funds come together to share cost of MiFID and research, SEC turns up the heat on U.S. investment advisers, India's Sebi asks hedge funds to report investments in commodity derivatives[more]

    David Stockman: Trump tax reform overhaul is a pipe dream, stocks are heading for 40-70% plunge From CNBC.com: David Stockman is warning about the Trump administration's tax overhaul plan, Federal Reserve policy, saying they could play into a severe stock market sell-off. Stockman, the R

  2. North America - Puerto Rico rejects loan offers, accusing hedge funds of trying to profit off hurricanes[more]

    From TheIintercept.com: Puerto Rico has rejected a bondholder group's offer to issue the territory additional debt as a response to the devastation of Hurricane Maria. Officials with Puerto Rico's Fiscal Agency and Financial Advisory Authority said the offer was "not viable" and would harm the islan

  3. Investing - WPP targeted by short-selling American hedge fund, Sun co-founder sells secretive hedge fund on big chip trade[more]

    WPP targeted by short-selling American hedge fund From Cityam.com: An American hedge fund has mounted a bet against WPP, the world's largest advertising group, with a trade worth almost £90m. Lone Pine Capital has built a short position worth 0.51 per cent of the FTSE 100 company,

  4. Hedge funds up as industry adjusts to rising rates[more]

    Komfie Manalo, Opalesque Asia: Hedge funds have reshuffled their portfolio after nearly four weeks of rising rates as the Lyxor Hedge Fund Index was up +0.2% from 19 September to 26 (+1.1% YTD), fuelled by strong results of global macro funds, Lyxor Ass

  5. Manager Profile - How the world's hedge fund king used 'idea meritocracy' to become a billionaire[more]

    From Forbes.com: In 1982, Ray Dalio made what he calls the biggest mistake of his life. He made a bet that there would be an economic collapse stemming from a debt crisis. And he was wrong. He lost money. He lost his client's money. He had to let people go from his firm and borrow money from his dad