Vol. 33 No. 2, 2007
# Emerald Group Publishing Limited
Investigation of performance
of Malaysian Islamic
unit trust funds
Comparison with conventional unit
School of Finance and Accounting, Universiti Utara Malaysia,
Department of Accounting and Finance, Faculty of Economics and
Management, Universiti Putra Malaysia, Serdang, Selangor, Malaysia, and
Faculty of Economics and Management, Graduate School of Management,
Universiti Putra Malaysia, Serdang, Selangor, Malaysia
Purpose – One of the implications of Islamic investment principles is the availability of Islamic
financial instruments in the financial market. The main aim of this research is to observe the
differences in terms of performance between Islamic and conventional mutual fund in the context of
Malaysian capital market.
Design/methodology/approach – To achieve the major objectives of this paper standard methods
wereused for evaluating the mutual funds performance, for example, Sharpe index and adjusted
Sharpe index, Jensen Alpha, Timing and selectivity ability. The scope of the paper is to measure the
relative quantitative performance of funds which was managed based on two different approaches.
Findings – The basic finding of the paper is that Islamic funds performed better than the
conventional funds during bearish economic trends while, conventional funds showed better
performance than Islamic funds during bullish economic conditions. In addition to that finding, both
conventional and Islamic funds were unable to achieve at least 50 per cent market diversification
levels, though conventional funds are found to have a marginally better diversification level than the
Islamic funds. The results also suggest that fund managers are unable to correctly identify good
bargain stocks and to forecast the price movements of the general market.
Research limitations/implications – The main limitation is that the samples of conventional and
Islamic mutual funds were from one developing market. The findings could be better validated if the
sample included the mutual funds from other developed and developing economies, where both
Islamic and conventional funds are available.
Practical implications – The findings suggest that having Islamic mutual funds in an investment
portfolio helps to hedge the downside risk in an adverse economic situation.
Originality/value – So far there is no published evidence on the relative performance of Islamic and
conventional mutual funds in Malaysia as well as other developing countries. Therefore, this paper
adds new knowledge to the mutual funds literature.
Keywords Performance management, Financial risk, Islam, Fund management, Unit trusts
Paper type Research paper
Mutual fund or better known as unit trust fund in Malaysia is an investment vehicle
created by asset management companies specializing in pooling savings from both retail
and institutional investors. Individual investors seeking liquidity, portfolio diversification
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