Introduction

Social Responsible Investment (SRI) is an investment strategy which focuses on ethical, green,
and socially conscious investment to bring social change with consideration of financial return
and environmental good. In other word according to (Humphrey and Lee,2011) investment
which includes an investor moral, spiritual, societal and other prescriptive liking into their
investment decision. Social investment has enormous and positive impact on society as well as
on the performance, return and reputation of most of the companies. In this analysis the
performance of both Social Responsible Investment Funds and Conventional funds can be seen
on the basis of three determinants such as Expense ratio, Return, and Revenue.

In Pakistan or in other Islamic countries people seem social investment funds in different
perspective. They are investing in securities of companies which are according to their spiritual
and moral beliefs rather than investing in conventional funds. In Pakistan it is primarily related to
in Islamic Mutual Funds and investing in funds of companies engage in moral, communal,
environmental friendly and other common activities which are valuable for the society. So in this
analysis the performance of Islamic and Conventional mutual Funds will be compare.

(Girard and Hassan, 2008) As of April 2010, Muslims constitute approximately 22% of the
world population with an investment of $800 billion which is rising 15% annually. So majority
of the firms take a look at their business activities to put up for Muslims spiritual and moral
inclination, this create the space for sharia compliant funds or assets.

(Rubio and Hassan,2012) Islamic funds are less risky as compare to conventional securities
generating low average return. (Mansoor and Hayat, 2009) argue that islamic mutual funds
perform better as compare to traditional assets in a cranky financial crunch. However some are
also disagree that sharia compliant securities have fewer diversification than conventional
securities therefore make it more risky, as a result financiers need more or higher compensation
to clutch Islamic funds.

The literature include studies which have been done to see the performance comparison of both
Islamic and conventional mutual funds and to find out which type of investment perform better.
For comparing these systems which is Islamic and conventional their mainly center of attention
are banking sector but there are few researches which have been done on Islamic and
conventional investment. So the centre of this study is on Islamic and conventional mutual funds
of Pakistan. As of fiscal year 2010-11 Pakistan mutual fund industry has experienced a rapid
growth rate of 24.95% and 8.87 in the last quarter. Conventional mutual funds growth rate were
9.94% to 188.225 billion and Islamic mutual funds grew by 15.52% to 36.313 billion (MUFAP
annual report 2010-11).

Mutual fund is a collaborative investment system in which the collected money of the spare units
is invested by the specialist in different securities such as bank deposits, government claims,
band shares, money market and other related assets (MUFAP).

This system provides a way to the spare units to place their additional money in portfolios which
are not easy to start without the requirement of an enormous initial resources or capital. This
scheme (MUFAP) gives a facility of assortment and efficiently management of different
portfolio and this is a critical features for the mutual funds by asset management companies
(Afza and Rauf, 2009).

From this definition of MUFAP it gives an evident opportunity or investment area for the
economy of country.

Mutual fund association of Pakistan (MUFAP) is a dealing organization for mutual fund. It is
associated with South Asian Federation of Exchanges (SAFE) constitute of 28 members.
Pakistan is also affiliate with International Investment Fund Manager Association (IIFM). This
scheme (MUFAP) specializes billion of country rupees in asset management companies. Its
focus is on to make sure the development of the industry, guarantee transparency and ethical
conduct. It has twenty (20) securities specialists also refer as asset management companies listed
as a part of the organization. These managers or specialists supervise the money of inexperienced
persons and put them in diverse financial assets for instance bonds, stocks and other financial
securities. It gives a great amount of return for capital markets as well as for the surplus units.
Each specialist organizes different categories of the funds. According to (Alhenavi, Medrad and
Hassan, 2010) these funds are classified into two major categories on the basis of their
characteristics which is Islamic and conventional mutual funds. Further these funds are classified
into sub categories for instance asset allocation funds, balance funds, equity funds, income funds,
money market and pension funds according to MUFAP.

