Newsletter & Bulletin

There are different ways through which debt exerts pressure on managers to align their interests with those of shareholders. For instance, it does this by reducing free cash flows (Jensen, 1986; Stulz, 1990), by increasing monitoring by debt holders (Ang, Cole, & Lin, 2000) and by increasing takeover threats (Williams, 1987). In this respect, another line of arguments indicates that good corporate governance is associated with lower agency issues (McKnight & Weir, 2009; Rashid, 2016). As per this view advanced by La Porta, Lopezde-Silanes, Shleifer, and Vishny (2000), both debt and governance mitigate agency conflicts and essentially play the same role; therefore, they can be good substitutes for each other.

The motivation to examine flow-performance relationship of Shariah compliant funds (SCFs) and Socially responsible funds (SRFs) is that investors investing in these two funds have certain non-financial motives such as religious, ethical, environmental etc. Renneboog et al., (2011) explained that more the investor is averse to certain non-ethical or non-religious corporate behavior the more satisfaction he/she gets by investing in the funds that are in line with his/her ethical or religious position. The above conjecture that the SRF and SCF investors chose funds based on a dual objective of socially responsible/religious investing and financial gains is in line with the way generally these funds advertise their funds emphasizing the importance of socially responsible/religious investing.

Benchmarks serve multiple purposes in financial markets and hence play a critical role. They serve as a reference point for pricing instruments, reflect the opportunity cost and also serve as a reference rate for the relative performance of a portfolio. Hence, a benchmark that is transparent, liquid, easy to calculate and non-manipulative is considered critical for the efficiency of financial markets. In this paper, we suggest a model proposed, by Mirakhor (1996) which can well serve the purpose of a potential benchmark for pricing. We also show the feasibility of the model in contemporary financial system. The main motivations behind the paper are, a) to move away from any fixed rate of return, b) to present a benchmark that reflects the return based on real sector of an economy as far as possible and, c) to present a non-manipulative benchmark.

We assess the managerial skills of globally invested 686 ethical funds taking into consideration the macroeconomic efficiency and fund inflows/outflows. It was observed that managers exhibit negative selection and market timing skills but no consistent pattern for style timing. A cursory glance at the literature indicates little support for superior managerial abilities, especially in terms of timing skills. Notwithstanding, some have highlighted the importance of including fund flows in the traditional models and argue that excluding it can lead to spurious timing skills (Bollen and Busse, 2001). The findings indicate that the investors increase their exposure to funds during a bullish period and reduce it during a bearish period.

The mutual fund industry observed a remarkable growth of two distinct types of mutual funds during the last two decades, namely, Shariah-compliant funds (SCFs) and Socially responsible funds (SRFs). These alternative investment avenues were created for investors who are keen on investments that are Shariah-compliant and have better ethical standards than conventional funds. To fulfil these needs, the funds' investment strategies incorporate specific non-financial screening criteria based on ethical and religious guidelines, besides the typical risk-return financial screening.

The mutual fund industry has seen rapid growth in the last two decades or so as an alternative investment scheme. The growth of the mutual fund industry saw a jump of 13% from the year 2012 to 2013 as assets under management (AuM) increased from $60.9 trillion in 2012 to $68.7 trillion in 2013 (Boston Consultancy Group, 2014). As far as regional growth is concerned, it has slowed down in most of the emerging markets but increased steadily in MENA and Asian countries. Its growth has varied in Australia, Asia, Japan, the Middle East and Africa and North America and varied from 14 percent to 20 percent. As far as Europe and Latin America is concerned, the average growth rate has been 8% and 7%, respectively.