Socially Responsible Investment (SRI)

in Indonesia: A Study on Jakarta Islamic

Index and Sharia Mutual Funds Performance

Bester Rajib

1358749

Arshad Hussain

September 2015

Word Count 12,185

A dissertation report submitted to Birmingham Business School in partial fulfilment of the requirements for the degree

Master of Business Administration in International Business.

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Table of Contents ACKNOWLEGDMENT ..................................................................................................................................... 2

ABSTRACT ...................................................................................................................................................... 3

CHAPTER I. INTRODUCTION .......................................................................................................................... 4

I.1. BACKGROUND ..................................................................................................................................... 4

I.2. SCOPE AND LIMITATION ..................................................................................................................... 5

I.3. OBJECTIVE AND RESEARCH QUESTION ............................................................................................... 6

I.4. METHODOLOGY .................................................................................................................................. 6

I.5. OUTLINE .............................................................................................................................................. 7

CHAPTER II. LITERATURE REVIEW ................................................................................................................. 8

II.1. HISTORY OF SRI .................................................................................................................................. 8

II.2. DEFINING SRI ...................................................................................................................................... 9

II.3. DEFINING ISLAMIC/SHARIA-COMPLIANT INVESTMENT IN INDONESIA ........................................... 13

II.4. SRI DEVELOPMENT IN INDONESIA ................................................................................................... 15

II.4. PREVIOUS RESEARCH ....................................................................................................................... 21

CHAPTER III. METHODOLOGY ..................................................................................................................... 25

III.1. RESEARCH METHODOLOGY ............................................................................................................ 25

III.2. DATA SAMPLE ................................................................................................................................. 28

III.3. HYPOTHESES DEVELOPMENT .......................................................................................................... 31

III.4. RESEARCH ANALYSIS METHODS ...................................................................................................... 31

CHAPTER IV. FINDINGS AND DISCUSSION ................................................................................................... 36

IV.1. DESCRIPTIVE STATISTICS ................................................................................................................. 36

IV.2. NON RISK-ADJUSTED RETURN PERFORMANCE ANALYSIS .............................................................. 40

IV.3. RISK-ADJUSTED RETURN PERFORMANCE ANALYSIS....................................................................... 43

CHAPTER V. CONCLUSION ........................................................................................................................... 56

RECOMMENDATION FOR FUTURE RESEARCH ........................................................................................ 58

REFERENCES ................................................................................................................................................ 59

APPENDICES ................................................................................................................................................ 66

ETHICS FORM .............................................................................................................................................. 68

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ACKNOWLEGDMENT

First and foremost, I would like to express my deepest gratitude and praise to Allah

subhanahu wa taala for blessing me with health, perseverance, and knowledge which

allow me to successfully complete this dissertation.

I am also sincerely grateful to my supervisor, Mr. Arshad Hussain, for his support and

guidance throughout this dissertation process.

I would also like to express my dearest appreciation to my wife, Vici Marsono, for her

love, patience, and support, not only in this MBA program but also in all aspects of my

life.

I would like to express my gratitude also to my parents (Abasman alm. and Yusnani), as

well as to my brothers and sisters, for their love and kindness throughout my life. For that,

I am forever in debt.

I want to thank you Karawang family as well for their support and prayer to me being able

to finish the MBA program successfully.

I am also thankful to the big family of University of Birmingham MBA program: lecturers,

staffs, and fellow students, who together walk hand in hand to achieve a wonderful study

experience.

Last but not least, I want to thank you Ministry of Finance of the Republic of Indonesia

and the World Bank for their sponsorship which makes all of this possible.

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ABSTRACT

The objective of this study is to give an overview on SRI Indonesia, with the focus on

describing and measuring its performance through the representation of Jakarta Islamic

Index (JII) and selected sharia mutual funds over the period of 1 January 2013 30 June

2015. The performance of JII and the selected sharia mutual funds were measured and

compared with market index and their conventional benchmarks from both non-risk-

adjusted and risk-adjusted perspectives. For risk-adjusted measurement, this study used

Sharpe Ratio, Treynor Index, and Jensen Alpha methods. The results of both non-risk-

adjusted and risk-adjusted performances were tested to determine their statistical

significance.

This study found that there is no statistically significant performance difference, either in

non-risk-adjusted or risk-adjusted, between JII and market index, JII and its conventional

benchmark, the selected sharia mutual funds and market, as well as between the selected

sharia mutual funds and their conventional benchmark. These findings indicate that the

recent growth of SRI in Indonesia might not be resulted from SRI having superior

performance. Nevertheless, those findings suggest that SRI is a solid investment

alternative, and therefore, the development of SRI in Indonesia will likely to continue

forward.

