Non‐parametric performance measurement of international and Islamic mutual funds

Purpose – The purpose of this paper is to study whether Islamic investors lose portfolio efficiency due to a limited asset universe. Design/methodology/approach – The paper contributes to prior literature by using non‐parametrical measurements of efficiency instead of regular (parametrical) methods. Data envelopment analysis (DEA) was used in order to better characterize the risk and return relationship, as well as estimating a single performance index to rank different funds and compare them to one another. Findings – Overall, the results are congruent with prior findings. That is, there is strong evidence suggesting that Islamic funds are highly efficient and that they outperform their international counterparts. Also, results are robust to different estimation of DEA, the specification of the asset universe, and the inclusion of financial crisis period in analysis. Research limitations/implications – Though the paper's findings are robust to different specifications of the DEA model and time periods, the authors caution readers due to the limited sample. Practical implications – Having defined a performance index, one can therefore isolate the funds which are the most efficient and thus drive trading activities towards said funds. Social implications – Since the paper's findings suggest that Islamic investors do not lose efficiency, investing into a limited asset universe which follows social and ethical constraints (given by Shariah law) is recommended. Originality/value – The paper is able to confirm prior literature, even by using a non‐parametrical measurement of efficiency. In this way, the authors have accounted for an extra penalty on the risk‐return relationship: skewness.