Journal Pre-proof

The impact of financial and economic factors on Islamic mutual fund

performance: Evidence from multiple fund categories

Gazi Salah Uddin, Jose Arreola Hernandez, Chiraz Labidi, Victor

Troster, Seong-Min Yoon

PII: S1042-444X(19)30165-3
DOI: https://doi.org/10.1016/j.mulfin.2019.100607
Reference: MULFIN 100607

To appear in: Journal of Multinational Financial Management

Received Date: 5 March 2019

Revised Date: 13 November 2019
Accepted Date: 22 November 2019

Please cite this article as: Uddin GS, Hernandez JA, Labidi C, Troster V, Yoon S-Min, The
impact of financial and economic factors on Islamic mutual fund performance: Evidence from
multiple fund categories, Journal of Multinational Financial Management (2019),
doi: https://doi.org/10.1016/j.mulfin.2019.100607

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 The impact of financial and economic factors on Islamic mutual fund
performance: Evidence from multiple fund categories

Gazi Salah Uddin,Jose Arreola Hernandez,Chiraz Labidi,Victor Troster,Seong-Min Yoon*

Gazi Salah Uddin

Department of Management and Engineering, Linköping University, Linköping, Sweden
E-mail: gazi.salah.uddin@liu.se

Jose Arreola Hernandez

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ESC Rennes School of Business, Rennes City, Brittany, France
Email: jose.arreola-hernandez@rennes-sb.com

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Chiraz Labidi
United Arab Emirates University, Al Ain, United Arab Emirates
E-mail: labidi@uaeu.ac.ae
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Victor Troster
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Department of Applied Economics, University of Balearic Islands, Palma de Mallorca, Spain
E-mail: victor.troster@uib.es
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Seong-Min Yoon*
Department of Economics, Pusan National University, Busan, Republic of Korea
E-mail: smyoon@pusan.ac.kr
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*
Corresponding author. 2, Busandaehak-ro 63beon-gil, Geumjeong-gu, Busan, 46241, Korea. Tel:
+82-51-510-255. Fax: +82-51-581-3143. Email: smyoon@pusan.ac.kr.
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 Highlights

 Influence of financial, economic, uncertainty, and seasonality factors on the performance of

funds are examined.

 125 Islamic mutual funds across America, Europe, Asia-Pacific, Middle East, and Africa are
analysed.

 Significant seasonal effects being positive throughout the year for equity funds is found.

 The early months of the year show a significant impact on the returns of most funds.

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 Fama and French factors only significantly impact equity and balanced funds.

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Abstract
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We examine the influence of financial, economic, and seasonal factors on the performance of equity,
fixed income, cash, and balanced Islamic mutual funds across global regions. We employ a global data
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sample (106 funds) of monthly mutual fund return observations along with Islamic funds’ factor
exposure over time, global developed Fama and French (1993, 2015) factors for equity and balanced
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funds, three factors of the Huij and Derwall (2008) for cash and bond funds, and monthly seasonal
effects. Seasonal effects are non-significant in balanced, equity, and cash funds. The Fama and French
factors significantly affect the performance of equity and balanced funds, whereas the three factors of
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Huij and Derwall (2008) are important for explaining the performance of cash and fixed income funds
for almost over the whole year. Our findings suggest that investors should not worry about a potential
seasonal effect from the Ramadan period.
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JEL classification: C23, G11, G12

Keywords: Islamic mutual funds, Seasonal effects, Ramadan effect
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1. Introduction
In the last decade, socially responsible investment (SRI) has grown rapidly around the
world. SRI is an investment process that combines investors’ financial objectives with
environmental, social, or ethical considerations (Renneboog et al., 2008). SRI equity funds, for
example, use financial screens as well as environmental, social, or ethical screens to select their
stocks. Islamic mutual funds represent a subset of socially responsible mutual funds that apply
negative screens in their portfolio selection process to exclude assets that fail to meet certain
religious criteria. Islamic mutual funds are a representative asset utilised in SRI. In this regards,
Islamic mutual funds are indeed prohibited from investing in certain companies and industrial
sectors, and they differ fundamentally from conventional mutual funds in this respect. 1

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According to Reddy et al. (2017), the total volume of Islamic financial investment in
the last two decades has grown by 15%-20% a year. Besides, the Islamic financial services

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industry, including three main sectors (namely, banking, capital markets, and takāful - Islamic
insurance), has reached for the first time a total worth surpassing USD 2 trillion in 2017
(Islamic Financial Services Board (IFSB), 2018). The Islamic funds’ segment has contributed
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significantly to this overall growth with its assets under management increasing by 19% to
reach USD 67 billion in 2017.
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Current and potential investors in Islamic mutual funds may wish to improve their
knowledge of the dynamics that drive their returns and the factors that explain them, given the
growing importance of Islamic funds and the different portfolio allocation decisions between
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Islamic and conventional mutual funds. Are the returns of Islamic mutual funds subject to year-
round seasonality effects due to their specific portfolio allocation criteria? Which financial,
economic, and seasonal factors exert the strongest positive or negative influence on the returns
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of Islamic mutual funds?

The holy month of Ramadan, observed throughout the Muslim world, is one of the most
important religious traditions in the world. Ramadan is a month of fasting and spirituality
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during which refraining from religiously prohibited activities is of utmost importance. Unlike
the January effect and other fixed calendar effects that have been extensively analysed,
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Ramadan, which is the ninth month of the lunar Islamic calendar, is a moving calendar event
that can have significant effects on economic and financial variables (Seyyed et al., 2005).
Białkowski et al. (2012) argue that Ramadan positively affects investors’ psychology, and they
find that stock returns during Ramadan are significantly higher and less volatile in comparison

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The difference between Islamic funds and other SRIs lies in the types of businesses they avoid: Islamic funds
avoid investments in interest-based financial institutions (i.e. banks, mortgage and insurance firms, and hedge
funds) and other prohibited activities and products such as gambling, pork, and alcohol, some of which could pass
SRI filters.

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with the rest of the year. Al-Hajieh et al. (2011) also document positive calendar effects over
the Ramadan period in Islamic Middle Eastern stock markets due to a positive investor’s
sentiment during the holy month. Moreover, Białkowski et al. (2013) find that the performance
of domestic institutional funds, hybrid funds, and foreign Turkish equity funds is substantially
higher during Ramadan. These findings point towards a potential seasonal effect of Ramadan
on the performance of Islamic mutual funds given the shared cultural and religious background
among Islamic funds market participants (Bley and Saad, 2010).
To address these questions, our study examines the relationship between seasonality,
financial, and economic factors, such as the Fama and French (1993, 2015) factors and the
monthly returns of 106 equity, fixed income, cash, and balanced Islamic mutual funds that
operate across North America, Europe, and the Asia-Pacific region. Our empirical analysis is

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based on the following settings. Firstly, we investigate the extent to which the impact of the
above listed factors on Islamic funds’ performance differs across fund categories. Secondly,

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we identify the factors that most strongly affect the performance of different fund categories.
Thirdly, we examine the effects of seasonality, which may increase the impact of any factor in
some months of the year in some funds in comparison with that in other months.
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The existing literature on the firm characteristics of international equity Islamic funds
is limited, and we shed light on this topic by using a large sample of 106 international Islamic
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funds (65 equity funds, 13 balanced funds, 9 cash funds, and 19 fixed income funds) over the
1997-2019 period. Further, to the best of our knowledge, there is no empirical study on the firm
characteristics of international Islamic fixed income funds. Hence, this paper is the first to
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analyse the performance and the firm characteristics of 19 international Islamic bond funds.

