An evaluation of the perfomance of islamically screened portfolios at the Nairobi Stock Exchange

Abstract

There has lately been great interest in Islamic Finance in Kenya. Concerns have however risen where investors fear that by investing Islamically, they risk getting lower returns from their investments. This study therefore seeks to form an Islamic portfolio from the NSE and to determine whether there exists any significant difference between the risk and returns of an Islamic portfolio and a conventional portfolio at the NSE. From a population of 47 companies from the NSE`s Main Market segment, the study formed an Islamic portfolio of 20 companies. All the 47 companies were put through Islamic screens, 22 companies did not meet at least one of the screens. 5 of the companies that met the screens were dropped in order to have the conventional portfolio and Islamic portfolio having an equal number of constituent companies. Weekly risk and returns were calculated for the two portfolios. Sharpe, Treynor and Jensen measures were also used to measure their performance. Z tests were then conducted to check whether there is significant difference between the risk and returns of the Islamic portfolio and the conventional portfolio. Results showed that there was no significant difference between the risk and raw returns of the conventional portfolio and Islamic portfolio. The results for risk adjusted returns were mixed; the Sharpe measure was in favour of the Islamic portfolio while the Treynor ratio was in favour of the conventional portfolio, both with significant differences. The Jensen measure was however indifferent. With more investors seeking to participate in the growing field of Islamic investments, this study will provide important information to investors that can be used to provide an additional tool on which investors can base their investment decisions and design a portfolio that suits their respective objectives.