Risk Adjusted Performance, Market Timing and Selectivity of Mutual Funds: A Comparative Analysis of Islamic and Conventional Mutual Funds of Pakistan

Abstract

The research investegate and explores, the risk adjusted performance, timing and selection abilities of conventional and Islamic funds. The study analyzed and evaluated the data of total 90 mutual funds in which 45 pertaining to the conventional funds and 40 funds represent Islamic funds. The study covers the period 2011-2016. The results of risk adjusted performance has been obtained through Sharp ratio, Treynor ratio and Jensen Alpha while the selectivity and timing abilities have been determined through TM model. The results demonstrate that majority of conventional funds in term of sharp ratio perform better than Islamic style portfolios. The results also predicted that overall, the different categories of conventional funds while comparing to the Islamic style portfolios are better performing in term of Treynor ratio and Jenesen alpha. The results showed that conventional mutual funds have better selectivity skills than Islamic funds, while analyzing the different styles of these both major funds categories. The results also reported higher risk for the conventional funds than their counterparts. Majority of the conventional funds style categories have higher beta values than Islamic counterparts. The results also demonstrated that conventional funds are better in term of timing abilities as compared to the Islamic counterparts. Furthermore, the outcome suggests that conventional fund have the selection and timing ability than Islamic funds. One possible explanation for the underperformance of Islamic funds than Conventional funds is that Islamic funds have some constraints and impotent to invest in non-Islamic businesses. That is why it is explained that conventional funds have more freedom in the selection of securities for investment and thus have the chance for well presentation. The study is overall beneficial for the fund’s managers, investors and other stakeholders. This research will extend benefits to the investment companies and asset management companies in Pakistan to gain trust and confidence of investors for investment in their portfolios.

Keywords: Risk-Adjusted Performance, Market Timing and Selectivity of Mutual Funds:  Sharp ratio; Treynor ratio; Jensen Alpha; Pakistan.