A Comparative Performance Evaluation of Islamic and Conventional Mutual Funds in Saudi Arabia

Purpose The literature on the comparative performance of Islamic and conventional mutual funds provides conflicting results. Some studies find superior performance of Islamic mutual funds (IMF) to conventional mutual funds (CMF) whereas others conclude to the contrary. This study aims to contribute to the debate on the comparative performance of Islamic and conventional mutual funds in Saudi Arabia. Design/methodology/approach This study participates in the ongoing debate by analyzing the performance of IMF and CMF based on risk-adjusted returns measures such as the Sharpe ratio, Treynor ratio, and Jensen’s Alpha. Furthermore, we examine the selectivity and the market timing skills of IMF and CMF using Treynor and Mazuy model. Five-year monthly data from 2013 to 2017 for forty mutual funds located in Saudi Arabia are used for analysis. Findings We find that IMF and CMF have almost similar performance on the basis of Treynor ratio and Jensen’s Alpha. However, results from the Sharpe ratio indicate that Islamic funds perform better than their conventional counterpart. The study also finds that the selectivity and the market timing abilities of both Islamic and conventional mutual funds outperform the market portfolio. Superior selectivity skills of IMF to the CMF and similar timing ability of both types of fund managers is also observed. Practical implications Islamic mutual funds are less risky than conventional mutual funds and they provide better hedging prospects for stockholders in general Originality/value This study aims to contribute to the debate on the comparative performance of Islamic and conventional mutual funds using the latest data and applying the equality of means and the Random effect model, which no other study has used in the context of Saudi Arabia.