The Investment Performance of Ethical Equity Funds in Malaysia

Round 1

Reviewer 1 Report

This is a good paper which provides empirical work on the performance of two types of Equity funds using excellent research methodology which is updated with econometrics equations to employ various aspects of portfolio performance measures to see which fund is better than the other. One can argue it's not a new method but using Shafiq et. al's  work on an improved existing model is a sort of innovation which is not done in Islamic finance literature before. Empirical work is also good but yet need some improvements. Though I accept the paper but suggest some minor revision detailed below.

1.    The paper needs thorough proofreading to enhance English exposition in relation to language improvement, particularly the first section and improvement in literature review part of the paper.

2.    There is updated information which needs revision and improvement for example pages 1 to 3  updating Kuwait Finance House in Malaysia and PWH. 

3.    The literature which was unpublished is now published so proper citation with volume and issue detailed may be done like; Azmi et al (2019) is published in Pacific-Basin Finance Journal. 

Author Response

This is a good paper which provides empirical work on the performance of two types of Equity funds using excellent research methodology which is updated with econometrics equations to employ various aspects of portfolio performance measures to see which fund is better than the other. One can argue it's not a new method but using Rahman et. al.'s work on an improved existing model is a sort of innovation which is not done in Islamic finance literature before. Empirical work is also good but yet needs some improvements. Though I accept the paper but suggest some minor revision detailed below.

Our response: Many thanks for these excellent and encouraging comments on the paper. Our revision of each point is detailed below and, in the manuscript for editorial ready reference.

1. The paper needs thorough proofreading to enhance English exposition in relation to language improvement, particularly the first section and improvement in literature review part of the paper.

Our response: The paper has gone through careful editing and help from a professional proof-reader has been sought to improve the paper which is highlighted in the track change version. The proof-reader’s email address is below and business details are appended at the end.– email address is [email protected]]

2. There is updated information which needs revision and improvement for example pages 1 to 3 updating Kuwait Finance House in Malaysia and PWH

Our response: The required corrections are highlighted on the revised manuscript’s pages 1 to 2 and footnotes 1 and 2 are added for the reader’s ready reference.

3. The literature which was unpublished is now published so proper citation with volume and issue details may be done like; Azmi et al (2019) is published in Pacific-Basin Finance Journal.

Our response: Many thanks for the feedback and we have updated this in the revised version – please see page 15. 

Reviewer 2 Report

The comments and suggestions are detailed clearly in the attached file below. I do not want to repeat the same thing here.

Comments for author File: Comments.pdf

Author Response

Thank you for your review. Please see the attachment.

Author Response File: Author Response.docx

Reviewer 3 Report

The first two footnotes have even references in it. Better to put it in the main body. 

Typo in line 5, 21, 24: etical -> ethical 

line 32-34: the evidence for the claim that malaysia is the leading countries is weak. author uses pricewaterhousecoopers result but need proper citation and it is only for a single year, which is ten years ago. it is highly recommended the author reinforce this part with more references as the whole paper is focused on malaysia's market. how big is the market share in recent year?

line 72-85: hard to relate to the current study.

line 96: not clear what a refined model means. the studies listed in line 86-93 does not use Bhattacharaya-Pfleiderer model. Again, it is hard to relate the current study with the references and contribution of this study. Please explain what the gap means in the line 97.

line 105: are you saying Bhattacharya-Pfleiderer model is simlar to the one that is proposed by Rahman et al? The reviewer strongly suggest that the author clearly state (not explain in full detail) 1) what Treynor-Mazuy Model is 2) what Bhattacharay-Pfleiderer Model is with proper citation. Currently it is difficult which equation is T-M model and B-P model.

footnote in page 4 is not necessary. move the citation to main body.

move the footnote mark at the equation number to line 199.

eq in line 191, 195, 199, 221 should be capitalized.

line 241 cite or specify the data set in detail. 

Table 2: The timing measure is reported significantly different. What statistical test has been used to test the hypothesis? The test statistics is missing only significant level is given. It is recommended to report p-value if the author doesn't want to show test statistics.

author needs to remove the references that is not cited in the article.

 

Author Response

REVIEWER 3:

• The first two footnotes have even references in it. Better to put it in the main body

Our response: Revised as advised, please refer to page 1, both footnotes are added in the main paper.

• Typo in line 5, 21, 24: etical -> ethical

Our response:  Spellings are now fixed as requested – thanks!

• line 32-34: the evidence for the claim that Malaysia is the leading country is weak. Author uses pricewaterhousecoopers results but needs proper citation and it is only for a single year, which is ten years ago. it is highly recommended the author reinforce this part with more references as the whole paper is focused on Malaysia's market. How big is the market share in recent years?

Our response: Revised as advised, please refer to page 1, both footnotes are added in the main paper.

