Does Faith Matter in Mutual Funds Investing? Evidence from Saudi Arabia

Abstract

This article investigates one of the most vital issues in the Islamic mutual fund literature: Are there any costs associated with investing in Islamic mutual funds? We used a unique sample of 143 Saudi mutual funds and grouped them into portfolios based on their geographical focus, Shariah compliance, and the Saudi market trend (overall, bull, bear, and the crisis period). Findings suggest there is a benefit from adhering to Shariah law in locally-focused Saudi mutual funds. However, there is a cost of this adherence in internationally-focused Saudi mutual funds. Finally, in Arab-focused Saudi mutual funds, there is neither a cost nor a benefit.

KEY WORDS:

• Islamic finance
• Islamic mutual funds
• risk-return profile
• Saudi Arabia
• Shariah law

Notes

1. See “GCC Mutual Fund Industry Survey 2010. Dr. Gıyas Gökkent is the Group Chief Economist in the National Bank of Abu Dhabi and is the editor and author of the “GCC Mutual Fund Industry Survey 2010” which was released on February 9, 2011. The study can be found at the following link: http://www.nbad.com/economic/countries/gcc_mf_industry_survey2010.php.

Note that Shariah is an Arabic word that refers to the legislative framework that regulates all aspects of life, both private and public.

2. The numbers are collected from different sections of the report titled: “Gulf Cooperation Council Mutual Fund Industry Survey.” http://www.qfc.com.qa/Files/GCC%20Mutual%20Fund%20Industry%20Survey%202011.pdf.

3. Source: http://www.tadawul.com.sa.

4. Source: http://www.hsbcsaudi.com.

5. Zawya is one of leading Middle Eastern business information firms. Their main website is: http://www.zawya.com. I would like to express my deep appreciation to Mr. James Randall, the international business manager, for providing me a trial access to the database.

6. Source: http://www.globalinv.net.

7. Source: www.msci.com. The MSCI data contained herein is the property of Morgan Stanley Capital International (MSCI). MSCI, its affiliates and any other party involved in, or related to, making or compiling any MSCI data; make no warranties with respect to any such data. The MSCI data contained herein is used under license and may not be further used, distributed, or disseminated without the express written consent of MSCI.

8. Conventionally, mutual fund returns are calculated as capital gains plus income (dividends). However, because obtaining data on dividends was very difficult, dividends are not accounted for in this study.

9. According to Hoepner, Rammal, and Rezec (2011), “It is common practice to analyze portfolios of assets with religious of ethical characteristics based on equal weighted rather than value weighted portfolios. This practice ensures a focus on the assets religious or ethical characteristics and substantially reduces the risk of bias due to idiosyncratic return characteristics of a specific asset” (p. 10). This is why in this empirical study all formed portfolios are equally-weighted portfolios.