Article2019

New evidence on fund performance in extreme events

Fadillah Mansor · Naseem Al Rahahleh · M. Ishaq Bhatti

30 citations0/0 files storedInternational Journal of Managerial Finance

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Islamic Finance and Banking Studies Financial Markets and Investment Strategies Corporate Social Responsibility Reporting

Abstract

Purpose The purpose of this paper is to compare the return performance and persistence of ethical and conventional mutual funds during two extreme events, the Asian and the global financial crises under Shariah constraints. Design/methodology/approach The overall sample comprises of 129 Islamic mutual funds (IMFs) and 350 conventional mutual funds (CMFs) in Malaysia, and the average monthly data cover two periods of market cycles, before and during a financial crisis. The net of all expenses data is obtained from the Morningstar Database. This study employs various market risk-adjusted performance measures (ratios) to estimate the funds’ overall performance during the crises, and then it uses CAPM model to estimate the parameters via panel data approach. Moreover, paper employs the two persistence performance measures on IMFs and CMFs through contingency tables. It tests for the performance persistence effects for IMFs, CMFs using repeat winner and the cross-product ratio (CPR) tests proposed by Malkiel (1995) and Brown and Goetzmann (1995), respectively. Findings The main findings of the paper are: on average, both funds IMF and the CMF outperform the market return during the entire sample period; none of the funds is better than the “others” during the financial crises and the pre-crisis periods; the ethical fund – IMF outperforms the CMF over the study period. This outcome also indicates that ethical funds are more persistent especially during and the pre-crisis AFC and the GFC periods. Research limitations/implications The finding of this study is limited to only Malaysian data because the objective was to guideline investors and market players in Malaysia to prefer investing in Islamic ethical funds to diversify their investment portfolio. Practical implications Cautions to use existing ratio measures and CAPM model rather persistence measures may be used with existing methodologies in light of extreme events which influenced investor decision making for better returns at lower risks. Social implications A class of ethical funds consists of religious sustainable, socially responsible and impact-investing (SRI) funds but Shariah implications of halal investment must be observed to avoid prohibited practices within the class of SRI funds. Originality/value The work done in this paper are original in the sense that the authors employed various ratios to measure fund performance in conjunction with CAPM model and then tested for two persistence performance measures; the repeat winner and CPR tests.

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1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1997On Persistence in Mutual Fund Performance 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1968THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964 1995Returns from Investing in Equity Mutual Funds 1971 to 1991 1981On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills 1993Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988

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