These lines are updated – refer to pages 2 & 3, also note para 2 where a few sentences are added to address your concerns. Furthermore the citations are fixed referring to the web links in footnotes 1 and 2.

• line 72-85: hard to relate to the current study.

Our response: These lines clearly state, Malaysia and other studies in the Islamic World. Please refer to “investment performance of Islamic equity funds and unit trusts in Malaysia and other countries of the Islamic world”. Thus besides Malaysia it covers other countries including Saudi Arabia.

• line 96: not clear what a refined model means. the studies listed in line 86-93 does not use Bhattacharya-Pfleiderer model. Again, it is hard to relate the current study with the references and contribution of this study. Please explain what the gap means in the line 97.

Our response: The Bhattacharya-Pfleiderer model is generally used in conventional finance but very few studies have employed it for Islamic finance. We utilized this model in our paper because it can measure not only the performance, but also market timing skills of fund managers, which is one of the important investment strategies in fund portfolio management. 

• line 105: are you saying Bhattacharya-Pfleiderer model is similar to the one that is proposed by Rahman et al? The reviewer strongly suggests that the author clearly state (not explain in full detail) 1) what Treynor-Mazuy Model is 2) what Bhattacharay-Pfleiderer Model is with proper citation. Currently it is difficult which equation is T-M model and B-P model.

Our response: We would like to thank our reviewer for highlighting this. Rahman et al. applied this model to investigate investment performance of US equity mutual funds which are conventional NOT Islamic. Moreover, we clearly stated in line 141: “This study employs a methodology similar to that proposed by Rahman et al. (2017).” The fact is we use the match-pair selection between the Islamic and conventional equity funds based on their similar fund objectives, fund characteristics and fund size. The reason is we can expect data is normal while using the Bhattacharya-Pfleiderer model. For robustness, we did test the normality of the data using Jarque-Bera (the results are not displayed here, but are available upon request).

• footnote in page 4 is not necessary. move the citation to main body.

Our response: This has now been done as advised.

• move the footnote mark at the equation number to line 199

Our response: Done as suggested.

• Table 2: The timing measure is reported significantly different. What statistical test has been used to test the hypothesis? The test statistics is missing only significant level is given. It is recommended to report p-value if the author doesn't want to show test statistics.

Our response: Table 2 reports the number of positive and negative coefficients from several regression equations of both Islamic and conventional funds based on the 5% level of significance (t-test). Please note that we reported this information at the end of Table 2 as follows: “* Significant at the 0.05 level”. 

author needs to remove the references that are not cited in the article.

Done – thanks!

Reviewer 4 Report

Lines 12-13: I am not sure if “profit maximization” is in mind of an investor who is investing in shariah-compliant investments.

I think what the authors mean to state in the introduction (lines 18-25) is a reference to the screening based on the personal beliefs of an investor.  I would recommend authors to adhere to the generally accepted format for definitions.  

I am not sure revisiting the case of shariah-compliant investment in the case of Malaysia is a good enough reason (lines 97-98) as to why a reader should be interested in this study.  This area has already been covered in the past, for example, see Alwi et. Al (2019), “Investigating the Islamic and Conventional Mutual Fund Performance: Evidence From Malaysia Equity Market.” And, if not only focused on Malaysia, is covered in broader studies to include Malaysia as a sample.  My point being authors need to find a good enough purpose for their study, i..e in which stream of work in this topic area will the current study fit and what is new in this study.

Similarly, lines 46-64 seem to lack cohesion since these are not grouped in topic areas.  Authors in my view need to focus on what has been done on the topic and what is missing and there is where they need to add to the body of literature.

(line 98) Why use Bhattacharya-Pfleiderer model? Why not any other?

The method of selection of the conventional counterpart (line 213) has not been defined clearly.  

What about other items of summary statistics? For example, kurtosis, skewness, and test for normality? One could suspect an above normal variance in IEF compared to CEF (Table 1). I suspect the nature of Bhattacharya-Pfleiderer model does assume normality in underlying data?

I would have also like to see information about the 30 shariah compliance funds and counterparts?

A simple application to answer the questions the authors are attempting is the Error Corrected (if needed) VAR model to assess the dependence of IEF on CEF or overall Market Index movement and a Volatility Spillover impact using GARCH application.  Why make the study this complicated that it loses the practicality aspect? For, an investor is concerned about the return and volatility in an underlying investment.  Here the purpose is to assess the comparison which can be easily figured out by VAR modeling. 

Author Response

REVIEWER 4:

• Lines 12-13: I am not sure if “profit maximization” is in mind of an investor who is investing in shariah-compliant investments.

Our response:   We would like to thank our reviewer for making this point. We agree with the reviewer’s opinion and improved the sentence (see line 12-13). 