The mutual funds are defined comprehensively by MUFAP so therefore giving a name of joint
investment scheme. This system is for the persons (investors) who have extra money and want to
put them or invest in financial securities i.e. bank deposits, bonds, stocks and other financial
assets. According to (Afza and RAUF, 2009) most of the people (investors) in Pakistan have
lack of information, less knowledge and skills regards an investing in these financial securities
and same as they have no experience regard the risk which is associated with these financial
claims, so than the investors purchase some shares and receives some return (capital gain)
according to their invested money and receive regular income in the form of dividend and
interest on underlying assets (MUFAP). So by the definition of MUFAP this scheme give an
evident area of investment for the economy of country.

Now seeing to above significant discussion and anticipated growth of mutual fund industry most
of the stack holders have been enthusiastic about this rising industry particularly the researchers,
they are studying various features of mutual funds for instance advertisements impact (Gupta and
Jain, 2011), while some are focusing on their socially responsible perspective (Forte and
Miglietta 2004, Douglus and Sofia 2007, Forte & Miglietta 2004, Shah & Hijazi, 2005, Gohar,
Ahamd & Niazi 2011, Blake & Timmermann 1998) similarly some are come across with finding
of their valuation (Abbasi & Dadashinasab 2012, Abbasi & Shah 2012). Similarly most of the
analyst have done a lot of work on the performance area of mutual funds. Different methods can
be used for the evaluation of mutual funds performance such as Absolute and Relative
performance, Jansen’s alpha, standard deviation and Sharp Ratio. In our country many studies
have been conducted on mutual funds performance, (Nawaz and Nazir, 2010) have done the
same studies comparing mutual funds growth by taking performance as base studies for this
topic, by intensive scrutiny their analysis findings give a positive and significant relation with the
determinants such as expense ratio, revenue and shows negative relation with risk adjusted
return. Similarly further studies have been conducted concerning the determinants of mutual
funds for instance tenure, fund size, turn over, expenses, liquidity for comparing the performance
of mutual funds (Afza and Rauf, 2009). Whereas some analyst have done further study and
detailed the study of (Nawaz and Nazir, 2010) and conclude that mutual funds diminish or
depressed during the period of crunch in the economy of Pakistan. Further studies regards
determinants of mutual fund performance have concluded that expense ratio has great impact on
performance on funds Das and Hlavka, Gruber, Elton (1993), Arshad( 2013).

Theme of the study

The main theme of the study is the analysis and comparison of open ended mutual funds
classified into Social Responsible investment funds (Islamic) and traditional funds for instance
conventional mutual funds on the basis of some factors which are expense ratio, return and
revenue for the time duration of five years 2015-19 in Pakistan. The reason of collection of data
of this time period is to scrutinize the latest data in literature. The data is the inclusion of these
two major classified categories of mutual funds and not consisting the data of close ended mutual
funds, funds of funds and pension this is in contrast these two funds mutual and pension funds
are differ from each other and are diverse phenomenon. Also we have excluded funds which are
accessible at MUFAP website but originated after 2015 and terminated earlier than 2019.

Objective of the study

In this analysis the effort is on the comparison of Social Responsible Investment Funds (Islamic)
and unconstraint (Conventional) mutual funds for the duration of 2015-19, the reason for
choosing this five years duration is the marvelous performance of mutual funds during this time.
After the assessment of this analysis we will also be capable to see the relation or impact of all
variables on the performance both mutual funds which are Islamic and traditional mutual funds.
Similarly in this time span the Islamic mutual funds have experienced good performance because
of minor alteration in Islamic countries.

Significance of the study

This analysis is dreadfully critical for an in experience investors and regulators of the county.
The study will also provide a general idea for stake holders regarding the performance
comparison of both Islamic and traditional mutual funds. The results of this study will lead the
surplus units regard investment in the rising market of mutual funds in Pakistan. By the detailed
assessment of this research an inexperience investor can composed more timed investment by
keeping in mind the impact of each factor and advisory of the funds can make the most of the
fund by restraining the deceased factors. As per my knowledge I would say this is the first
analysis in which the performance of open ended mutual funds is compared in Pakistan. This
research tells about the performance comparison of both SRI (Islamic)) and traditional mutual
funds and will test whether the performance of traditional unconstraint funds is better than the
sharia compliant funds (Islamic) or the adverse is exact for this analysis. Because of the
incredible performance of SRI (Islamic) funds in the late past particularly during the time of
financial crunch the anticipation will be that Islamic mutual funds will perform better than
traditional funds.