The main contributions of our study are threefold: (i) the use of a large Islamic mutual
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fund dataset (106 funds in total) with a global scope; (ii) the diverse range of factors selected
to explain mutual fund returns, namely, seasonal, financial, and economic ones; and (iii) the
original and novel insights we put forward by identifying factors that play a significant role in
determining the performance of different fund categories. Overall, we provide a comprehensive,
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intuitive, and useful analysis not previously pursued in prior related literature. International
evidence on the performance of Islamic funds is indeed very scarce, and our study is the first
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(to the best of our knowledge) to consider a widely selected data sample from various regions
of the world. Besides, most of the previous studies suffer from methodological problems. They
mostly pooled all types of mutual funds regardless of their asset class, and thus could not
provide evidence by fund category.
Our empirical results indicate that seasonal effects are non-significant in balanced,
equity, and cash funds; yet, fixed income funds display a strong positive seasonal effect in
September and a weak negative seasonal effect in November. Moreover, funds trading with

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equities are significantly influenced by the Fama and French factors. The market risk premium
is the most relevant factor throughout the year. The profitability and investment factors also
affect the performance of Islamic equity funds.
In addition, the three factors of Huij and Derwall (2008) are important for explaining
the performance of cash and fixed income funds for almost over the whole year. The returns
on low-grade debt and the returns on US mortgage-backed securities positively affect the
performance of Islamic cash and fixed income funds, for almost over the whole year. Moreover,
the Islamic cash funds have a negative exposure to US bond returns, whereas the fixed income
funds have a positive exposure to US bond returns. The lagged spread between the 10-year and
the three-month Treasury bill rate affects the performance of all funds, for almost all model
specifications. It has a negative effect on the performance of Islamic balanced and equity funds,

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whereas its impact is positive on cash and fixed income funds. The lagged returns on the world
index negatively affect the performance of Islamic equity funds. Finally, the Ramadan period

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is non-significant for the performance of all types of funds.
The rest of this paper is organised as follows. Section 2 presents the related literature,
and Section 3 explains the methodology used in the paper. Sections 4 and 5 report data and
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results. Finally, Section 6 summarises the results and concludes.
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2. Literature review

Islamic mutual funds apply negative screens in their portfolio selection process to
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exclude assets that fail to comply with the Shari’ah (Islamic) law, and they differ fundamentally
from conventional mutual funds in this respect. On the one hand, Islamic funds do not attempt
to merely maximize profits. Hong and Kacperczyk (2009) report that stocks on some prohibited
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products by the Shari’ah law (like tobacco and gambling) have considerable high returns. Thus,
the exclusion of these stocks from the portfolio may worsen the performance of Islamic funds
compared with that of conventional funds. On the other hand, some authors state that the
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Islamic funds strategies make them more resilient especially during financial turmoil periods.
Hussein and Omran (2005) and Ghoul and Karam (2007) argue that the exclusion of Enron and
Worldcom from the Dow Jones Islamic Market Index (DJIMI), due to their exorbitant level of
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debt, helped the DJIMI record a superior performance than the Dow Jones Index (DJI) after
Enron and Worldcom scandals in 2001-2002.
Islamic funds strategies are also less reliant on managers’ skills and their use of leverage.
Kosowski et al. (2006) and Fama and French (2010), among others, report evidence that few
fund managers outperform passive investors. Thus, Islamic funds strategies reduce potential
losses produced by fund managers. Another implication of the drastic screening imposed by
Shari’ah principles is that it reduces Islamic funds securities universe and makes Islamic funds

3
strategies more similar compared to conventional strategies. Hoepner et al. (2011) find that
Islamic funds display smaller betas in comparison with conventional (and leveraged) funds.
Besides, Islamic funds invest more in smaller stocks that have a lower probability of receiving
earnings from forbidden products or activities (Girard and Hassan, 2008). Finally, Islamic
funds are expected to invest more in growth stocks than in value ones, because growth stocks
display a smaller leverage than value stocks (Campbell and Vuolteenaho, 2004; Hou et al.,
2015).
The performance of Islamic funds compared with conventional funds remains a highly
controversial topic, although it has been widely assessed in the literature. Some studies have
documented a superior performance of Islamic funds in comparison with conventional funds,
especially during market downturns (Hoepner et al., 2011; BinMahfouz and Hassan, 2012;

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Rubio et al., 2012; Walkshäusl and Lobe, 2012; Lesser and Walkshäusl, 2018). Other studies
found significant underperformance of Islamic funds compared with conventional funds

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(Merdad et al., 2010; Hayat and Kraeussl, 2011; Mansor and Bhatti, 2011). There are also
studies reporting mixed results (Abdullah et al., 2007; Jawadi et al., 2014; Lesser and
Walkshäusl, 2018) and others failing to find a significant performance difference between the
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two types of funds (Girard and Hassan, 2008; Hassan et al., 2010; Boo et al., 2017; Reddy et
al., 2017).
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Previous literature on the performance of Islamic funds predominantly covers
developed Islamic markets with most of the empirical studies considering only one
market/country, e.g. Abdullah et al. (2007; Malaysia, January 1992 - December 2001), Hassan
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et al. (2010; Malaysia, January 1996 - November 2005), Merdad et al. (2010; Saudi Arabia,
January 2003 - January 2010), Mansor and Bhatti (2011; Malaysia, January 1996 - April 2009),
BinMahfouz and Hassan (2012; Saudi Arabia, July 2005 - July 2010), and Reddy et al. (2017;
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the UK, January 2004 - October 2014).2

Some international evidence on the performance of Islamic funds exists but remains
limited. Hoepner et al. (2011) analysed funds from 20 different countries, and they concluded
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that Islamic funds from Islamic financial centres perform competitively or even outperform
their benchmarks, whilst portfolios from nations with less developed Islamic financial services
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underperform their benchmarks. Hayat and Kraeussl (2011) analysed the risk and return
characteristics of 145 Islamic equity funds (IEFs) from several countries, including those in the
Asia-Pacific, European, and Middle-Eastern regions, as well as the US. Their results indicated
that IEFs underperform those of the conventional types. Moreover, the 2008 financial crisis
augmented their underperformance, whilst managers of IEFs are found to be bad market timers.
El Khamlichi et al. (2014) showed that local Islamic funds outperform global funds, analysing

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The citation format in this sentence is as follows: author’s name(s) (year of publication; countries analysed,
sample period).

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111 IEFs from 2005 to 2011. Lesser and Walkshäusl (2018) analysed 25 internationally
investing funds from developed Islamic and non-Islamic markets. They showed that funds
operating in Islamic markets do better than those in non-Islamic markets, more noticeably
during periods of financial turmoil. The outperformance of funds in Islamic markets is
attributed to the Islamic portfolio selection criteria.

