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Islamic Mutual Funds' Financial Performance and Investment Style: Evidence from 20 Countries

Andreas G. F. Hoepner
University of St. Andrews - School of Management

Hussain Gulzar Rammal
International Graduate School of Business, University of South Australia

Michael Rezec
University of St. Andrews - School of Management


September 17, 2009


Abstract:     
We contribute to the investment literature by pursuing the first sophisticated, large scale analysis of a strongly growing mutual fund type: Islamic funds. Despite hundreds of Islamic funds exist the few previous studies investigate the financial performance of less than 60 and the investment style of 6 funds. Based on unique data access, we analyse the financial performance and investment style of 262 Islamic equity funds from twenty countries. We develop a (conditional) three level Carhart model to simultaneously control for their exposure to different national, regional and global equity markets and investment styles. Our findings are fourfold. First, Islamic funds from eight (mainly western) nations significantly underperform their international equity market benchmarks, while funds from only three nations do the opposite. Second, Islamic funds generally prefer small stocks but have no preference for other investment styles. Third, Islamic funds from the Gulf Cooperation Council (GCC) or Malaysia neither significantly underperform nor clearly prefer small stocks. These three findings have some theoretical appeal, as Islamic funds’ investment universe is limited to Shari’ah law compliant companies, which are more likely small and present in economies with a higher density of Muslims. Fourth, we find some evidence that Islamic equity funds exhibit a hedging function, as their investment universe is limited to low debt/equity ratio stocks.

Keywords: Carhart model, investment, Islamic banking and finance, Islamic mutual funds, recession hedge, religious investment

JEL Classifications: C22, F21, G01, G10, G11, G32, Z12

Working Paper Series

Date posted: October 12, 2009 ; Last revised: October 12, 2009

Suggested Citation

Hoepner, Andreas G. F., Rammal, Hussain Gulzar and Rezec, Michael, Islamic Mutual Funds' Financial Performance and Investment Style: Evidence from 20 Countries (September 17, 2009). Available at SSRN: http://ssrn.com/abstract=1475037


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Contact Information

Andreas G. F. Hoepner (Contact Author)
University of St. Andrews - School of Management ( email )
The Gateway
North Haugh
St. Andrews, Fife, Scotland KY16 9SS
United Kingdom
HOME PAGE: http://www.st-andrews.ac.uk/management/aboutus/people/academic/andreashoepner/
Hussain Gulzar Rammal
International Graduate School of Business, University of South Australia ( email )
Michael Rezec
University of St. Andrews - School of Management ( email )
The Gateway
North Haugh
St. Andrews, Fife KY16 9SS
United Kingdom
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