• I think what the authors mean to state in the introduction (lines 18-25) is a reference to the screening based on the personal beliefs of an investor.  I would recommend authors to adhere to the generally accepted format for definitions.  

Our response: Thanks for alerting us to this, and we are grateful to the reviewer for the comment. We revised the text as advised by the reviewer.

• I am not sure revisiting the case of shariah-compliant investment in the case of Malaysia is a good enough reason (lines 97-98) as to why a reader should be interested in this study.  This area has already been covered in the past, for example, see Alwi et. Al (2019), “Investigating the Islamic and Conventional Mutual Fund Performance: Evidence from Malaysia Equity Market.” And, if not only focused on Malaysia, is covered in broader studies to include Malaysia as a sample.  My point being authors need to find a good enough purpose for their study, i.e. in which stream of work in this topic area will the current study fit and what is new in this study.

Our response: We would like to thank reviewer 3 for raising this point.  We realised Malaysia equity funds have been the topic of much previous research. However, we believe that a new opening-up of the performance evaluation discussions in this study would trigger new ideas about performance measurement in the context of Islamic funds using the Malaysian experience. 

• Similarly, lines 46-64 seem to lack cohesion since these are not grouped in topic areas.  Authors in my view need to focus on what has been done on the topic and what is missing and there is where they need to add to the body of literature.

Our response: We agree with our reviewer’s opinion and we have made certain changes.

• (line 98) Why use Bhattacharya-Pfleiderer model? Why not any other?

Our response: We would like to thank our reviewer for the valuable comments. We choose this model because not many studies in Islamic equity funds explore it, however, the model is well-utilized for conventional funds. This model can measure not only the performance, but also market timing skill, which is one of the important investment strategies in fund portfolio management.  However, we like the idea of using another model and we intend to incorporate in future research.

• The method of selection of the conventional counterpart (line 213) has not been defined clearly.  

What about other items of summary statistics? For example, kurtosis, skewness, and test for normality? One could suspect an above normal variance in IEF compared to CEF (Table 1). I suspect the nature of Bhattacharya-Pfleiderer model does assume normality in underlying data?

Our response: We would like to thank our reviewer for highlighting this. We use the match-pair selection between the Islamic and conventional equity funds based on their similar fund objectives, fund characteristics and size of funds. Our emphasis in Table 1 is to highlight the simple statistics measurement finding for equity fund performance was not adequate but needs further sophisticated performance evaluation (see line 243-246). Yes, you are right, we can expect data is normal while using the Bhattacharya-Pfleiderer model. On the issue of robustness, we did test the normality of the data using Jarque-Bera (the results are not displayed here, but are available upon request).

• I would have also like to see information about the 30 shariah compliance funds and counterparts?

Our response: Certainly, we will provide the name of the funds as requested.

• A simple application to answer the questions the authors are attempting is the Error Corrected (if needed) VAR model to assess the dependence of IEF on CEF or overall Market Index movement and a Volatility Spillover impact using GARCH application.  Why make the study this complicated that it loses the practicality aspect? For, an investor is concerned about the return and volatility in an underlying investment.  Here the purpose is to assess the comparison which can be easily figured out by VAR modeling. 

Our response: We would like to thank our reviewer for his/her valuable comments, which enabled us to improve our work further. However, our focus in this study is to provide evidence that an ethical equity fund is companionable with its conventional peers as investment portfolio preference for fund managers. We will incorporate this idea into our future research.

Reviewer 5 Report

This is well written paper which investigates the investment performance of Malaysian Islamic equity funds relative to conventional funds. It uses panel data regression methodology to capture market timing and fund selectivity skills of fund managers. The paper observes that the fund selectivity skills of Islamic fund managers are poorer than the conventional but both funds’ performance are similar. However, paper conclude that in some situation, Islamic Funds perform better. The story in the paper is well narrated. However, the paper still needs some revisions as suggested below.

1. My concern is the conclusion of the paper should be, “if both funds’ performance is at the same level, then this means by providing expert training (timing and fund selectivity) to Islamic fund managers may lead the Shariah fund to perform better”. This may be emphasized in the conclusion section of the paper as well
2. Section 1 also need revision considering my comments in item 1, above.
3. Literature review section needs improvement. I suggest that the authors must include the following articles to further strengthen the literature review and conceptual background of the paper.

 

• Climent, F., Mollá, P., & Soriano, P. (2020). The Investment Performance of US Islamic Mutual Funds. Sustainability, 12(9), 3530.
• Abdullah, A., Hassan, R., & Kassim, S. (2020). A real asset management approach for Islamic investment in containerships. Journal of Islamic Accounting and Business Research.
• Peillex, J., Erragragui, E., Bitar, M., & Benlemlih, M. (2019). The contribution of market movements, asset allocation and active management to Islamic equity funds’ performance. The Quarterly Review of Economics and Finance, 74, 32-38.