Overall, the existing evidence on international Islamic funds is limited, and we

contribute to this literature strand by using a large sample of 106 international Islamic funds
(65 equity funds, 13 balanced funds, 9 cash funds, and 19 fixed income funds) over 1997-2019.
We apply the multifactor models of Fama and French (1993) and Fama and French (2015) to
examine the main drivers of equity funds returns. Furthermore, to the best of our knowledge,
our paper is the first to analyse the performance of international Islamic bond funds using the

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model of Huij and Derwall (2008) to examine the determinants of the returns of Islamic bond
funds. Therefore, this paper provides comprehensive and novel insights by identifying the main

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determinants of the performance of different categories of Islamic funds.

3. Methodology -p
To investigate the financial performance and underlying characteristics of Islamic funds,
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this study uses multi-factor performance measurement models. We implement a variety of
model combinations in a matrix form to analyse the impact of financial, economic, and
seasonality factors on different Islamic asset class returns.
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For the estimation of seasonal effects on different fund categories, using monthly
observations, we fit the following model:
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𝐫𝐢,𝐭 = 𝛍𝐢 + 𝐬𝐭′ 𝜽𝒊 + 𝛜𝐢,𝐭 , (1)

where 𝒔𝒕 is a vector of seasonal dummies with size (11 × 1) that accounts for monthly effects
from February to December with a parameter vector 𝜽𝒊 . This indicates the extent to which each
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month of the year influences the performance of the Islamic mutual fund categories considered.
The vector 𝛜𝐢,𝐭 is a vector of errors of the model. The vector 𝐫𝐢,𝐭 is a (𝑁𝑖 × 1) vector of returns
for Islamic fund category 𝑖, with 𝑁𝑖 denoting the number of funds in each fund category. Table
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2 in Section 5 displays the empirical results corresponding to the estimation of Eq. (1).
We use the following equation (Eq. (2)) to estimate the impact of financial, economic, and
seasonality factors on the performance of equity and balanced funds:
𝐫𝐢,𝐭 = 𝛂𝐢 + 𝐅𝐅𝐭′ 𝛃𝐢 + 𝐲𝐭′ 𝛄𝐢 + 𝐳𝐭′ 𝛉𝐢 + 𝛜𝐢,𝐭 , (2)
with 𝐅𝐅𝐭′ = (𝐌𝐤𝐭-𝐑𝐅𝐭 , 𝐒𝐌𝐁𝐭 , 𝐇𝐌𝐋𝐭 , 𝐑𝐌𝐖𝐭 , 𝐂𝐌𝐀 𝐭 ),

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 𝐲𝐭 ′ = (𝑇𝑆𝑃𝑡−1 , 𝐷𝐸𝐹𝑡−1 , 𝑊𝐷𝑡−1 ),
𝐳𝐭 ′ = (𝐑𝐀𝐌𝐭 , 𝒔𝒕 ).
We estimate Eq. (2) by employing a pooled time-series regression with standard errors
corrected for autocorrelation up to five periods, heteroscedasticity, and cross-sectional
dependence developed by Driscoll and Kraay (1998). The vector 𝐅𝐅𝐭 comprises the global
developed Fama and French (2012, 2015) factors, since our data on Islamic funds do not allow
us to construct country-level factors accurately. We follow Renneboog et al. (2008) and
Hoepner et al. (2011), who showed that their factors are very similar to the ones of Fama and
French (1993). They are calculated using market data from 23 developed countries, including
Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, the UK, Greece,
Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore,

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Spain, Sweden, Switzerland, and the United States. We consider only Islamic funds with a
geographical focus on some or all of these developed countries.

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More specifically, the vector 𝐅𝐅𝐭 in Eq. (2) consists of the market risk premium, 𝐌𝐤𝐭-𝐑
𝐅𝐭 ,, the performance of small cap stocks relative to large cap stocks, 𝐒𝐌𝐁𝐭 , the performance of
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value stocks relative to growth stocks, 𝐇𝐌𝐋𝐭 , the performance of robust profitability stocks
relative to weak profitability stocks, 𝐑𝐌𝐖𝐭 , the performance of conservative investment
portfolios relative to aggressive investment portfolios, 𝐂𝐌𝐀 𝐭 . Vector 𝐲𝐭 in Eq. (2) includes the
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lagged spread between the 10-year US government bond yield and the three-month Treasury
bill rate (𝑇𝑆𝑃𝑡−1 ), the lagged default spread between Moody’s BAA and AAA rated corporate
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bond yield (𝐷𝐸𝐹𝑡−1 ), the lagged return on the Thomson Reuters world index (𝑊𝐷𝑡−1 ). Finally,
vector 𝐳𝐭 encompasses a “Ramadan” effect (𝐑𝐀𝐌𝐭 ) as well as the vector of monthly seasonal
dummies, 𝒔𝒕 , of Eq. (1).
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We explain the performance of 𝐫𝐢,𝐭 when all of the global developed Fama and French
(F&F), macroeconomic factors (MAC), and seasonality effects factors (SEAS) are considered,
in combinations of pairs as well as in isolation. Tables 3 and 4 report the empirical results of
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Eq. (2).
To estimate the impact of various financial, economic, and seasonality factors on the
performance of cash and fixed income funds, we implement the model of Blake et al. (1993),
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Elton et al. (1995), and Huij and Derwall (2008):

𝐫𝐢,𝐭 − 𝐫𝐟,𝐭 = 𝛂𝐢 + 𝐇𝐃′𝐭 𝛃𝐢 + 𝐲𝐭′ 𝛄𝐢 + 𝐳𝐭′ 𝛉𝐢 + 𝛜𝐢,𝐭 , (3)

where 𝐫𝐟,𝐭 is a vector of one-month US Treasury bill rate (risk-free rate), and the vector 𝐇𝐃′𝐭 =
(𝑼𝑺𝑩𝑰𝑮𝒕 − 𝐫𝐟,𝐭 , 𝑯𝒀𝒕 − 𝐫𝐟,𝐭 , 𝑮𝑵𝑴𝑨𝒕 − 𝐫𝐟,𝐭 )′ , where 𝑼𝑺𝑩𝑰𝑮𝒕 measures the overall US bond
market, 𝑯𝒀𝒕 proxies the low-grade debt returns, and 𝑮𝑵𝑴𝑨𝒕 are the returns on US mortgage-
backed securities. We also estimate Eq. (3) by applying a pooled time-series regression with

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standard errors corrected for autocorrelation up to five periods, heteroscedasticity, and cross-
sectional dependence developed by Driscoll and Kraay (1998). The vectors 𝐲𝐭 and 𝐳𝐭 are the
same as in Eq. (2). Tables 5 and 6 report the estimation results of Eq. (3).
To assess the individual impact of the five Fama and French (F&F) factors included in
Eq. (2) on the Islamic fund returns across different months of the year (i.e., their seasonal
effects), we consider the following model:
𝐫𝐢,𝐭 = 𝛂𝐢 + 𝐅𝐅𝐭′ 𝐁𝐢 𝒔𝒕 + 𝛜𝐢,𝐭 , (4)
where 𝐁𝐢 is a (5 × 11) matrix of seasonal parameters. Tables 7 and 8 report the estimation
results of Eq. (4) for Islamic balanced and equity funds, respectively.
Similarly, we analyze the seasonal effect of the individual impact of the three factors