Limitation
The pathway of the industry of mutual funds is newly in Pakistan. The industry is recently got on
track in our country. Therefore our study will reflect on the spirit linked with shifting behavior of
the people (investors) who have extra money in the industry. Similarly the variation in industry
rules and regulation because of the variation in regulatory body which brings new regulatory
framework and practices is also one of the drawbacks of this analysis. Consequently the
irrational behaviors of people (investors) which can be change with the little incidental
circumstances in the industry.
Literature Review
The mean of this literature analysis is to provide a short general idea of previous studies
techniques and results which were conducted on the performance comparison of both Social
Responsible Investment funds (SRI) and Conventional mutual funds. The analysis mostly
focused on comparison of SRI funds (Islamic) and traditional funds, return, expense ratio and
revenue by the deep study of mutual funds in the context of Pakistan. The main subject of the
studies is concerned with the performance comparison of SRI funds and conventional
(unrestricted) mutual funds and which one perform better Islamic or non-Islamic that have no
limitation in the market. SRI funds (Islamic) employ a set of ecological, moral, societal and
spiritual standard to pick securities while the other one conventional funds are unconstraint
securities having no limitation in investment universe. These standard or benchmark is moreover
employ to go for particular securities or stocks out of the investment market (positive criteria) or
to avoid some securities or stocks (negative criteria). According to [ CITATION Sal93 \l 1033 ] that
surplus unit anticipates to lose nothing while putting their money in SRI funds (Islamic). This
indicates that there is no major distinction if someone put money either in SRI funds or in
traditional unconstraint funds. Cumby and Glen (1990) have studied fifteen mutual funds site in
US which were assorted globally in the middle of 1982 and 1988. They came with different
techniques to see the performance of the funds which are Jensen measure and the positive-
period-weighting measure. From this analysis the results showed that mutual funds were not
capable to hit the market. According to (Cai, Chin and Yamada, 1997) that mutual funds in Japan
have showing low performance to the benchmarks set by the market. The basis for this was the
inflow of funds which caused the dilution effects.

Rao (2003) studied the Indian market for mutual funds in a pessimistic time period of 1998 to
2001 by using some techniques and methods which were trenynor, sharpe, jensen and fama
measures. The results of these measures showed that majority of the sample funds converge with
the anticipation of surplus unit and grant surplus return while there total risk was compensated
by their premium.

Kurtz (1997) and Bauer (2005) found that SRI securities failed to beat the entire market
(Renneboog, 2008) for in summary of the analysis. Some report from the time period of 1992-
2004 a positive and remarkable risk-adjusted return from SRI funds of US portfolio. They base a
long-short strategy for this portfolio by putting their investment 10% preeminent SRI securities
and 10 % in worst stocks of SRI. In comparison, Hong and Kacperczyk (2007) states superior
return from funds or stocks that are generally expelled from portfolio as a result of some immoral
concerns. For instance they rule out some firm concern with alcohol, gambling and tobacco.

Ethical investment or SRI has enormous significance in private equity. Therefore Cumming
(2007) SRI have more frequent among the bigger firm investors and they anticipate positive and
superior Risk-adjusted returns from such ethical investments. This results that both conventional
and SRI mutual funds have similar performance or SRI outperform conventional funds (Mallin,
1995).

SRI and Conventional investing have less familiarity here in Pakistan. So the study main focus is
the SRI and Conventional mutual funds in the context of Pakistan. People mostly refers SRI an
investment in Islamic mutual funds while conventional mutual funds refers to the traditional type
of investing i.e. investing in unconstraint way. Therefore this study aims on the performance
comparison of Islamic and conventional mutual funds. According to the Elfakhani (2007)
statistically there is no dissimilarity found between the performance of market benchmark and
Islamic mutual funds. There studies suggest that against recession IMF have suitable hedging
opportunity. Similarly Abdullah (2007) apply some statistical techniques and tools such as
Jensen Alpha, Sharpe index, adjusted Sharpe index, timing and selectivity ability to the mutual
funds of Malaysia and found that compare to traditional funds, Islamic mutual funds show better
performance during worst economic situation whereas conventional funds performed well at the
time of optimistic economic situation.