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CHAPTER I. INTRODUCTION

I.1. BACKGROUND

In the recent years, investors, both institutional and retail, are becoming increasingly

concerned about the Environmental, Social, and Governance (ESG) aspects of their

investment which leads to the positive development of Socially Responsible Investment

(SRI). According to Fung et. al. (2010) and Global Sustainable Investment Association

(GSIA) (2014), SRI has become the fastest growing segment in the global financial

market. The US, Canada, and Europe were the three fastest growing SRI markets with

76%, 60%, and 55% growth rate, respectively, over the period of 2012 2014. In total,

at the start of 2014, global SRI assets had reached USD 21.4 trillion, an increase of 61%

from the figure at the outset of 2012 (GSIA, 2014). SRI assets proportion relative to the

total global managed assets also increased from 21.5% in 2012 to 30.2% in 2014 (ibid).

Looking at Asia market in particular, Asia Sustainable Investment Review 2014 by

Association for Sustainable and Responsible Investment in Asia (ASrIA) showed that at

the end of 2013, SRI assets in Asia (ex-Japan) region, which consists of 11 key markets

(China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea,

Taiwan, Thailand, and Vietnam), stood at USD 44.9 billion. Even though compared with

global SRI assets the size of Asia (ex-Japan) SRI assets is very small, it underwent an

increasingly positive growth with a year-on-year increase of 22% from 2011 (ASrIA,

2014).

In term of market concentration, the Asia (ex-Japan) region SRI markets are concentrated

in 4 particular markets: Singapore, Hong Kong, Seoul, and Malaysia which represented

90% of the total SRI market (ASrIA, 2014). In term of strategy, the two most common SRI

strategies in Asia are the ESG integration which implemented by 52% or USD 23.4 billion

of Asia SRI assets, and the exclusion/negative screening which applied by 37% of Asia

SRI assets with the total value of USD 16.6 billion (ibid). With regard to the

exclusion/negative screening strategy, within Asia (ex-Japan) markets, Malaysia and

Indonesia are the two major contributors (ibid). This iss understandable as 99% of the

SRI assets in the two markets were in the form of Islamic or sharia-compliant investment

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which applied negative/exclusionary screening method in its investment policy (ibid).

Meanwhile, in term of availability, the number of SRI funds available for investors had

grown positively to a total of 500 funds at the end of 2013, representing a 24% increase

from 2011 figure (ibid).

With regard to Indonesia, based on ASrIA Review 2014, at the end of 2013 Indonesian

SRIs assets were recorded at USD 1.142 billion. Even though its SRI assets only

amounted to 2.54% of total Asia (ex-Japan) market, Indonesia has become the fastest

growing market since 2011 with 39% Compound Annual Growth Rate (CAGR),

outperformed even Singapore and Hong Kong which represented 44% of Asia (ex-Japan)

SRI market (ASrIA, 2014). Out of the total of USD 1.142 billion of Indonesian SRIs assets,

99.14% of them are identified as Islamic or sharia-compliant investment (ibid).

GSI and ASrIA findings indicate that the development of SRI is encouragingly positive,

both in global market and Indonesian market. However, in term performance, there are

mixed view on SRI. According to Sjostrom (2011) financial theory would suggest that SRI

to be more likely to underperform the market due to the screening process which restricts

SRI investment universe. Furthermore, the screening and monitoring of ESG

performance in SRI will likely to cause SRI to underperform its conventional benchmark

(Sjostrom, 2011). Nevertheless, some critics argued that the selection of companies with

stronger social performance and higher quality of corporate management in SRIs

portfolio will result in SRI having superior performance compared with its conventional

counterparts (ibid). Therefore, it is important to measure the performance of SRI to see

whether the recent growth is resulted from a superior performance.

I.2. SCOPE AND LIMITATION

SRI is a global phenomenon and has become the fastest growing segment in global

financial market (Fung et. al., 2010; and GSIA, 2014). However, for the purpose of this

study, the scope of the research was limited to SRI in Indonesian market. For analysis

purposes, the performance of SRI in Indonesia was measured by the daily returns of

Jakarta Islamic Index (JII) and selected sharia mutual funds. Due to the restricted access

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to publicly available data, especially with regards to JIIs daily returns data, the

observation period of the study was limited to 2.5 years period from 1 January 2013 30

June 2015.

I.3. OBJECTIVE AND RESEARCH QUESTION

In general, the objectives of this study is to describe and measure the performance of SRI

in Indonesia, by comparing the performance of JII and selected sharia mutual funds,

against market and their conventional benchmarks. This study also aims to provide a brief

overview of SRI in general and SRI in Indonesia in particular. In line with the objective,

the main research question of this study is that whether there is a performance difference

between SRI and market, as well as between SRI and its conventional counterparts in

Indonesia. Based on this, the research question is narrowed into 4 (four) smaller

questions as follows:

1. Is there a performance difference between JII and market?

2. Is there a performance difference between JII and its conventional counterpart?

3. Is there a performance difference between sharia mutual funds and market?

4. Is there a performance difference between sharia mutual funds and their conventional

counterpart?

