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Literature Review On Ethical Mutual Funds Performance

With €7 trillion in Europe and $10 trillion in US of investment assets, the mutual funds industry has became very important in financial sector (ICI and EFAMA respectively, 2007). All of empirical studies focus on the performance of mutual funds industry. And we will also in this chapter focus on the performance of mutual funds as general and Islamic mutual funds by study many academic literatures on this field.

3.2 Literature on Ethical Mutual Funds Performance

Ethical funds or socially responsible investments (SRI) are an ethical investment strategy in agreement with socio-political believes work to maximize both social good and financial return. Ethical funds and Islamic funds are similar in many aspects. So, we will give some guides on the literature that studied the performance of SRI funds or ethical funds.

3.2.1 UK Ethical Funds

Mallin, Saadouni, and Briston (1995) studied a sample of 29 ethical mutual funds and 29 of conventional mutual funds in UK during the period from 1986 to 1993. They used three models to measure the performance which are Treynor, Sharpe, and Jensen. Their results suggest that a small majority of both types of funds conventional and ethical underperformed the FTSE All Share Price index. Furthermore, Gregory, Matatko, and Luther (1997) experienced ethical mutual funds in UK between 1986 and 1994. They compared 18 conventional funds with 18 ethical mutual funds using a matched pair analysis. Their findings suggested that the ethical mutual funds and conventional funds significantly underperformed the market at 5% using Jensen alpha. The benchmark that used in this study is FTSE All Share benchmark. Gregory and Whittaker (2007) tested performance for UK ethical funds with 32 ethical funds and 5 non-ethical funds compared together during the period 1989-2002. Their findings suggested that performance shows to be time variant.

3.2.2 Global Ethical Funds

Annuar et al. (1995) used the Mazuy and Treynor model to evaluate the timing performance and selectivity of 31 unit trust funds in Malaysia for the period of July 1990 to August 1995. They concluded that the selectivity performance of the funds was positive; on the other hand the timing performance of funds was negative. Also, there was a correlation between selectivity and timing performances and this correlation was positive correlation. They conclude also that the funds have not attained the predictable level of diversification, and the risk-return characteristics of the unit trust funds are incompatible with their affirmed objectives.

Geczy, Stambaugh, and Levin (2003) studied US ethical funds for 34 ethical funds as well as 894 conventional funds during the period 1963-2001. Study results suggested that the ethical funds underperformed the market compared to conventional funds. Kreander, Gray, Power, and Sinclair (2005) assessed the performance of 30 non-ethical and 30 ethical European funds using matched pair analysis during the period 1995-2001. Stock selection modeling was the main approach that used in this study. Results using Treynor, Jensen and Sharpe indicate that funds overall underperformed the index that suggest by Jensen measure. The conclusion suggested that the performance of ethical and non-ethical funds is similar.

3.3 Analyzing the Performance of Islamic Mutual Funds

3.3.1 Malaysian Islamic Mutual Funds Performance

Annuar, Shamsher, and Ngu (1997) examined the performance of sample of 31 Malaysian Islamic equity funds during the period 1990-1995. The study used the stock selection approach. They located proof of positive selection abilities. On the contrary, Shamsher, Annuar, and Taufeeq (2000) studied 41 Malaysian funds during the period 1995-1999 using Treynor, Jensen, and Sharpe models, the study conclude that the Malaysian mutual funds underperformed their benchmark. Furthermore, they evaluated the performance of vigorously with inertly managed funds and they conclude that there is no significant difference between it.

Abdullah et al (2002) examine the Islamic equity funds industry though purely for Malaysian funds. The study studies the performance of 67 Malaysian unit trust funds, containing 14 Islamic funds and 53 conventional funds. They used many financial performance measurement models which are Sharpe ratio, Information ratio and the Modigliani measures. They concluded both types of funds somewhat significantly underperformed the Kuala Lumpur Composite Index (KLCI) benchmark. In addition they concluded that the return of both funds Islamic and conventional is sensibly the same. They have but in their general conclusion that Malaysian Islamic equity funds follow the benchmark in addition to conventional funds and that they both do this almost well. Though when taking risk into account, the study found that the conventional equity funds perform is less than Islamic funds during bears markets and conventional funds perform is better than Islamic equity funds during bull markets. This entails that shareholders and investors have the alternative to alter between these funds conditional on the market situation and their personal favorites.