Shah (2012) finding suggests that Pakistani sharia compliant funds have lower average risk rate
and higher return as compared to unconstraint or non-Islamic funds. Performance comparison
and assessment of mutual funds have been focus of many studies in Pakistan too. See for
instance Afza & Rauf (2009); Gohar, Ahmad & Niazi (2011); Shah & Hijazi (2005); Zaheer, Mir
& Saeed (2011); Sipra (2006); Rasheed & Qadeer (2012); Khalid, Abbas & Shah (2010); Shah,
Iqbal & Malik (2012); Nafees, Shah & Khan (2011); Nafees, Shah & Khan (2011). Still the
studies regards performance comparison of mutual funds (Islamic & conventional) is little
known here. Exclusively in the circumstances of worst economic condition the studies regards
comparative performance hasn’t been examine so far. However, some of the international studies
have paying attention to the role of SRI or ethical funds due to their closeness to the ideology of
sharia compliant funds.

Statmant (2000) used statistical techniques such as Jensen alpha and ESDAR (excess standard
deviation adjusted returns) measures to evaluate the performance of SRI mutual funds. He used
two benchmarks i.e. Domini social index (DSI) and S&P 500 index and assessed the
performance of the funds against these two standards. From his results he suggests that SRI
funds aren’t capable to go on better than both indices DSI and S&P 500 but they surpassed the
conventional mutual funds.

Maulana and Majid (2010) finding suggest that Islamic mutual are more efficient in term of
performance than conventional mutual funds. They assessed the performance through a non-
parametric performance measure, but there is only limited to Indonesia. Similarly Hassan (2010)
concludes that there are no performance dissimilarities between Islamic and traditional
unconstraint funds. Hassan and Bin Mahfouz (2012) findings reject the statement regard Islamic
investment that such investment lead to lower performance and exposed to risk as of limited
investment universe. They proposed that an investor can select sharia compliant investment
according to their religion without being vulnerable to risk or low performance. Alam &
Rajjaque (2010) conclude that Islamic equities portfolio show better performance than
conventional equities portfolio takeout from S&P 350 for the period of 2007-2009 financial
crises. On the other hand Hayat and Kraeussl (2011) used a sample of 145 IMFs and their finding
suggest that such funds show low or worst performance in bullish or bearish economic scenario.
They evaluate the funds against two benchmarks Islamic and conventional.

In Islamic countries IMFs consider as a broad category of SRI. Consequently, a process called
screening process is applied for mutual funds in certain industries to avoid investing in some
equities of those industries. According to Ernst & Young (2010) statements, that by the end of
2010 the estimated worth of Islamic finance securities reached to $938-939 billion globally with
the anticipation that this will grow more in coming years. While seeing to this increasing
demands most of the conventional banks are focusing on Islamic assets and services, these banks
includes HSBC, Deutsche bank, TSB, Merrill Lynch and Morgan Stanley (Hussein & Omran,
2005) and (Ghoul & Karam, 2007).
Kumar & Noronha (1992) analysis suggest that explaining variation in discounts of closed end
funds expenses are an important factor and have a key role to analyze or evaluate the funds.
Malothra and McLeod (2000) evaluate close end funds for the time period of 1989-1996 and
their finding shows that expense ratio of closed end stock show a growing trend as compare to
the expense ratio of close end funds which shows a downward trend. They used a model of close
end funds expenses. In account, as compare to U.S. closed end fund the foreign funds shows a
higher expense ratio.

Social responsible funds and conventional mutual funds in Pakistan

Alhenavi and Medrad (2010) states that mutual funds are divided into two categories globally
according to the nature of the funds i.e. conventional and Islamic funds. The traditional
unconstraint funds are based on interest and these funds aren’t concerned to the set law and
principles of Islam, On the other hand sharia compliant securities or funds are according to the
laws and principle of Islam.

