Empirical comparison of Shariah-compliant vs conventional mutual fund performance

Abstract

Purpose

This paper investigates the performance of locally focused equity mutual funds (LFEFs) in Saudi Arabia as compared with the performance of benchmark funds. More specifically, the focal question pertains to whether Shariah-compliant mutual funds (SMFs) and conventional mutual funds (CMFs) outperform their respective benchmarks. Undertaken in the context of Saudi Arabia's economic planning under Vision 2030, the study offers a foundation for determining whether and the extent to which Shariah-compliant investment strategies are competitive—a matter of considerable importance across 57 Muslim countries.

Design/methodology/approach

The Carhart four-factor model is applied to a sample of 39 Saudi Arabian mutual funds (MFs) using the monthly net asset value (NAV) per share. The sample period, April 2007 to October 2016, is considered in its entirety and as three sub-periods, i.e. low-, medium- and high-volatility.

Findings

The results show that the locally focused equity mutual funds (LFEFs) significantly outperformed their benchmark, i.e. the Tadawul All Share Index (TASI), during the full sample period and the low-volatility period. According to the empirical comparison, the CMFs also outperformed their TASI benchmark for the full sample period and the low-volatility period. However, the SMFs neither outperformed nor underperformed their S&P Saudi Arabia Domestic Shariah Index benchmark. That is, for each of the SMFs included in the sample, the Jensen's alpha was insignificant for both the full sample and all three volatility sub-periods.

Research limitations/implications

In this paper, the four-factor model is used in the context of a single country. The results, therefore, may not be generalizable to the multi-country level in the Gulf Council Cooperation (GCC) region given differences between the member countries in terms of financial structure and economic focus.

Practical implications

The results reported constitute a useful guide for policymakers and faith-based-sensitive investors concerned about the Shariah compliancy of their portfolios given that there is very little difference between how CMFs and SMFs performed in the focal period. This research can be extended to include other Islamic countries in the GCC region as a basis for identifying optimal investment vehicles, i.e. those most likely to produce high returns at low risk.

Originality/value

The work reported in this paper is original and constitutes a valuable asset for ethnoreligious-sensitive investors. The research has not been published in any capacity and is not under consideration for publication elsewhere.

Citation

Al Rahahleh, N. and Bhatti, M.I. (2023), "Empirical comparison of Shariah-compliant vs conventional mutual fund performance", International Journal of Emerging Markets, Vol. 18 No. 10, pp. 4504-4523. https://doi.org/10.1108/IJOEM-05-2020-0565