MAKING A COMPELLING CASE FOR ESG & ISLAMIC FUNDS: AN EMPIRICAL INVESTIGATION IN COMPARISON WITH CONVENTIONAL FUNDS
Abstract
The purpose of this research is to analyze and evaluate the performance of ESG funds and Islamic funds vis-à-vis conventional mutual funds, whereby ESG funds and Islamic funds take into account environmental, social, governance and Shariah-based factors into account during portfolio structuring. To conduct this study, the approach primarily employed the publicly available data of thirty funds from each aforementioned category, calculated their logarithmic returns based on closing prices and subsequently ranked the funds according to the returns. Ten of the top-ranking funds were then selected (owing to some limitations of market data availability) for the methodology to calculate performance using descriptive statistics, one-sample t-tests, portfolio performance measures (Sharpe ratio, Treynor ratio, Jensen’s Alpha) and the well renowned Fama-French three-factor model. The results show that much of the excess returns across a majority of the funds (in all categories) are largely explained by the market premium, while the fund manager skill, SMB and HML factors do not lend much weight in explaining the excess returns attributable to the funds. Furthermore, a considerable finding of this study is that ESG and Islamic funds are not underperforming, but exhibit resilience, and has the potential to evolve and become mainstream options for investments.
JEL Classification Codes: B26, G11, G15, G23, M14.
References
Chang, C. E., & Doug Witte, H. (2010). Performance Evaluation of U.S. Socially Responsible Mutual Funds: Revisiting Doing Good and Doing Well. American Journal of Business, 25(1), 9-24. https://doi.org/10.1108/19355181201000001
Dah, M., Hoque, M., & Wang, S. (2015). Constrained investments and opportunity cost – evidence from Islamic funds. Managerial Finance, 41(4), 348-367. https://doi.org/10.1108/MF-06-2014-0179
El-Masry, A. A., de Mingo-Lopez, D. V., Matallin-Saez, J. C., & Tortosa-Ausina, E. (2016). Environmental conditions, fund characteristics, and Islamic orientation: An analysis of mutual fund performance for the MENA region. Journal of Economic Behavior & Organization, 132(S), 174-197. https://doi.org/10.1016/j.jebo.2016.10.015
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210 – 233. https://doi.org/10.1080/20430795.2015.1118917
Hayat, R., & Kraeussl, R. (2011). Risk and return characteristics of Islamic equity funds. Emerging Markets Review, 12(2), 189-203. https://doi.org/10.1016/j.ememar.2011.02.002
In, F., Kim, M., Park, R. J., Kim, S., & Kim, T. S. (2014). Competition of socially responsible and conventional mutual funds and its impact on fund performance. Journal of Banking & Finance, 44, 160 – 176. https://doi.org/10.1016/j.jbankfin.2014.03.030
Jarque, C. M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255-259. https://doi.org/10.1016/0165-1765(80)90024-5
Jensen, M. C. (1968). THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945 – 1964. The Journal of Finance, 23(2), 389 – 416. https://doi.org/10.1111/j.1540-6261.1968.tb00815.x
Mansor, F., & Bhatti, I. (2011). Risk and return analysis on performance of the Islamic mutual funds: Evidence from Malaysia. Global Economy and Finance Journal, 4(1), 19-31. Retrieved from https://www.isfin.net/sites/isfin.com/files/risk_and_return_analysis_on_performance_of_the_islamic_mutual_funds-_evidence_from_malaysia.pdf
Orsagh, M., Allen, J., Sloggett, J., Bartholdy, S., Georgieva, A., Dehman, N. A., & Sofronova, Y. (2019). ESG integration in Europe, the Middle East, and Africa: Markets, practices and data. Principles for Responsible Investment. Retrieved from https://www.unpri.org/download?ac=6036
Pew Research Centre. (2011). The Future of The Global Muslim Population. http://www.pewforum.org/The-Future-of-the-Global-Muslim-Population.aspx
Sauer, D. A. (1997). The impact of social-responsibility screens on investment performance: Evidence from the Domini 400 social index and the Domini Equity Mutual Fund. Review of Financial Economics, 6(2), 137-149. https://doi.org/10.1016/S1058-3300(97)90002-1
Sharpe, W. F. (1966). Mutual fund performance. The Journal of Business, 39(1), 119-138. https://dx.doi.org/10.1086/294846
Smith, P. (2019). The client of the future cares passionately about ESG, and it needs to be incorporated into the investment process #cfapresident [Video]. LinkedIn https://www.linkedin.com/feed/update/urn:li:activity:6516283481318842368
Treynor, J. (1965). How to rate management of investment funds. Harvard Business Review, 43(1), 63-75.
Tripathi, V., & Bhandari, V. (2016). Performance of socially responsible stocks portfolios – The impact of Global Financial Crisis. Journal of Economics and Business Research, XXII(1), 42-68. Retrieved from https://ssrn.com/abstract=2843113
Copyright (c) 2022 Aasim Abdullah, Ullas Rao
This work is licensed under a Creative Commons Attribution 4.0 International License.