Iqbal, Malik and Shah (2012) analyze the performance comparison of both Islamic and
conventional mutual funds; for their study their main focus was the banking sector of the
industry, they evaluate the data from the site of MUFAP for the comparison. Mostly the
researches done in this area are limited. Iqbal, Malik and Shah (2012) perform an analysis on the
growth comparison of Islamic and conventional funds, find that it shows 7.88% growth rate in
the quarter and 23.93% in the fiscal year in Pakistan. About the last financial year the net assets
of traditional mutual funds (open end) category have increased by 8.94-8.95% to 187.23 billion,
at the same time the sharia compliant funds have raised by the growth rate of 14.5% to 35.31
billion.

Carhart (1997) concludes that for an investor three important principle are important for
maximizing their return through mutual funds: (1) if a mutual funds don’t show steadily better
performance than don’t go for it; (2) An investor can be able to obtain more return for the next
year but subsequently not for more by putting their money in securities with high return in the
prior year; (3) Analyzing the concerned cost such as fees, expense ratio and transaction cost
while investing in underlying funds.
Islamic mutual funds industry
Gerrard and Hassan (2005) studied that initially the sharia compliant funds were step up in Gulp
countries by a prominent organization during 1980s to expand the range of financial claims and
to increase their wealth or earning. To keep their investment efficiently regarding to their beliefs
and Islamic principles the Islamic mutual funds were introduced. Regardless to their newness in
the financial market they still have the likelihood to show a significant role and performance in
the market, this is because Muslims constitutes 20% of the world total population (Girard &
Hassan, 2005). Wagan and Jabeen, (2016) report that Muslims people are changing their mind
from investing in banking sectors towards sharia compliant investment because 72% of Muslims
of Islamic countries haven’t find a good experience with the services given by the banks, despite
of the global financial crunch Islamic mutual funds showed massive performance rate from 90s.
They elaborate that the enormous interest in Islamic securities originated due to moral, religious
beliefs and reasonable sharing of return and loss among the involved parties and some other
concerns such as economical and financial.

Medrad and Alhenavi, (2010) found that the analysis which have been done on Islamic
investment are limited, majority of the studies concerned with the set principles, boundaries and
rules and regulations established by religion for the funds and much of the studies are carried out
by conventional funds or Non-Islamic funds.

Medrad, Hassan and Alhenawi, (2010) also used some measures and techniques for the
performance comparison of both funds and their findings suggest that conventional securities
outperform sharia compliant funds during bullish market condition and Islamic beat conventional
when there is bearish market condition. Nadia and Amin (2014) states that during the time of
crises IMFs can be use as defensive for portfolio against losses as IMFs gives better performance
during financial crises.

Amin and Nadia, (2014) found that the introduction of first IMFs to the market were in 1990s
when the researchers acknowledge the securities investment according to the Laws and
principles of Islam, in Pakistan it came to the financial market with the start of 2000s.
Conventional mutual fund industry
Hassan, Alhenawi and Medrad, (2010) states that majority of the are carried out globally on the
subject of conventional funds and SRI mutual funds or ethical funds, in most countries people
refers ethical funds to IMFs but fewer studies have been done on the topic of IMFs.

Abdullah, (2007) concludes that on the basis of performance comparison of both mutual funds
(Islamic and Non-Islamic), sharia compliant funds give better performance during the worst
economic situation than traditional unconstraint mutual funds.
 Methodology
In this chapter the debate is regard the factor or variable of the analysis, sample size of the study,
hypothesis of the research, research model to be used, time duration, statistical tools, methods
and techniques and sources of the data.

Variable of the study:

The factors or determinants which are used in this analysis are performance, return, revenue and
expense ratio. In this analysis I will discuss the performance as dependent variable while the
other three determinants return, revenue and expense ratio as independent variables.

Return
Brown (1995) concludes that there is a positive relation between the performance and return of
the funds, the analysis were on US mutual funds, further the analysis report that returns of the
funds for future is significant trait of the performance of mutual funds.