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included in 𝐇𝐃𝐭 in Eq. (3). We estimate the following model:
𝐫𝐢,𝐭 − 𝐫𝐟,𝐭 = 𝛂𝐢 + 𝐇𝐃′𝐭 𝐁𝐢 𝒔𝒕 + 𝛜𝐢,𝐭 , (5)

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where 𝐁𝐢 is a (3 × 11) matrix of seasonal parameters. We also estimate Eqs. (4)-(5) by
applying a pooled time-series regression with standard errors corrected for autocorrelation,
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heteroscedasticity, and cross-sectional dependence. Tables 9 and 10 report the estimation
results of Eq. (5) for Islamic cash and fixed income funds, respectively.
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4. Data
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Our survivorship bias-free data consist of monthly net returns of 106 Islamic mutual
funds spanning from September 1997 to July 2019. We obtain the data from Lipper, and all
returns are denominated in US dollars. The returns are net of management fees and do not
include distributions. The selected funds invest in various regions of the world including
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Europe (five funds), Asia-Pacific (13 funds), North America (12), and other parts of the world
denoted as ‘global’ (76 funds). Therefore, the domiciliation of the funds is different from their
investment universe. Furthermore, 65 out of the 106 funds are equity funds, nine are cash funds,
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19 are fixed income funds, and 13 are balanced funds. The balanced funds invest both in equity
and in fixed income securities. They range from conservative funds, with a percentage of stocks
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(bonds) of at most 35% (at least 65%), to aggressive funds, with a percentage of stocks (bonds)
of at least 65% (at most 35%).
We also consider data sets for market variables that we regress on the historical returns
of equity and balanced fund categories. Specifically, we consider the global developed Fama
and French (2012, 2015)’s factors from Kenneth French’s website; namely, Mkt-RF is the
global market-risk premium or excess returns on the market, which is the difference between
the returns of the market portfolio and the returns of a risk-free benchmark asset, the one-month
US Treasury bill rate. SMB is the global performance of stocks from small-capitalised firms

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relative to the performance of stock from large capitalised firms, and it is estimated as the
difference between the returns of small and large capitalised equities. HML is the performance
of value stocks relative to growth stocks, estimated as the difference between the returns of
listed firms with high book-to-market ratio and those of listed firms with low book-to-market
ratio. RMW is the profitability factor, calculated as the difference between the average return
on two robust profitability portfolios and the average return on two weak profitability portfolios.
We also employ a CMA data set that accounts for the difference between the returns offered by
conservative investment portfolios and aggressive investment portfolios.
To analyse the performance of cash and fixed income funds, we consider the variables
proposed by Blake et al. (1993), Elton et al. (1995), and Huij and Derwall (2008). More
specifically, we employ the returns of the overall US bond market, 𝑼𝑺𝑩𝑰𝑮, the low-grade debt

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returns, 𝑯𝒀, and the returns on US mortgage-backed securities, 𝑮𝑵𝑴𝑨. We use the returns on
FTSE US broad investment-grade index as a proxy of 𝑼𝑺𝑩𝑰𝑮, and we apply the returns on Citi

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US broad investment-grade mortgage index as a proxy of 𝑮𝑵𝑴𝑨 (Government National
Mortgage Association). We employ US proxies for these variables because the US bond market
is the most relevant bond market in the world for global investing fixed income funds. The
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returns on the US bond market provide the betas of the cash and fixed income funds to the US
bond market. Besides, the returns on mortgage-backed securities in the US have option-like
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characteristics since homeowners may sell or refinance their mortgages whenever they want.
Finally, we use the returns on the Merrill Lynch global high-yield index as a measure of 𝑯𝒀.
We obtain the data on 𝑼𝑺𝑩𝑰𝑮, 𝑮𝑵𝑴𝑨, and 𝑯𝒀 from Bloomberg.
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Further, we consider lagged macroeconomic variables that measure Islamic funds’

factor exposure over time, following Hoepner et al. (2011). We employ the spread between the
10-year US government bond yield and the three-month Treasury bill rate (𝑇𝑆𝑃𝑡−1 ), the default
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spread between Moody’s BAA and AAA rated corporate bond yield (𝐷𝐸𝐹𝑡−1 ), and the return
on the Thomson Reuters world index (𝑊𝐷𝑡−1). We obtain the macroeconomic risk factors from
the Federal Reserve Bank of St. Louis webpage (https://fred.stlouisfed.org/) and from
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DataStream.
Table 1 displays a summary of the overall and seasonal mean returns of the Islamic
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funds by fund category. Over the sample period considered, equity funds have the highest mean
returns, followed by balanced funds, reflecting the higher exposure to market and other types
of risks, while cash and fixed income Islamic funds exhibit the lowest mean returns.
Table 1 indicates that the Islamic equity funds best perform during the months of April
and July. On the other hand, they record their lowest performance from August to October.
Islamic balanced funds and fixed income funds exhibit a similar pattern to that of equity funds;
they have their highest mean return under the later part of the spring seasonal effect (April) and
in July, whereas their lowest mean returns occur in October.

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5. Empirical results

Table 2 displays the seasonality effects on the performance of Islamic mutual funds
across fund categories. Taking January as reference, the performance of balanced, cash, and
equity funds is unaffected by monthly seasonal effects at the 5% significance level. On the
other hand, the returns on Islamic fixed income funds exhibit a positive seasonal effect in July
(at the 10% level) and a negative seasonal effect in November (at the 5% level).
Table 3 reports the global developed Fama-French effects on the performance of Islamic
balanced funds. The market risk premium significantly and positively leads the performance
of balanced funds at the 1% significance level for all the model specifications considered.
Further, the adjusted R2 is quite stable across the model specifications including the five Fama-

of
French factors. The SMB, HML, RMW, and CMA factors are not significant at any level. The
adjusted R2 slightly decreases as we remove the lagged macroeconomic variables from the
model, ranging from 0.596 when all variables are considered to 0.585 when only the F&F

ro
factors are included. This highlights the economic importance of the market risk premium for
explaining the returns on Islamic balanced funds.
-p
The lagged spread between the 10-year and the three-month Treasury bill rate
negatively affects the performance of the Islamic balanced funds at the 5% level, when the
re
F&F factors are included in the model. Nevertheless, the lagged default spread rate and the
lagged returns on the world index are not significant for returns on balanced funds at the 5%
lP

significance level. Moreover, both the Ramadan period and the monthly seasonality do not
affect the performance of Islamic balanced fund returns at the 5% level, in line with the results
from the estimation of Eq. (1) presented in Table 2.
na

Table 4 displays the multifactor effects on the performance of Islamic equity funds.
Consistent with the results presented for the balanced funds in Table 3, the market-risk
premium significantly and positively influences the performance of Islamic funds engaged
ur

solely in equity trading at the 1% level and for all model specifications considered. Furthermore,
the influence of the market factor on the performance of equity funds is larger than that on
balanced funds. The adjusted R2 does not significantly change as we remove the lagged
Jo

macroeconomic variables from the model, ranging from 0.604 when all variables are
considered to 0.603 when only the F&F market factors are included in the model.

