PERFORMANCE EVALUATION: ISLAMIC MUTUAL FUNDS VS. CONVENTIONAL MUTUAL FUNDS IN SAUDI ARABIA

Abstract

The performance of mutual funds has long been the topic of discussion. Many studies have been conducted to evaluate mutual funds’ performance against the overall market performance. Moreover, the comparisons have also been made between the performance of Islamic mutual funds (IMF) and conventional mutual funds (CMF). The literature documents contradictory results when IMF performance is compared with CMF. Some studies conclude that IMF has superior performance over CMF whereas others conclude the opposite. This study participates in this debate and provides new empirical evidence. This study analyzes and compares the risk-adjusted returns for both Islamic funds and conventional funds using Sharpe ratio, Treynor ratio, and Jensen’s Alpha. Furthermore, this study examines fund managers’ selectivity and market timing of IMF and CMF. The basic finding of this paper is that Islamic mutual funds and conventional mutual funds have almost similar performance on the basis of Treynor ratio and Jensen’s Alpha. Whereas Sharpe ratio results indicate that Islamic funds perform better than conventional funds. The study also finds that selectivity and market timing abilities for both Islamic mutual funds and conventional mutual funds outperform the market portfolio. Moreover, selectivity skills of Islamic mutual funds mangers are superior to conventional mutual funds mangers whereas market timing ability is same for both types of managers.