Comparative performance-related fund flows for Malaysian Islamic and conventional equity funds

Abstract

Australia AbstractPurpose -Compare the fund flow-performance relationship for Islamic and conventional equity funds in Malaysia.Design/methodology/approach -We employ panel regression models to estimate the relationship between fund flows and performance for Islamic and conventional equity funds in Malaysia from 2001 to 2009. The data for each fund include fund flows, assets under management, management expenses, fund age, portfolio turnover, fund risk, fund return, and the number of funds in the fund's family. We also include market returns and fixedyear effects. Our sample consists of 127 Malaysian equity funds with at least 65 per cent domestic equity holdings comprising 35 Islamic and 92 conventional equity funds.Findings -Islamic fund investors respond to performance in much the same way as conventional fund investors, increasing fund flows to better performing funds, and decreasing fund flows to poorer performing funds. However, there is evidence that Islamic fund investors are relatively less responsive toward poorly performing Islamic funds, suggesting an asymmetry in the fund flow-performance relationship. When choosing funds based on other fund attributes, Islamic fund investors again exhibit similar behaviour, and like conventional fund investors direct larger percentage fund flows into smaller funds as well as funds with larger past fund flows and those with higher management expenses, possibly signifying marketing expenditure.Research limitations/implications -We were only able to access data on annual net fund flows not quarterly or monthly fund inflows and outflows as usual in developed markets and this may obscure some important aspects of investor decision-making. There is also insufficient data for matched-sample techniques, which may better control for fund-specific characteristics than our regression-based approach.Practical implications -Islamic funds like conventional funds will experience increased fund flows with better performance and vice versa. However, Islamic fund investors appear somewhat less likely to remove monies from poorly performing funds. We believe this is because investors either place a premium on the nonperformance-related attributes of Shariah-compliant funds and/or because they wish to avoid search costs in finding another suitable Islamic fund. Apart from this, Islamic and conventional fund investors behave in a similar manner, and we believe this is possible in Malaysia given the size and diversity of its Islamic fund sector.Originality/value -One of very few empirical studies concerning the behaviour of Islamic investors, particularly in Malaysia, primarily because of limitations in data availability.

A Review of Islamic Investment Literature

“…As such, Islamic financial transactions prevail on the conditions that warrant rightful ownership of property which links the investment with the real economic sector. This is similar to the situation where the equity fund investors of both Islamic and conventional banks alike tailor their behaviour in the same direction as they increase their fund inflows to outpace equity funds and vice versa (Marzuki & Worthington, 2015). Although some recent literature of Islamic finance is highlighting reverse practice by the industry towards saleand lease-based contracts, which indicate risk-averseness of the Islamic investors' behaviour.…”

“…Therefore, Islamic finance regulators may tend to figure out a strategy for enforcing compliance with the standards on the design and approval of products, since firms' investment behaviour mostly focuses on high return ventures, rather than other motives. This is similar to the situation where the equity fund investors of both Islamic and conventional banks alike tailor their behaviour in the same direction as they increase their fund inflows to outpace equity funds and vice versa (Marzuki & Worthington, 2015). In this regard, returns on investment stand as a yardstick for projecting likely future inflows of funds rather than socio-ethical or religious motives.…”

Star and Poor Fund Phenomena in Islamic- And Conventional-Focused Families: Emerging Country Evidence

“…Such funds demonstrated a convex relationship between flow and performance, thereby indicating that past performance was a significant factor driving fund inflow when the return on the fund was positive, but that its effect vanished when the return was negative. Marzuki and Worthington (2015) and Bani Atta and Marzuki (2019b) studied Islamic and conventional funds in the Malaysian market over the period [2001][2002][2003][2004][2005][2006][2007][2008][2009]. They found that Islamic fund investors were more receptive to poorly performing funds, thus suggesting that when selecting funds such investors were rational decision-makers.…”

“…In spite of previous studies at the fund level, which propose that fund performance has a positive impact on fund cash flow (Marzuki & Worthington, 2015;Azmi, Mohamad, & Shah, 2018), no study has tested the rationality of fund investors who buy into another fund from the same star fund family. In addition, it is not known if star fund-owning families perform better than non-star ones.…”

New evidence on fund performance in extreme events

“…Other recent relevant studies on the comparative performance of Islamic and conventional funds include that done by Marzuki and Worhington (2015). They estimated the relationship between fund flows and performance for Islamic and conventional equity funds in Malaysia using monthly returns of 127 Malaysian equity funds from 2001 to 2009.…”