9
 Table 1: Mean returns of Islamic funds by category (in %)

f
oo
Funds Mean Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Balanced 13 0.30 0.33 0.95 0.58 1.40 -0.24 -0.19 1.06 -0.60 0.04 -0.34 0.24 0.26
Cash 9 0.18 0.18 0.16 0.18 0.18 0.17 0.17 0.17 0.17 0.18 0.18 0.17 0.19

pr
Equities 65 0.44 0.64 0.87 1.02 1.92 -0.44 -0.08 1.25 -0.73 -0.14 -0.21 0.46 0.62
Fixed Income 19 0.22 0.25 0.37 0.42 0.44 0.21 0.05 0.61 0.03 0.08 0.28 -0.24 0.09

e-
All funds 106 0.36 0.49 0.70 0.76 1.41 -0.25 -0.04 0.98 -0.48 -0.04 -0.11 0.32 0.46
Notes: The table displays the monthly mean returns of Islamic funds according to fund category, for different months of the year. The bottom row displays the mean
returns for all funds (106 in total) in aggregation operating in various regions of the world.

Pr
Table 2: Seasonal effects on Islamic funds returns performance by funds category

Funds
R2 Cons Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
categories l
na
Balanced 0.061 0.329 0.618 0.252 1.072 -0.572 -0.515 0.730 -0.926 -0.285 -0.664 -0.089 -0.070

Cash 0.001 0.183*** -0.018 -0.007 -0.002 -0.012 -0.011 -0.012 -0.009 -0.006 -0.003 -0.009 0.005
ur

Equities 0.026 0.641 0.226 0.375 1.277 -1.083 -0.726 0.612 -1.375 -0.780 -0.853 -0.179 -0.022
Fixed
0.073 0.248 0.120 0.172 0.189 -0.038 -0.196 0.363* -0.213 -0.163 0.031 -0.492** -0.156
Income
Jo

All funds 0.021 0.490 0.214 0.274 0.925 -0.739 -0.528 0.493 -0.975 -0.532 -0.600 -0.169 -0.035
Notes: The table displays the results from the estimation of Eq. (1). The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively, with
Driscoll and Kraay (1998)’s standard errors corrected for autocorrelation, heteroscedasticity, and cross-sectional dependence.

10
 Table 3: Multifactor effects on the performance of Islamic balanced funds

F&F +
F&F + F&F + MAC +
Factors MAC + F&F MAC
MAC SEAS SEAS
SEAS
Mkt-RF 0.436*** 0.445*** 0.434*** 0.444***
SMB 0.044 0.049 -0.002 0.008
HML 0.011 0.012 -0.004 -0.004
RMW 0.083 0.088 0.045 0.050
CMA -0.133 -0.135 -0.131 -0.130
𝑻𝑺𝑷𝒕−𝟏 -0.141** -0.149*** -0.170 -0.192
𝑫𝑬𝑭𝒕−𝟏 -0.169 -0.135 -0.190 -0.120
𝑾𝑫𝒕−𝟏 -0.020 -0.018 0.015 0.016
RAM 0.152 0.168 0.237

of
Feb 0.332 0.340 0.602
Mar -0.154 -0.120 0.219

ro
Apr 0.353 0.362 1.032
May -0.090 -0.113 -0.708
Jun -0.404 -0.335 -0.677
Jul
Aug
Sep
0.242
-0.366
-0.074
0.249
-0.394
-0.024
-p 0.594
-1.035
-0.350
re
Oct -0.481 -0.495 -0.731
Nov 0.003 -0.016 -0.122
Dec 0.083 0.097 -0.075
lP

R2A 0.596 0.589 0.593 0.585 0.058 0.005

Notes: F&F, MAC, and SEAS are the global developed Fama-French factors (Mkt-RF, SMB, HML, RMW, and
CMA), lagged macroeconomic variables ( 𝑇𝑆𝑃𝑡−1 , 𝐷𝐸𝐹𝑡−1 , and 𝑊𝐷𝑡−1 ), and seasonal effects (RAM and
monthly effects). The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively,
with Driscoll and Kraay (1998)’s standard errors corrected for autocorrelation, heteroscedasticity, and cross-
na

sectional dependence. R2A is the adjusted R2 .

The RMW positively affects the performance of equity funds at the 5% significance
ur

level for all model specifications, illustrating that equity funds exhibit a higher profitability
than the market portfolio. Besides, the HML is negatively significant for the performance of
equity funds at the 10% level, when the lagged macroeconomic variables are omitted. The
Jo

negative effect of the HML factor indicates that Islamic equity funds are more exposed to
growth stocks than value stocks, in line with Walkshäusl and Lobe (2012) and Lesser and
Walkshäusl (2018). Finally, the CMA factor negatively affects the performance of equity funds
at the 10% level, suggesting that Islamic equity funds display a less aggressive investment
portfolio than the market.
The lagged spread between the 10-year US government bond yield and the three-month
Treasury bill rate and the lagged returns on the world index negatively affect the performance

11
of the equity funds at the 5% and 10% significance levels, respectively, when the F&F factors
are included. This negative effect of 𝑇𝑆𝑃𝑡−1 also appears in balanced funds. Nevertheless, the
effects of 𝑇𝑆𝑃𝑡−1 and the lagged returns of the world index become non-significant when the
Fama-French factors are omitted. In line with the results presented for the balanced funds in
Table 3, the Ramadan period and the seasonal effects do not affect the equity fund performance
at the 5% level, for all model specifications.
Table 4: Multifactor effects on the performance of Islamic equity funds

F&F +
F&F + F&F + MAC +
Factors MAC + F&F MAC
MAC SEAS SEAS
SEAS
Mkt-RF 0.845*** 0.849*** 0.844*** 0.849***

of
SMB 0.071 0.082** 0.043 0.054
HML -0.066 -0.069 -0.083* -0.084*
RMW 0.131** 0.130** 0.121** 0.119**

ro
CMA -0.150* -0.140* -0.121* -0.112
𝑻𝑺𝑷𝒕−𝟏 -0.137** -0.147** -0.097 -0.124
𝑫𝑬𝑭𝒕−𝟏 0.103 0.115 0.114 0.182
𝑾𝑫𝒕−𝟏
RAM
-0.032*
0.266
-0.032*
0.255
-p 0.044
0.545
0.045

Feb 0.056 0.050 0.274

re
Mar -0.199 -0.194 0.406
Apr -0.100 -0.116 1.287
May -0.207 -0.258 -1.291
lP

Jun -0.421 -0.382 -0.963

Jul 0.078 0.080 0.499
Aug -0.349 -0.381 -1.466
Sep -0.043 -0.043 -0.814
na

Oct -0.412 -0.446 -0.952

Nov -0.127 -0.152 -0.239
Dec 0.177 0.165 -0.043
R2A
ur

0.604 0.603 0.604 0.603 0.028 0.002

Notes: F&F, MAC, and SEAS are the global developed Fama-French factors (Mkt-RF, SMB, HML, RMW, and
CMA), lagged macroeconomic variables ( 𝑇𝑆𝑃𝑡−1 , 𝐷𝐸𝐹𝑡−1 , and 𝑊𝐷𝑡−1 ), and seasonal effects (RAM and
monthly effects). The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively,
Jo

with Driscoll and Kraay (1998)’s standard errors corrected for autocorrelation, heteroscedasticity, and cross-
sectional dependence. R2A is the adjusted R2 .

