On the post-financial crisis performance of Islamic mutual funds: the case of Riyad funds

ABSTRACT

Using Riyad Capital mutual funds as a proxy for Saudi Arabian mutual funds, this paper empirically compares the risk-adjusted performance and investment style of Islamic mutual funds with that of conventional funds in the wake of the recent global financial crisis of 2009–2014. Absolute and relative risk-adjusted measures with single factor (Jensen) and multifactor (Carhart) models are applied. Our findings suggest that Islamic funds outperformed conventional funds domestically, given similar risk exposure, and produced comparable results under lower market risk globally. The results show that Islamic funds are a relatively big cap from the strong statistical significance registered on the global side as evidenced by the difference portfolio outcomes. In addition, the difference portfolios provide statistical evidence that Islamic funds are more value-oriented compared to conventional funds on both fronts. Furthermore, Islamic funds tend to slightly favour a contrarian trading investment strategy as suggested by statistically significant local portfolio value and global difference portfolios results. The results of home bias test show stronger ties by local Islamic funds to local market relative to the global proxy suggesting that domestic investors and managers favour Islamic funds over conventional funds, thus confirming a local preference for Shari’ah-compliant investments.

KEYWORDS:

• Islamic finance
• Islamic mutual funds
• performance analysis
• home bias
• three-level Carhart model

JEL CLASSIFICATION:

• G11
• G12
• G20
• G24

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Total Islamic Banking Assets:1,496.5 (billions USD) – Total Sukuk outstanding: 290.6 (billions USD)

² Mutual funds in Saudi Arabia are managed by 41 institutional fund managers. Five major investment companies (NCB Capital Co, Riyad Capital Co., SAMBA Capital, ALRAJHI Financial Services Co. and HSBC Saudi Arabia Limited) share 80% of the market.