ABSTRACT
Islamic Portfolios have evolved from their nascent introduction to a point that enables their performance to change under different economic conditions. To test how the funds changed under different economic conditions the data were divided into three-time periods: pre-financial crisis, during financial crisis and post financial crisis. Tests were run against conventional growth and value indices for the three-time periods as identified above in addition to an overall period which serves as a benchmark. Statistically significant relationships were observed between Islamic Portfolio and conventional growth and value indices, implying that the performance of these indices is closely related. For sector-wide analysis however, Islamic funds display significant relationship with growth sectors of energy, health care, information technology, materials, and teleservices but, an insignificant relationship unrated with the value sectors of consumer discretionary, consumer staples, financials, industrials, and utilities. This implies that there is a possibility of achieving risk reduction portfolio diversification strategies when Islamic funds are combined with conventional products during periods of economic turmoil. Further, it is shown that generally, the impact of the investment distribution between growth and value on Islamic Portfolios results in tilting slightly toward value in the long run but toward growth in the shorter sub-period of precrisis; it almost completely tilts toward growth in the sub-crisis period and then is equally distributed between growth and value in the recovery period. The impact of this distribution under the three different economic periods on the comparative performances shows that conventional value investments outperform both growth investments and Islamic Portfolios. Islamic Portfolios outperform the conventional growth investments in the pre-crisis period. However, in the crisis period, Islamic Portfolios outperform both conventional value and growth investments, while value continues to outperform growth. Finally, under the recovery period, despite drastic improvement in the performances of both growth and value investments, Islamic Portfolios continue to outperform both.
Keywords
Islamic Funds, financial crisis, growth and value indices, risk reduction, diversification.