Masliza and Maheran (2007) tested the risk and return of Malaysian funds to study the performance of these funds by concentrating more on aggressive equity types of fund. The sample of study was nine mutual funds over the weakly period 2002-2006. The study suggested that mutual funds outperformed the bench market (Kuala Lumpur Shariah Index "KLSI").

Abdullah, Hassan and Mohammad (2007) examined the performance of Malaysian Islamic mutual funds compared to the performance of Malaysian conventional funds. The study used Treynor, Sharpe and Jensen as a performance measurement to study the performance of 65 Malaysian Islamic mutual funds, 14 Islamic mutual funds and to 51 conventional funds during the period 1992-2001. The study divided the period of study into tree stages, pre-financial crises from 1992 to 1996, during the market crises from 1997 to 1998 and post-crises from 1999 until 2001. Study used Jensen and Sharpe as a performance measurement. Study findings suggest that the both type of funds underperformed the benchmark, which was Kuala Lumpur Composite Index (KLCI). In the period between 1992 and 1996 conventional funds performed better than Islamic mutual funds but in the period between 1997 and 2001 the Islamic mutual funds performed better than the conventional funds. The study also concluded that the both Islamic and conventional funds were not capable to attain as a minimum 50 percent diversification levels. The conventional funds are found to have a slightly diversification level more than the Islamic mutual funds in the period 1997-1998. Finally, study findings suggested that the fund managers are not capable to properly recognize good bargain stocks, and also not capable to predict the movements of price of the market during the period 1999-2001.

3.3.2 US Islamic Mutual Funds Performance

Tower and Dean (2010) evaluated the performance of four of Islamic mutual funds in the U.S. against their market benchmarks. Within a year there are two types of mutual funds AMANX and AMAGX have outperformed their market benchmarks, In addition, Amana’s new Developing World Fund (AMDWX), has existed for only five months, it underperformed Vanguard’s Emerging Market fund, but the short period causes us to pay this result little attention. The other mutual fund, the Dow Jones Islamic mutual fund, IMANX, underperformed both sets of benchmarks; the advocates of indexing will be surprised by the positive results for the two long‐lived Amana funds, because of the higher expense ratios carried by the Amana funds than by the Vanguard index funds.

3.3.3 Performance of Islamic Mutual Funds in Different Countries

Hoepner et al (2009) examined the financial performance of Islamic equity funds from 20 countries in five regions for the period of 20 years (from September 1990 to April 2009) as a monthly return data in US$. Study based on the sample of 265 equity funds. According to Hoepner et al (2009) the regions were: "(1) Africa: Egypt, Morocco and South Africa, (2) Asia Pacific: Australia, Indonesia, Malaysia, Singapore and Pakistan, (3) Europe: Germany, Ireland, Liechtenstein, Luxembourg and United Kingdom, (4) Golf Cooperative Council (GCC): Bahrain, Kuwait, Qatar, Saudi Arabia and UAE, (5) North America: Canada and US". The researchers compared the performance of Islamic equity funds from different nations and different regions with the conventional funds. Study used Carhart three factor models to measure the performance of Islamic equity funds in 20 countries. The study concluded that the financial performance of Islamic funds is better than the financial performance of the conventional.

3.4 Other Empirical Literature on Mutual Fund Performance

Perception, beliefs, attitude and expectations are many characteristics distinguish investors of ethical funds and Islamic mutual funds. Forte and Miglietta (2007) specified if Islamic mutual funds can be inserted in the group of socially responsible mutual funds by evaluating thoughts and investment approach. Their conclusion suggested that Islamic mutual funds and ethical funds have different characteristics in terms of asset allocation.

