BASES TEÓRICAS

Assessing the locally-focused fund portfolios, the total risk (variance) results indicate, as hypothesized, that there is statistical evidence that the Islamic fund portfolio is, indeed, less risky than the conventional fund portfolio. This is true regardless of the period under examination. Even though the Islamic fund portfolio is less risky, there is no statistical evidence that the performance (using non risk-adjusted returns) of such portfolio is different from that of the conventional fund portfolio (fail to reject the null hypothesis). This is true during all periods, but the bull period.

However, when risk is adjusted, results provide a different story. As hypothesized, all simple risk-adjusted performance measures show that the locally-focused Islamic fund portfolio underperforms its peer the locally-focused conventional fund portfolio during both the overall and bull periods. That underperformance could mainly be attributed to the lower level of risk assumed. Furthermore, all risk-adjusted performance measures show that the locally-focused Islamic fund portfolio performs less badly than its peer the locally- focused conventional fund portfolio during both the bear and financial crisis periods. Such finding is not surprising given that the Islamic fund portfolio has less risk exposure, and therefore is not going to perform worse than the conventional fund portfolio in adverse market trends. However, it worthy to note that these differences in performance between the Islamic and the conventional locally-focused fund portfolios are very small using all these simple risk-adjusted performance measures during all studied periods, except when using the modified Sharpe ratio during the bull period.

For example, during the overall period, the underperformance of the Islamic fund portfolio ranges from 0.08 to only 0.86 percent. Also, during the bull period, the

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underperformance of the Islamic fund portfolio ranges from 0.92 to only 1.14 percent (excluding the results from the modified Sharpe ratio where the underperformance is around 19.83 percent). Lastly, during both the bear and financial crisis periods, the outperformance of the Islamic fund portfolio ranges from 0.04 to only 0.39 percent.

In order to further examine the persistence of these small performance and risk differences between the Islamic and the conventional locally-focused fund portfolios, a regression approach is employed.

Looking at the risk differences (differences in beta), the results from both the single- factor and four-factor models confirm the earlier finding that the locally-focused Islamic fund portfolio is, indeed, less risky than the locally-focused conventional fund portfolio (reject the null hypothesis of no risk differences between Islamic and conventional funds). This is true regardless of the sample period under examination and regardless of the locally-focused market benchmark used to adjust for risk. However, there is one exception when the locally-focused Islamic index (GCC Islamic) is employed during the bull period where the beta-difference results from both models still indicate that the Islamic fund portfolio is less risky than its peer, but that risk difference is statistically insignificant. Nevertheless, it is worthy to note that such exception does not carry any importance because the locally-focused Islamic market benchmark (GCC Islamic) is considered by far inferior to the locally-focused conventional market index (TASI) in explaining returns of both Islamic and conventional locally-focused portfolios.

Looking at the performance differences (differences in alpha), the results from all three models (single-factor, Treynor & Mazuy, and the four-factor models) indicate that there is no statistical evidence that shows any performance differences between the Islamic

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and the conventional locally-focused fund portfolios (fail to reject the null hypothesis of no performance differences between Islamic and conventional funds). These findings are observed regardless of the sample period under examination and regardless of the locally- focused market benchmark used to adjust for risk.

It is worthy to note that all findings from examining locally-focused fund portfolios suggest that the risk-return profile of the Islamic fund portfolio is considered superior to that of the conventional fund portfolio. This is considered good news for investors interested in investing in a portfolio of locally-focused Islamic funds because these investors are exposed to lower risk, but at the same time they are not penalized by less return. In other words, investors interested in locally-focused portfolios are better off investing in an Islamic fund portfolio than in a conventional fund portfolio because the Islamic fund portfolio exposes investors to less risk for a return that is statistically no different from that earned when investing in the conventional fund portfolio.

Furthermore, the results from the Treynor & Mazuy model indicate that there is no evidence that there exist any differences in the market timing skills between the Islamic and the conventional locally-focused portfolios. This is true regardless of the sample period under examination and regardless of the locally-focused market benchmark used to adjust for risk.

Finally, the results from the four-factor model indicate that when the locally-focused Islamic index (GCC Islamic) is employed, both locally-focused fund portfolios (Islamic and conventional) exhibit virtually identical sensitivities to all risk factors: SMB, HML, and MOM. This is true regardless of the sample period under examination. However, as indicated earlier, the locally-focused conventional index (TASI) is much superior to the GCC

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Islamic index in explaining returns of both Islamic and conventional locally-focused fund portfolios. Thus, the results that are based on using TASI shed more light on the behavior of locally-focused fund portfolios when common equity investment strategies are introduced into the picture.

When TASI is used, results from the four-factor model indicate that the locally- focused Islamic fund portfolio during only the overall and financial crisis periods is more sensitive to the SMB risk factor where such fund portfolio is more biased towards small capitalization stocks than is its peer the locally-focused conventional fund portfolio. Such findings are consistent with findings of Abderrezak (2008) and Hoepner, Rammal, & Rezec (2009) where they find that Islamic funds, in general, are biased towards small capitalization stocks. However, results from both HML and MOM risk factors indicate that both locally-focused fund portfolios (Islamic and conventional) exhibit virtually identical sensitivities to these risk factors, regardless of sample period under examination.