However, some analyst report inverse relation for the return and expense ratio with the
performance of the funds and found that there is a weak direct correlation among the income and
performance (Blume & Crockett, 1970).

In this research we will look at the impact of the determinant return on both funds conventional
and Islamic mutual funds.

Expense Ratio:
In many studies expense ratio is used as a variable to measure the performance of mutual funds.
Abbasi and Dadashinasab (2012) found that to meet the expenses of a diversified portfolio, Total
expense ratio (TER) is the indicator to know about the amount of mutual funds require to meet
their expectation during the year, it is (TER) calculated by dividing (TOE) total operating
expense by firm total net asset (TNA).
Elton (1993) found that the performance of US mutual funds and expense ratio have negative
impact on each other, as the performance of the funds gets better the funds size tend to rise and
therefore increases the management and operating cost of the funds and thus leading towards
high expense ratio.

Revenue
Revenue is important determinant affecting the performance of mutual funds. There are
differences in opinion and diverse kind of results regards the revenue impact on mutual fund
performance. Carhart(1997) results show an inversely relation between the performance and
revenue of mutual fund. The same results of inversely relation among the two determinants were
also report by Afza and Rauf (2010).

Some analysts have found a direct relation between revenue and performance of mutual funds
(Soderlind & Wermer, 2000).

Performance
Some researchers reports that a notable performance have shown by the mutual funds in recent
times. Crysler and Jr, (1962) that open end funds have shown remarkable performance and close
end funds performance have increase three times since 1940, the rise in performance is because
of increase investments made by companies in mutual funds sector. The performance of the
mutual funds is also rise by the emergence of sales of new stocks and securities, which raise the
worth of the funds with the appreciation of market.

Performance in this analysis used as dependent factor, we will see the impact of other
independent determinants on performance, dependent variable.

Sources of data and sample size

The overall population for both mutual funds open ended Islamic and conventional funds consist
of 119 mutual funds and the companies which are listed on MUFAP are 20 asset management
companies (AMCs), while most of the funds are excluded such as planning funds, pension funds
and close ended funds. This is because these funds are not included in mutual funds. The time
duration which I have selected is from 2015-19, so the inception of the above population before
2014 is significant for this analysis but mustn’t be ended or terminated before 2019. There the
sample size for this analysis is 119 mutual funds.

For the variables such as expense ratio, revenue and return all the data are secondary data which
can be collect from annual report, websites of AMCs and fund manager report. The SECP code
of reporting and rules and regulations have made the annual financial reports applicable and
therefore standards provide the guidance to AMCs for reporting.

Hypothesis
To find the impact of each variable and significance on the performance of both open ended
Islamic and conventional mutual funds the following hypothesis were tested:

Return:
Ho: Returns has negative impact on performance of open ended Islamic funds.

H1: Returns has positively impact on open ended Islamic funds performance.

Revenue:
Ho: Revenue is insignificant factor of open ended Islamic mutual funds performance.

H1: Revenue is significant factor of performance of open ended Islamic mutual funds.

Expense ratio:
Ho: Expense ratio negatively affects the performance of open ended Islamic Mutual funds

H1: Expense ratio positively affects open ended Islamic mutual funds performance.

Research Model
Regression analysis will be applied to see the impact of determinants or variable with
performance of mutual funds. The specified regression model can be:
 P = β Return ( Return )+ βrenenue ( revenue )+ β Expenseratio ( expenseratio )

Time period
The selected time period for this research is from 2015-19. The basis for this period is the
insertion of latest data in this analysis because this period is very strong for the changes in the
financial market of country economy; another cause is changes by regulatory body in rules and
regulation and funds practices. Therefore the consequences obtain from the study findings will
illustrate the impacts of all determinants on funds performance in this time period.

Techniques and tools

For data analysis we will apply some statistical techniques and methods. In this research we will
go through some descriptive and inferential statistics to see association of factors of the open
ended funds with their performance for the time span of five years which is from 2015-19. We
will use regression analysis to check the impacts of each variable on funds performance and the
models which will be use for analysis are fixed effect model, random model and pooled OLS.