Elfakhani and Hassan (2005) tested the performance of 46 Islamic mutual funds in the period between Jan 1997 and Aug 2002. They divided the period into two stages, 1997-2000 as a growth stage and 2000-2002 as recessionary stage. Study divided the Islamic mutual funds to eight categories which are American equity, European equity, Malaysian equity, Asian equity, Global equity, Small Cap-Technology funds, Emerging-Market and Emerging-Market South Africa. They used DJIM as an Islamic benchmark and S&P 500 as a conventional benchmark. The models that used in this study were Sharpe, Treynor and Jensen Model. The study findings suggest that the Islamic emerging market funds set had the maximum Sharpe ratio whilst the Asian funds set had the minimum Sharpe ratio. Also Islamic emerging market set had a higher performance when using Treynor ratio, the Asian and Malaysian sets had a poorest performance. Findings from Jensen alpha, which shows performance of fund manager according to the market index, proposed that Asian fund's set significantly outperformed both indices whereas emerging market funds insignificantly underperformed DJIM and S&P 500. Study concluded that the Islamic emerging market set outperformed the market using Alpha, Treynor and Jensen alpha, and they impute that to a shortage of market diversification. In general, the study conclusion concluded that there is no different in performance between Islamic mutual funds and the conventional funds.

Hussein and Omran (2005) give a complete study on the precise performance of every Islamic index by taking the effects and size of industry, and economic environment, on (Dow Jones Islamic Market World) DJIMI returns. They have covered the period 1996-2003, they disclose that Islamic indices gave investors positive abnormal returns over the mentioned period; on the other hand, the study concluded that the Islamic indices underperformed over the bear market period. The conclusion of them study, quite the opposite to the ordinary principle that technology sector institutions are behind the positive abnormal of Islamic indexes' return, give proof that compactness and essential resources, customer cyclical, and manufacturing and telecommunication manufacturing are the leading pouring issues in Islamic index positive irregular returns.

Kräussl and Hayat (2008) examined the performance of Islamic equity funds in surplus of the last 10 years. The study has concluded that Islamic equity funds are comparatively secure investment vehicles that don't considerably under or outperform their Islamic in addition to conventional benchmarks in usual market circumstances. Islamic equity funds outperformed the Islamic and conventional market during the bear market of 2002. In addition, Islamic equity funds appear most attractive when use in better completely diversified portfolio. The study also has concluded that the Islamic mutual funds bear some definite risks which are regularly not born by conventional ones. Some of these risks are: changing Sharia rules, elevated experience to sub-optimally influenced firms, and firms with small working capital size. Islamic equity funds managers should take these risks in account when evaluating the Islamic mutual funds as an investment option.

Kräussl and Hayat (2009) examine the performance of 145 Islamic equity funds in excess of the period from January 2000 to February 2009. The study has concluded that the Islamic equity funds underperformed the Islamic benchmark. Furthermore, this underperformance has viewed increase during the period of current financial crises. Also, Islamic equity funds underperformed the conventional benchmark during the current financial crises. They also found that the manager of Islamic equity fund do not seems to have good timing ability in market.

Literature in Mutual Fund Performance

Title, Author and Year

Summery

Data Source and Data Period

Methodology and Model

Conclusion and Results

The Financial Performance of Ethical Investment Funds

Mallin, Saadouni, and Briston (1995)

Mallin, Saadouni, and Briston studied the performance of ethical funds in UK

29 ethical mutual funds and 29 of conventional mutual funds in UK during the period from 1986 to 1993

Treynor, Sharpe, and Jensen

results suggest that a small majority of both types of funds conventional and ethical underperformed the FTSE All Share Price index

Ethical Unit Trust Financial Performance: Small Company Effects and Fund Size effects

Gregory, Matatko, and Luther (1997)

Matatko, and Luther experienced the performance of ethical mutual funds in UK

Ethical mutual funds in UK between 1986 and 1994. They compared 18 conventional funds with 18 ethical mutual funds

Jensen alpha

Their findings suggested that the ethical mutual funds and conventional funds significantly underperformed the market at 5%. The benchmark that used in this study is FTSE All Share benchmark.

