Constrained investments and opportunity cost – evidence from Islamic funds
Abstract
Purpose
The purpose of this paper is to examine the impact of Shariah guidelines on the performance of the Dow Jones Islamic Index (DJIM-US). Shariah or Islamic law is a set of rules that determines Islamic allowed activities including socially and ethically acceptable investments.
Design/methodology/approach
The authors apply four risk-adjusted methodologies and co-integration analysis to investigate whether limited asset universe Shariah investments limit investment opportunities and impose an opportunity cost on investors given the prediction of conventional portfolio theories.
Findings
In contrast to the prediction of conventional portfolio theories, the findings suggest no apparent opportunity cost for Shariah compatible investments. In particular, Dow Jones Islamic Mutual Funds do not under-perform the broader market US benchmarks nor do they have any co-integration with the broader indexes. Moreover, the authors find similar evidence in the studies of Islamic mutual funds in Saudi Arabia, Malaysia and Kuwait.
Research limitations/implications
The findings will be reinforced when the authors will look into long run performance of Shariah compliant funds in future. Using non-linear approach will add further clarity to the findings.
Practical implications
The results provide an insight suggesting that successful mutual fund managers are able to overcome Shariah restrictions and constraints through creative investment strategies. In the data set, the Amana Trust Growth fund and the Amana Trust Income fund were always the best performers with a highly significant abnormal return, no matter what the methodology was.
Social implications
The performance of Islamic funds during the approximately seven-year period covered by the study is very promising. Popularity of Islamic Investment is expected to grow as Muslim population represents about 25 percent of the world population and the possibility for the Muslim funds to be considered as viable alternative by non-Shariah abiding or non-Muslim investors. The empirical results in the paper provide evidence that lack in diversification did not constrain the performance of Islamic funds.
Originality/value
This paper applied comprehensive risk-adjusted methodologies and co-integration analysis to Islamic Funds for a seven-year period for multiple countries. The findings confirm previously obtained results and highlight the fact that constrained Islamic Funds may not under-perform as per conventional portfolio theories.
Keywords
Acknowledgements
The editor of our paper was Jamshid Mehran, a member of the Editorial Board for the Journal of Finance Issues. Mihaela Craioveanu, a discussant at the Academy of Finance Conference, and two anonymous referees enriched the paper with helpful comments.
Citation
Dah, M., Hoque, M. and Wang, S. (2015), "Constrained investments and opportunity cost – evidence from Islamic funds", Managerial Finance, Vol. 41 No. 4, pp. 348-367. https://doi.org/10.1108/MF-06-2014-0179
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited