Comparative analysis of Shari’ah-compliant portfolios: evidence from Pakistan

Abstract

Purpose

This study aims to comparatively analyze the performance of Islamic and conventional income and equity funds using various performance evaluation methods.

Design/methodology/approach

The authors comparatively analyze the performance of mutual funds using measures, such as tracking error, Sharpe ratio (1966), Treynor ratio (1965), M-square measure by Modigliani and Modigliani (1997) and information ratio. The authors also use market timing and selection measures, such as Treynor and Mazuy model (1966), Henriksson and Merton (1981) model and Fama’s decomposition approach (1973).

Findings

The authors find that Islamic equity funds are as much competitive as conventional equity funds. All Islamic equity funds have positive Sharpe ratio, Treynor ratio and net selectivity measure. Islamic equity funds are slightly less risky in general. Islamic equity and income funds generally have positive Jensen's Alpha and a positive market timing ability. However, the authors find that Islamic income funds generally underperform the market due to less Shari’ah-compliant investment class assets in the market.

Practical implications

It will help the industry players to assess their strategic positioning with regard to the commercial competitiveness of Islamic investments.

Originality/value

The authors take considerably large sample of 60 funds in Pakistan as compared to previous studies and also cover recent period (2006-16). For income funds, the authors construct an original benchmark index based on price and dividend data and use that in performance assessment.

Citation

Shaikh, S.A., Ismail, M.A., Ismail, A.G., Shahimi, S. and Mohd. Shafiai, M.H. (2019), "Comparative analysis of Shari’ah-compliant portfolios: evidence from Pakistan", Journal of Islamic Accounting and Business Research, Vol. 10 No. 3, pp. 466-487. https://doi.org/10.1108/JIABR-10-2016-0121