Performance and Performance Persistence of Ethical Unit Trusts in the UK

Gregory and Whittaker (2007)

Gregory and Whittaker tested performance for UK ethical funds

UK ethical funds with 32 ethical funds and 5 non-ethical funds compared together during the period 1989-2002

Their findings suggested that performance shows to be time variant

Annuar et al. (1995)

Annuar et al. examined the timing performance and selectivity of Malaysian unit trust funds

31 unit trust funds in Malaysia for the period of July 1990 to August 1995

Mazuy and Treynor model

They concluded that the selectivity performance of the funds was positive; on the other hand the timing performance of funds was negative. Also, there was a correlation between selectivity and timing performances and this correlation was positive correlation. They conclude also that the funds have not attained the predictable level of diversification, and the risk-return characteristics of the unit trust funds are incompatible with their affirmed objectives.

Investing in Socially Responsible Mutual Funds

Geczy, Stambaugh, and Levin (2003)

Geczy, Stambaugh, and Levin studied US ethical funds

US ethical funds for 34 ethical funds as well as 894 conventional funds during the period 1963-2001

Study results suggested that the ethical funds underperformed the market compared to conventional funds

Evaluating the Performance of Ethical and Non-ethical Funds: A Matched Pair Analysis

Kreander, Gray, Power, and Sinclair (2005)

Kreander, Gray, Power, and Sinclair (2005) examined the performance non-ethical and ethical European funds

30 non-ethical and 30 ethical European funds using matched pair analysis during the period 1995-2001

Stock selection modeling

Treynor, Jensen and Sharpe

Results using Treynor, Jensen and Sharpe indicate that funds overall underperformed the index that suggest by Jensen measure. The conclusion suggested that the performance of ethical and non-ethical funds is similar.

Selectivity and Timing: Evidence from the Performance of Malaysian Unit Trusts

Annuar, Shamsher, and Ngu (1997)

Annuar, Shamsher, and Ngu examined the performance of sample of Malaysian Islamic equity funds

31 Malaysian Islamic equity funds during the period 1990-1995

Stock Selection approach

They located proof of positive selection abilities

Investigation of performance of Malaysian Islamic unit trust funds: Comparison with conventional unit trust funds

Shamsher, Annuar, and Taufeeq (2000)

Shamsher, Annuar, and Taufeeq studied the performance of Malaysian funds

41 Malaysian funds during the period 1995-1999

Treynor, Jensen, and Sharpe models

The study conclude that the Malaysian mutual funds underperformed their benchmark. Furthermore, they evaluated the performance of vigorously with inertly managed funds and they conclude that there is no significant difference between it.

A Comparative Performance of Malaysian Islamic and Conventional Mutual Funds

Abdullah et al (2002)

Abdullah et al the performance examine the Islamic equity funds

67 Malaysian unit trust funds, containing 14 Islamic funds and 53 conventional funds

Sharpe ratio, Information ratio and the Modigliani measures

They concluded both types of funds somewhat significantly underperformed the Kuala Lumpur Composite Index (KLCI) benchmark

the return of both funds Islamic and conventional is sensibly the same

the study found that the conventional equity funds perform is less than Islamic funds during bears markets and conventional funds perform is better than Islamic equity funds during bull markets

Islamic Equity Mutual Fund Performance in Malaysia: Risk and Return Analysis

Masliza and Maheran (2007)

Masliza and Maheran tested the risk and return of Malaysian funds to study the performance of these funds by concentrating more on aggressive equity types of fund

nine Malaysian mutual funds over the weakly period 2002-2006

The study suggested that mutual funds outperformed the bench market (Kuala Lumpur Shariah Index "KLSI")

Investigation of the Performance of Malaysian Islamic Unit Trust Funds: Comparison with Conventional Unit Trust Funds

