Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context

Abstract

Defining social investing and its boundaries is a challenging task. Since the religious beginning of ethical investments, many overlapping investment styles have been grouped into the bucket of socially responsible investments, or SRI. This includes, for instance, faith-based investments. In this paper we study the underlying principles of SRI and Islamic funds as investment classes, and try to determine whether Islamic mutual funds, as faith-based investments, can be included into the category of socially responsible mutual funds, or if they exhibit distinguishing characteristics that indicate that they would be more fittingly grouped in a separate investment family. We address the question from both a qualitative and quantitative point of view. Comparing ideas, ratios and investment styles underlying SRI and comparing them to Islamic portfolios, we identify the potential inconsistencies related to some of the investment decisions. Together with a qualitative assessment of the differences and similarities, we discuss, in the quantitative section of our study, the different sector and country composition of two generic portfolios, SRI and Islamic (proxied by relevant European indices), derived from the application of the investment screens. In addition, through a cointegration analysis on FTSE indices, we show that FTSE Islamic, exhibits peculiar and interesting portfolios' differences in terms of econometric profile, compared to conventional and SRI indices. This paper attempts to unify the studies regarding SRI, with the available studies on Islamic investments. To the best of authors' knowledge, this is the first time that SRI and Islamic indices are analysed and compared.

Keywords: Style Analysis, Ethical Investments, Socially Responsible Investments, Cointegration Analysis, Islamic Investments, Islamic Mutual Funds

JEL Classification: G12, G14