To relate to the financial distress issues in banking and finance, the authors need to include the following article.

• Halteh, Khaled, Kuldeep Kumar, and Adrian Gepp. "Financial distress prediction of Islamic banks using tree-based stochastic techniques." Managerial Finance (2018).

Another article that talks about distress issue in developing Islamic fund is given below, that may be included in the literature review.

Alam, I (2015). Developing Sharia-compliant Financial Services for the Muslim Customers in India. Journal of Islamic Economics, Banking and Finance. 11 (1): 47-70.

Also, author the must include the latest review article by Alam & Seifzadeh (2020) in our J. Risk Financial Management. 2020, 13, 12.

 

I recommend acceptance of the article after the completion of the recommended revisions as given above.

Author Response

As advised, motivation on the paper including financial inclusion and financial distress issues in the area of Islamic banking and finance is done and incorporated on page 1. Needed papers are cited, please refer relevant page and the reference list the end of the paper - Halteh et al (2018) and Alam and Seizadeh (2020).

Round 2

Reviewer 2 Report

They have addressed most of the concerns raised in the first review report.

Author Response

1. Captions “Sources: Authors’ calculation from data set” are removed from all tables
2. Thank you for your comment regarding line 315 & 318 to 322. Please note that we have not estimated VAR model, so stationary characteristic is not necessary for the best linear unbiased estimators (BLUE) under Gauss-Markov theorem. However, as suggested by the referee, we have checked and corrected Heteroskedasticity and Autocorrelation problems for every single regression. This sentence has been inserted in the updated manuscript from rows 306-308 (OLD version copy attached). (Detailed of this process can be seen in our internal conversation in the below Appendix).

Reviewer 3 Report

• Never seen a caption like "Source: Authors' calculation from data set" in published article. The data that is used should be available to public or source has to be included. There is no way to validate the current study. 
• line 315, the stationarity of risk is not something to assume as it is the foundation to price assets. In monthly window I strongly doubt it is the case. In the following paragraph, line 322, the author examine performance based on nonstationary risk-adjusted measures. The author should disclose the data exhibits either stationary or nonstationary structure with simple statistics. The stationarity of data is not something that can be assumed. It has to be checked and clearly presented before moving further.
• line 318, based on just the descriptive statistics conventional equity funds performs twice better than islamic fund in terms of average return with similar variance and beta. If the manager(or research) is sane, conventional equity funds is the GO place. What do you mean by "not meaningful to compare". The Table screams conventional equity funds is better.
• The overall conclusion is logically structured in the following way: "Islamic funds lacks diversification compared to conventional fund(this is obvious fact that does not need much explanation because of the selection criteria). Thus, it is no surprising that the islamic fund can not match the performance of general funds." In other words, there is no finding or interesting knowledge.

 

 

Author Response

1. Captions “Sources: Authors’ calculation from data set” are removed from all tables
2. Thank you for your comment regarding line 315 & 318 to 322. Please note that we have not estimated VAR model, so stationary characteristic is not necessary for the best linear unbiased estimators (BLUE) under Gauss-Markov theorem. However, as suggested by the referee, we have checked and corrected Heteroskedasticity and Autocorrelation problems for every single regression. This sentence has been inserted in the updated manuscript from rows 306-308 (OLD version copy attached). (Detailed of this process can be seen in our internal conversation in the below Appendix).

3. Our response: Thank you very much for your comments. Due to large sample size (more than 30 observations in each return series), employing Central Limit theorem, the sample means are approximated to normality. However, note that the normality assumption is an optional assumption under Gauss-Markov Theorem. Thus, it is not necessarily to check for normality of return series. However, as advised by the referee, we have checked and corrected all Heteroskedasticity and Autocorrelation problems. Detailed can be seen from rows 306-308 in the updated manuscript.  Please see the appendix below for our computation work.

Author Response File: Author Response.docx

Reviewer 4 Report

I am still not convinced about the robustness of the data check - I would have liked to see the aspect of normality of data a pre-assumption of the model selected by authors.

I am also not convinced about the importance of the study.  Simply to state that it is important because no other study has focused on Malaysia is not a valid reason at least in my opinion. 

Author Response

Our response: Thank you very much for your comments. Due to large sample size (more than 30 observations in each return series), employing Central Limit theorem, the sample means are approximated to normality. However, note that the normality assumption is an optional assumption under Gauss-Markov Theorem. Thus, it is not necessarily to check for normality of return series. However, as advised by the referee, we have checked and corrected all Heteroskedasticity and Autocorrelation problems. Detailed can be seen from rows 306-308 in the updated manuscript.  Please see the appendix below for our computation work.

Author Response File: Author Response.docx