Table 5 shows the estimation results of the model of Huij and Derwall (2008) in Eq. (3)
for the performance of Islamic funds that trade only with cash securities. Consistent with the
findings of Huij and Derwall (2008) and Chen and Qin (2017) for bond funds, the returns on
low-grade debt positively affect the performance of Islamic cash funds at the 1% significance
level. The returns on US mortgage-backed securities positively affect the performance of

12
Islamic cash funds at the 1% significance level. These findings are robust to alternative model
specifications. Moreover, the Islamic cash funds have a negative exposure to US bond returns
at the 1% significance level, for all model specifications.

In addition, the adjusted R2 is large when the three factors are included in the model. It
does not significantly change as we remove the lagged macroeconomic variables from the
model, ranging from 0.869 when all variables are considered to 0.860 when only the three
factors are included in the model. However, the adjusted R2 drops significantly to 0.540 when
the three factors are omitted, illustrating their significance for explaining the returns on Islamic
cash funds.
Table 5: Multifactor effects on the performance of Islamic cash funds

of
H&D +
H&D + H&D + MAC +
Factors MAC + H&D MAC
MAC SEAS SEAS
SEAS

ro
HY 0.067*** 0.065*** 0.078*** 0.076***
USBIG -0.448*** -0.452*** -0.490*** -0.487***
GNMA 1.169*** 1.166*** 1.257*** 1.251***
𝑻𝑺𝑷𝒕−𝟏
𝑫𝑬𝑭𝒕−𝟏
0.142**
-0.057
0.150**
-0.058
-p 1.044***
0.415*
1.042***
0.408*
𝑾𝑫𝒕−𝟏 0.016** 0.015** 0.007 0.005
re
RAM 0.116 0.139 0.033
Feb 0.125 0.116 -0.025
Mar 0.178 0.176 0.057
lP

Apr 0.059 0.057 0.057

May 0.165 0.209 -0.058
Jun 0.271 0.274 -0.017
Jul 0.007 -0.009 -0.024
na

Aug -0.135 -0.130 -0.054

Sep 0.089 0.063 0.177
Oct 0.140 0.094 0.176
ur

Nov 0.087 0.086 0.053

Dec 0.127 0.126 0.054
R2A 0.869 0.866 0.865 0.860 0.540 0.541
Jo

Notes: H&D, MAC, and SEAS are the variables of the model of Huij and Derwall (2008) presented in Eq. (3)
(HY, USBIG, and GNMA), lagged macroeconomic variables (𝑇𝑆𝑃𝑡−1 , 𝐷𝐸𝐹𝑡−1 , and 𝑊𝐷𝑡−1 ), and seasonal
effects (RAM and monthly effects). The symbols ***, **, and * indicate significance at the 1%, 5%, and 10%
levels, respectively, with Driscoll and Kraay (1998)’s standard errors corrected for autocorrelation,
heteroscedasticity, and cross-sectional dependence. R2A is the adjusted R2 .

The lagged spread between the 10-year and the three-month Treasury bill rate and the
lagged returns on the world index positively affect the performance of the cash funds at the 5%
significance level, for almost all model specifications. Further, the lagged default spread

13
positively leads the performance of cash funds when the factors of the model of Huij and
Derwall (2008) are omitted (at the 10% level).

Table 5 illustrates that the Ramadan period has a non-significant effect on cash fund
performance, in line with the results for equity and balanced funds presented in Tables 3-4.
Besides, the returns on Islamic cash funds do not display a significant seasonality throughout
the year, for all model specifications.

Table 6 presents the estimation results of the model of Huij and Derwall (2008) in Eq.
(3) for the Islamic fixed income funds. The low-grade debt returns and the returns on US
mortgage-backed securities positively affect the performance of Islamic fixed income funds at
the 5% significance level, when the lagged macroeconomic variables are included. In contrast

of
to the results for cash funds in Table 5, the US bond returns display a positive effect on the
performance of fixed income funds. Nevertheless, the US bond returns become non-significant

ro
when the lagged macroeconomic variables are omitted. The returns on US mortgage-backed
securities positively affect the performance of Islamic cash funds at the 1% significance level
(when the lagged macro variables are omitted), in line with the results for cash funds presented
in Table 5.
-p
The lagged spread between the 10-year and the three-month Treasury bill rate positively
re
affects the performance of the fixed income funds at the 1% level, for all model specifications.
In contrast to the regression results for the cash funds, the lagged default spread and the lagged
returns on the world index are not significant for the returns on fixed income funds.
lP

Table 6 reports that the Ramadan period is not significant for the performance of Islamic
fixed income funds, in accordance with the results for balanced, equity, and cash funds. Further,
na

the performance of fixed income funds presents a positive seasonal effect in September at the
5% significance level. We also find a negative seasonal effect in November at the 10%
significance level, when we omit the three factors. In addition, the adjusted R2 slightly
ur

decreases when we omit the lagged macroeconomic variables, ranging from 0.617 when we
include all variables to 0.590 when we consider only the three factors. Conversely, the adjusted
R2 falls to 0.330 when the three factors are omitted. These findings highlight the economic
Jo

importance of the three factors of Huij and Derwall (2008) for explaining the returns on Islamic
fixed income funds.

Table 7 presents the results corresponding to the seasonal effects (monthly effects) of
the five-factor model in Eq. (4) for Islamic balanced funds. The effect of the market risk
premium on the performance of balanced funds is significant throughout the whole year at the
1% significance level. The impact of the market risk premium is the strongest in August and in
November. The impact of the SMB factor on balanced fund performance is negatively

14
significant in May, July, August, and December. The negative sign of the estimated coefficient
of SMB indicates that Islamic balanced funds are more prone to invest in large-capitalization
stocks, in line with Walkshäusl and Lobe (2012), who estimated a negative coefficient of SMB
for Islamic equity funds. These findings, however, are in contrast to Hoepner et al. (2011) and
Lesser and Walkshäusl (2018), who found a positive slope of the SMB factor for Islamic equity
funds.

