Does it pay to be a faithful investor? : a risk-based approach performance analysis of Islamic funds versus UCITS schemes

Abstract

This study investigates the performance of Islamic funds in comparison with that of UCITS schemes. Their risk and return relationship is evaluated relative to a market benchmark over a 10 year period from January 2006 until December 2015, thus capturing both bull and bear market conditions. Results show that there is no clear-cut dominance of one category of funds over the other.

The faithful Islamic funds‟ investors do not face a competitive disadvantage arising from their strict compliance with Shari‟ah law, as the performance of Islamic funds is relatively comparable to that of UCITS schemes, and they generally share similar investment styles. The time-series regressions revealed that neither Islamic nor UCITS schemes were able to generate statistically significant positive alpha, and their fund managers do not possess market timing abilities. Worst still, in the aftermath of the financial crisis, both categories significantly underperformed the market. Thus the faithful investor might reap better risk-adjusted returns by investing in Exchange Traded or Index Tracking Islamic funds instead of targeting individual funds. In line with existing empirical literature, results show that Islamic funds represent a low risk investment due to their very mild betas, and thus, when forming part of a diversified portfolio, they can act as a hedging tool against adverse market movements.