Performance Persistence and Predictive Ability of Islamic and Conventional Mutual Funds: A Case of Pakistan

Abstract

This study aims to investigate the performance persistence and predictive ability of different fundamental factors for Islamic and conventional open-ended mutual funds (MF) operating in Pakistan. The evaluation of performance persistence entails an investigation of the lucrative efficiency and strategic behaviour of Islamic and conventional open-ended MFs in Pakistan. The lucrative efficiency refers to the risk adjusted performance of Islamic and conventional open-ended MFs. Meanwhile, strategic behaviour refers to the selectivity skills and market-timing abilities of Islamic and conventional open-ended MF managers who can invest in the capital market. Our analysis of predictive ability entails an investigation of the role of different factors, such as risk premium, value premium, size premium, and momentum premium, in explaining the expected returns of Islamic and conventional open-ended MFs that can invest in the capital market. This study has utilised survivorship biased free sample to avoid spurious results. The sample set covers the span from 2010-2016 to analyse the lucrative efficiency and strategic behaviour of Islamic and conventional MFs. Meanwhile, the sample set extends from 2011-2016 to investigate the predictive ability of different factors for Islamic and conventional open-ended MFs in Pakistan. The overall results indicate that most Islamic and conventional MFs have underperformed in terms of risk adjusted performance. Meanwhile, the risk-adjusted performance of conventional MFs is better than that of Islamic MFs. The overall results also suggest that most managers of Islamic and conventional MFs possess poor stock-selection skills and exhibit bad market timings abilities. Comparatively, Islamic MF managers possess better stock selection skills and exhibit better market timing abilities than their conventional counterparts. Moreover, the overall results of CAPM, Fama and French three-factor model and Carhart four-factor and Fama and French five factor model are quite consistent. The overall results suggest that risk premium and value premium play a vital role in predicting the returns of Islamic and conventional s. The size factor is only significant for conventional MFs. The momentum, profitability and investment premium are insignificant for Islamic and conventional MFs in Pakistan.