Table 6: Multifactor effects on the performance of Islamic fixed income funds

H&D +
H&D + H&D + MAC +
Factors MAC + H&D MAC
MAC SEAS SEAS
SEAS
HY 0.244*** 0.243*** 0.242*** 0.242***

of
USBIG 0.211** 0.184** 0.116 0.090
GNMA 0.172 0.202* 0.413*** 0.434***
𝑻𝑺𝑷𝒕−𝟏 0.268*** 0.256*** 0.791*** 0.778***

ro
𝑫𝑬𝑭𝒕−𝟏 -0.242 -0.244 0.304 0.307
𝑾𝑫𝒕−𝟏 -0.004 -0.003 -0.005 -0.002
RAM 0.083 0.073 -p 0.119
Feb 0.382 0.368 0.127
Mar 0.295 0.281 0.164
re
Apr 0.163 0.139 0.212
May 0.256 0.221 -0.055
Jun 0.092 0.123 -0.212
lP

Jul 0.412 0.384 0.413

Aug 0.110 0.095 -0.124
Sep 0.363** 0.354 0.003
Oct 0.300 0.299 0.182
na

Nov 0.231 0.234 -0.421*

Dec 0.206 0.189 -0.133
R2A 0.617 0.610 0.596 0.590 0.359 0.330
Notes: H&D, MAC, and SEAS are the variables of the model of Huij and Derwall (2008) presented in Eq. (3)
ur

(HY, USBIG, and GNMA), lagged macroeconomic variables (𝑇𝑆𝑃𝑡−1 , 𝐷𝐸𝐹𝑡−1 , and 𝑊𝐷𝑡−1 ), and seasonal
effects (RAM and monthly effects). The symbols ***, **, and * indicate significance at the 1%, 5%, and 10%
levels, respectively, with Driscoll and Kraay (1998)’s standard errors corrected for autocorrelation,
heteroscedasticity, and cross-sectional dependence. R2A is the adjusted R2 .
Jo

The HML market factor significantly influences the performance of balanced funds in
January and from August to November, being significantly negative only in January and in
November. The negative slope of the HML factor reveals that Islamic balanced funds are more
exposed to growth stocks than value stocks, consistent with Walkshäusl and Lobe (2012) and
Lesser and Walkshäusl (2018). The effect of the RMW factor is significant in January, February,
March, July, August, and October. As the sign of the RMW factor changes throughout the year,
the balanced funds display higher (e.g., in March) and lower profitability (e.g., in July) than

15
the market portfolio over the year. Finally, the Islamic balanced funds exhibit a significantly
less aggressive investment portfolio than the market from July to September; yet, the balanced
funds have a more aggressive investment portfolio in November (at the 5% level).
Table 8 displays the seasonal effects of the five-factor model in Eq. (4) for Islamic
equity funds. The influence of the market risk premium on Islamic equity funds is significant
during the whole year at the 1% significance level. Besides, the market beta is always smaller
than one, consistent with Hoepner et al. (2011), Walkshäusl and Lobe (2012), and Lesser and
Walkshäusl (2018), among others. In line with the results for the balanced funds presented in
Table 7, the strongest impacts of the market risk premium take place in August and in
November. The effect of the market risk premium is stronger in equity funds than that of
balanced funds. The impact of the SMB factor on the performance of equity funds is positively

of
significant in June and November, whereas it is negatively significant in December. The
estimated positive coefficient of SMB in June and in November suggests that Islamic funds

ro
have a preference for investing in small-capitalization stocks, in line with the results of Hoepner
et al. (2011) and Lesser and Walkshäusl (2018).
The HML factor negatively affects Islamic equity funds in January, February, June, and
-p
November. It positively affects the returns on equity funds in October at the 10% level. These
findings are similar to that for the balanced funds presented in Table 7. The negative estimated
re
coefficient of the HML factor indicates a higher exposure of Islamic equity funds to growth
stocks than to value stocks, as in Walkshäusl and Lobe (2012) and Lesser and Walkshäusl
(2018). The effect of the RMW factor is significant in February, March, April, September,
lP

November, and December. Similar to the results for the balanced funds presented in Table 7,
the sign of the RMW factor changes during the year so that the funds present higher (e.g., in
March) and lower profitability (e.g., in December) than the market portfolio over the year. In
na

addition, Islamic equity funds have a significantly less aggressive investment portfolio than the
market in March and in October, although they exhibit a more aggressive investment portfolio
in November.
ur

Table 9 reports the seasonal effects of the three-factor model of Huij and Derwall (2008)
in Eq. (5) for Islamic cash funds. Consistent with the findings of Huij and Derwall (2008) and
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Chen and Qin (2017) for bond funds, the returns on low-grade debt positively affect the
performance of Islamic cash funds for almost the whole year, except in June, July, and
September. Nevertheless, the low-grade debt returns have a negative effect on the performance
of Islamic cash funds in October. In addition, the returns on US mortgage-backed securities
(GNMA) are significantly positive throughout the year, at the 1% significance level. The US
bond returns negatively affect the performance of the cash funds in February, March, April,
July, November, and December. However, they positively affect the cash funds in January.
Table 10 shows the seasonal effects of the three-factor model of Huij and Derwall (2008)

16
in Eq. (5) for Islamic fixed income funds. Consistent with the results for the cash funds, the
influence of the low-grade debt returns is significant for almost the whole year, except in
January and in July. Besides, the low-grade debt returns have a positive effect on the
performance of Islamic fixed income funds, in line with the findings of Huij and Derwall (2008)
and Chen and Qin (2017) for bond funds. The returns on US mortgage-backed securities
(GNMA) are significantly positive for almost all months, at the 1% significance level, except
in January, May, and October. The US bond returns negatively affect the performance of the
fixed income funds in March and in December. On the other hand, they positively influence
the fixed income funds in January, February, July, August, and October. Overall, the three
factors of Huij and Derwall (2008) are important for explaining the performance of fixed
income funds over the entire year.

of
In sum, our results indicate that seasonal effects are noticeable and more positive
throughout the year on all categories of funds. In the early months of the year, significant

ro
impacts on returns in cash and fixed income funds are more evident than that in balanced and
equity funds. The five Fama and French (1993, 2015) significantly affect balanced and equity
funds, specially from July to December, with the risk premium effect appearing most frequently
-p
throughout the year. The three factors of Huij and Derwall (2008) are relevant for explaining
the performance of cash and fixed income funds for almost over the whole year. The lagged
spread between the 10-year and the three-month Treasury bill rate affects the performance of
re
all funds, for all model specifications. It has a negative effect on the performance of Islamic
balanced and equity funds, whereas its impact is positive on cash and fixed income funds. The
lP

lagged default spread negatively impacts on the performance of Islamic balanced and cash
funds, although it also has a positive effect on cash funds when we omit the three factors of
Huij and Derwall (2008). Nevertheless, the lagged default spread does not affect the equity and
na

fixed income funds. In addition, the lagged returns on the world index negatively affect the
returns on Islamic balanced and equity funds, although they positively affect Islamic cash funds.
The Ramadan period is non-significant for the performance of all types of funds, in
ur

contrast to the findings of Seyyed et al. (2005), Al-Hajieh et al. (2011), Białkowski et al. (2012),
and Białkowski et al. (2013). Monthly seasonal effects are also non-significant for the
performance of balanced, equity, and cash funds. On the other hand, the fixed income funds
Jo

display a strong positive seasonal effect in September and a weak negative seasonal effect in
November. Moreover, the adjusted R2 slightly decreases when we omit the lagged
macroeconomic variables and the seasonal effects, for all types of funds. These findings
highlight the strong explanatory power of the five-factor model for explaining Islamic balanced
and equity funds, and these results provide evidence of the importance of the three factors of
Huij and Derwall (2008) for explaining the performance of Islamic cash and fixed income
funds.

