Risks and Returns and Economic Processes In Developing Islamic Countries

First, we give a concise overview on the nature of Islamic investing by discussing the main opportunities and challenges. Second, we analyze in a thorough empirical study the performance and risk-return characteristics of 145 IEFs over the period January 2000 to February 2009. Third to investigate the impact of the recent financial crisis of 2008/09 on the systematic risk of IEFs during down markets. We hypothesize that loss-averse investors prefer stocks that entail lower systematic risk during downswings and thus require less return. downside risk component Panel Regression On average IEFs substantially under perform both their Islamic and conventional benchmarks. This is even before considering management fees. We find that globally invested IEFs have the worst performance, while IEFs invested locally do slightly better. These risks include: changing sharia (Islamic law)rules, the lack of a sufficient track record, high exposure to companies that might be sub-optimally leveraged, and companies with low working capital. Overall, it seems that IEF managers have a long way to go, before offering Muslims an investment proposition that is attractive in terms of risk and return. A major implication here is that Muslim investors might be better off buying Islamic index trackers or Islamic exchange traded funds (ETFs) rather than invest through IEFs.