Abdullah, Hassan and Mohammad (2007)

Abdullah, Hassan and Mohammad examined the performance of Malaysian Islamic mutual funds compared to the performance of Malaysian conventional funds

Malaysian Islamic mutual funds compared to the performance of Malaysian conventional funds. The study used Treynor, Sharpe and Jensen as a performance measurement to study the performance of 65 Malaysian Islamic mutual funds, 14 Islamic mutual funds and to 51 conventional funds during the period 1992-2001

Treynor, Sharpe and Jensen Model

Study findings suggest that the both type of funds underperformed the benchmark, which was Kuala Lumpur Composite Index (KLCI).

Islamic Mutual Funds: Assessing Performance

Tower and Dean (2010)

Tower and Dean evaluated the performance of four of Islamic mutual funds in the U.S. against their market benchmarks.

4 of Islamic mutual funds in the U.S. against their market benchmarks. Within a year

Within a year there are two types of mutual funds AMANX and AMAGX have outperformed their market benchmarks, In addition, Amana’s new Developing World Fund (AMDWX), has existed for only five months, it underperformed Vanguard’s Emerging Market fund, but the short period causes us to pay this result little attention. The other mutual fund, the Dow Jones Islamic mutual fund, IMANX, underperformed both sets of benchmarks;

Islamic Mutual Funds’ Financial Performance and International Investment Style: Evidence from 20 countries

Hoepner et al (2009)

Hoepner et al (2009) examined the financial performance of Islamic equity funds from 20 countries in five regions

Islamic equity funds from 20 countries in five regions for the period of 20 years (from September 1990 to April 2009) as a monthly return data in US$. Study based on the sample of 265 equity funds.

Carhart three factor models

The study concluded that the financial performance of Islamic funds is better than the financial performance of the conventional.

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

Forte and Miglietta (2007)

Forte and Miglietta specified if Islamic mutual funds can be inserted in the group of socially responsible mutual funds by evaluating thoughts and investment approach

The conclusion suggested that Islamic mutual funds and ethical funds have different characteristics in terms of asset allocation.

Performance of Islamic Mutual Funds

Elfakhani and Hassan (2005)

Elfakhani and Hassan tested the performance of Islamic mutual funds

46 Islamic mutual funds in the period between Jan 1997 and Aug 2002. They divided the period into two stages, 1997-2000 as a growth stage and 2000-2002 as recessionary stage

Sharpe, Treynor and Jensen Model

The study conclusion concluded that there is no different in performance between Islamic mutual funds and the conventional funds.

Ethical Investment Revisited: Evidence from Dow Jones Islamic Indices

Hussein and Omran (2005)

Hussein and Omran give a complete study on the precise performance of every Islamic index by taking the effects and size of industry, and economic environment, on (Dow Jones Islamic Market World) DJIMI returns

covered the period 1996-2003

The study concluded that the Islamic indices underperformed over the bear market period

Risk and Return Characteristics of Islamic Equity Funds

Kräussl and Hayat (2008)

Kräussl and Hayat examined the performance of Islamic equity funds

145 Islamic equity funds in excess of the period of 10 years

Islamic equity funds outperformed the Islamic and conventional market during the bear market of 2002

Risk and Return Characteristics of Islamic Equity Funds

Kräussl and Hayat (2009)

Kräussl and Hayat examine the performance of Islamic equity funds

145 Islamic equity funds in excess of the period from January 2000 to February 2009

The study has concluded that the Islamic equity funds underperformed the Islamic benchmark

Islamic equity funds underperformed the conventional benchmark during the current financial crises

They also found that the manager of Islamic equity fund do not seems to have good timing ability in market.

3.5 Conclusion

The chapter reviewed some academic literature about the performance of mutual funds. First, we explored some literatures on an ethical mutual funds performance in UK and other countries such as US and Malaysia. The second section from this chapter explored some literatures which studied the performance of Islamic mutual funds, in Malaysia, US and other countries. Finally, we discussed also some empirical literatures on mutual funds performance.

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