17
 Table 7: Seasonal effects of the five-factor model on the performance of Islamic balanced funds

f
oo
Par Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

𝛽𝑀𝑘𝑡 0.470*** 0.572*** 0.490*** 0.279*** 0.364*** 0.437*** 0.190*** 0.647*** 0.330*** 0.510*** 0.623*** 0.422***

𝛽𝑆𝑀𝐵

pr
0.129 0.438 0.084 0.022 -0.332** 0.063 -0.149** -0.384** -0.021 0.115 0.088 -0.205*

𝛽𝐻𝑀𝐿 -0.217* -0.208 0.070 0.135 -0.092 -0.059 0.124 0.286* 0.540*** 0.306*** -0.369*** -0.013

e-
𝛽𝑅𝑀𝑊 -0.208* 0.615* 1.496*** -0.026 -0.062 0.258 -0.698*** 0.398*** 0.064 0.401** -0.068 -0.007

𝛽𝐶𝑀𝐴 -0.196 0.182 -0.008 -0.105 -0.072 0.083 -0.819*** -0.371* -0.543*** -0.381 0.549** 0.196

Pr
Notes: The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively, with Driscoll and Kraay (1998)’s standard errors corrected for
autocorrelation, heteroscedasticity, and cross-sectional dependence.

Table 8: Seasonal effects of the five-factor model on the performance of Islamic equity funds

Par Jan Feb l

Mar Apr May Jun Jul Aug Sep Oct Nov Dec
na
𝛽𝑀𝑘𝑡 0.854*** 0.897*** 0.861*** 0.601*** 0.885*** 0.948*** 0.722*** 0.961*** 0.845*** 0.880*** 0.987*** 0.784***

𝛽𝑆𝑀𝐵 0.191 0.226 0.159 -0.107 0.034 0.269*** 0.038 -0.080 -0.051 0.040 0.211* -0.333***
ur

𝛽𝐻𝑀𝐿 -0.230* -0.313* 0.033 0.034 -0.015 -0.651*** 0.043 0.032 -0.109 0.163* -0.394*** -0.080

𝛽𝑅𝑀𝑊 0.065 0.405** 0.775*** -0.136* 0.037 0.157 -0.020 0.207 0.252* 0.188 0.285* -0.348**
Jo

𝛽𝐶𝑀𝐴 -0.215 0.225 -0.536*** -0.318 -0.069 0.333 -0.336 -0.061 -0.052 -0.547*** 0.446*** -0.222

Notes: The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively, with Driscoll and Kraay (1998)’s standard errors corrected for
autocorrelation, heteroscedasticity, and cross-sectional dependence.

18
 Table 9: Seasonal effects of the three-factor model on the performance of Islamic cash funds

f
oo
Par Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

𝛽𝐻𝑌 0.138** 0.130*** 0.141** 0.083* 0.135** 0.021 0.049 0.166*** 0.063 -0.076*** 0.174*** 0.232***

𝛽𝑈𝑆𝐵𝐼𝐺

pr
0.241*** -0.420*** -0.459* -0.677** 0.031 -0.359 -0.871*** -0.392 -0.281 -0.219 -0.860*** -1.155***

𝛽𝐺𝑁𝑀𝐴 0.416*** 1.229*** 1.152*** 1.367*** 0.602** 1.188*** 1.728*** 1.301*** 1.076*** 1.201*** 1.616*** 1.874***

e-
Notes: The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively, with Driscoll and Kraay (1998)’s standard errors corrected for
autocorrelation, heteroscedasticity, and cross-sectional dependence.

Pr
Table 10: Seasonal effects of the three-factor model on the performance of Islamic fixed income funds

Par Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

𝛽𝐻𝑌 0.141 0.246*** 0.393*** 0.141** 0.386*** 0.252** 0.003 0.310*** 0.253*** 0.154** 0.366*** 0.353***
l
na
𝛽𝑈𝑆𝐵𝐼𝐺 0.712** 0.267*** -0.972*** 0.088 0.561 -0.171 1.610*** 0.415** 0.186 0.550** 0.093 -1.414***

𝛽𝐺𝑁𝑀𝐴 -0.127 0.396*** 1.544*** 0.712*** 0.081 0.831*** -0.880** 0.289* 0.493*** 0.167 0.477* 2.018***

Notes: The symbols ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively, with Driscoll and Kraay (1998)’s standard errors corrected for
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autocorrelation, heteroscedasticity, and cross-sectional dependence.

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19
6. Conclusion

In this study, we examine the influence of seasonal, financial, and economic factors on
the performance of Islamic mutual funds that invest in equities, fixed income, and cash. We
employ a large and global data sample (106 funds) of monthly mutual fund return observations
along with Islamic funds’ factor exposure over time, global developed Fama and French (1993,
2015) factors for equity and balanced funds, three factors of Huij and Derwall (2008) for cash
and fixed income funds, and monthly seasonal effects.
Our empirical analysis of Islamic mutual funds that operate in North America, Europe,
and the Asia-Pacific region indicates that seasonal effects are non-significant in balanced,

of
equity, and cash funds; yet, fixed income funds display a strong positive seasonal effect in
September and a weak negative seasonal effect in November. These findings are in contrast to
Choi et al. (2017) and Kamstra et al. (2017), who found strong evidence of seasonality in

ro
mutual funds. The Fama and French factors significantly influence funds trading with equities
as well as balanced funds. The market risk premium is the most relevant factor throughout the
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year. The profitability and investment factors also affect the performance of Islamic equity
funds.
re
In addition, the three factors of Huij and Derwall (2008) are important for explaining
the performance of cash and fixed income funds for almost over the whole year. The returns
on low-grade debt and the returns on US mortgage-backed securities positively affect the
lP

performance of Islamic cash and fixed income funds, for almost over the whole year. Moreover,
the Islamic cash funds have a negative exposure to US bond returns, whereas fixed income
funds have a positive exposure to US bond returns.
na

The lagged spread between the 10-year and the three-month Treasury bill rate affects
the performance of all funds, for almost all model specifications. It has a negative effect on the
performance of Islamic balanced and equity funds, whereas its impact is positive on cash and
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fixed income funds. The lagged returns on the world index negatively affect the performance
of Islamic equity funds. Finally, the Ramadan period is non-significant for all types of funds.
This finding is consistent with Choi (2015) and Choi et al. (2017), who document a turn-of-
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the-year effect in mutual fund flows, indicating that the observed seasonality in investors’ asset
allocation decisions is unrelated to potential seasonality in personal income and consumption
growth observed during Ramadan.
Our findings suggest that cash funds are immune to significant seasonal effects,
highlighting their usefulness to stabilise equity portfolios. Our results show, indeed, that the
financial and economic factors considered significantly influence all types of funds. Moreover,
given the portfolio allocation criteria used by Islamic funds on different asset classes and the

20
obtained empirical results, investors should overall not worry about a potential seasonal effect
from the Ramadan period.

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