I.4. METHODOLOGY

This study was designed as a deductive research using quantitative method. The

measurement of SRI performance was conducted from non-risk-adjusted and risk-

adjusted daily returns perspectives. To explain the risk-adjusted performance of SRI, this

study used Sharpe Ratio, Treynor Index, and Jensen Alpha as the measurement tools.

Statistical test was performed on both non risk-adjusted and risk-adjusted performance

to measure the significance level of the findings. In general, the research was a desk-

based work using published reports, academic literatures, and statistical data available

from relevant sources.

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I.5. OUTLINE

The study consists of 5 Chapters. Chapter 1 provides an introduction which includes

background, scope and limitation, objective and research question, methodology, as well

as outline of the study. Chapter 2 reviews the relevant literatures which explain the history

of SRI, definition of SRI, definition of Islamic/sharia-compliant investment in Indonesia,

development of SRI in Indonesia, and also findings from previous research on SRI

performance. Chapter 3 explains the research methodology, data sample, hypotheses,

and analysis methods. Chapter 4 discusses the findings with regards to the performance

of SRI based on both non risk-adjusted and risk-adjusted returns. The final Chapter,

Chapter 5, summarises and concludes the findings of the study.

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CHAPTER II. LITERATURE REVIEW

II.1. HISTORY OF SRI

Even though, arguably, the application of Socially Responsible Investment (SRI)

strategies can be rooted to some of the oldest religions, such as Judaism, Christianity,

and Islam (Lane, 2005; Fung, et. al., 2010), the most prominent early concept of SRI can

be attributed to the investment practices by religious society such as Quackers and

Methodists in the 17th 18th century (Sparkes, 2002; Lane, 2005; Blanchett, 2010; and

Cadle, 2015). In 17th century, the Quakers, in accordance to their religious belief,

introduced the concept of shunning unethical companies or industries, in particular

companies dealing with slavery, from their investment money (Lane, 2005; and Fung et.

al., 2010). Meanwhile, the Methodist through John Wesleys, one of its founding

members, sermon in 1760 titled The Use of Money, underlined the importance of the

right use of money whereby although people should employ money to its greatest

advantage, they needed to ensure that their use of money did not inflict harm to the body

and mind of themselves or their neighbours (Sparkes, 2002). Essentially, Wesleys

sermon introduced the avoidance scheme toward what would be recognized as sinful

trades such as gambling and alcohol since both of them are considered harmful to the

health of the people and encourages moral corruption to the society as a whole (ibid).

20th century SRI movement started in the 1920s period when Methodist Church of the

United Kingdom began to apply screening methods to exclude sin stocks such as

alcohol, tobacco, and gambling from its investment portfolio (White, 2005; and Fung et.

al., 2010). There was also similar movement in the United States (US) at that period with

the 28th Amendment to the US Constitution which prohibited the production or sale of

alcohol throughout the US for 15 years (Sparkes, 2002). Gambling was also banned in

most of the US at that period (ibid). In 1928, the temperance groups in the US introduced

Pioneer Fund, which, even though fairly small in size and made only a little impression,

was the first SRI mutual fund in the world (ibid).

However, it was not until 1960s that the development of modern SRI truly started. At that

period, worker unions in continental Europe began to voice their concerns toward the

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decisions about their pensions (White, 2005; and Fung, et. al., 2010). Furthermore,

religious groups started to adopt SRI approach in their investment (ibid). Meanwhile in

the US, there were rise in shareholder activism and civil rights campaign. These sparked

when the campaigning group FIGHT bought Eastman Kodak shares in order to attend

Annual General Meeting (AGM) to voice their concerns regarding the living conditions

and job opportunities for black employees in Eastman Kodak Company (Sparkes, 2002).

In 1970s, college endowment funds and other US investors began to exclude companies

that profiting from the Vietnam War from their portfolios (Sparkes, 2002; and Fung et. al.,

2010). One example of the companies was Dow Chemical. It produced Agent Orange, a

powerful defoliant that was alleged to cause diseases to the children of US Vietnam War

veterans (Sparkes, 2002). The concerns regarding the Vietnam War eventually led to the

establishment of Pax World, the first modern SRI mutual fund on the basis of the

exclusion of sin stocks and avoidance of profiteering from war (ibid). Opposition against

the Vietnam War also inspired the divestment from companies that associated with South

Africa during the anti-apartheid movement in 1980s (Sparkes, 2002; Hussein and Omran,

2005; and Fung et. al., 2010). Ralph Naders consumer right activism completed the driver

for the development of modern SRI with its successful campaign (Campaign GM) that

convinced churches, university, and pension funds to be actively involved in corporate

governance, pollution, and automobile safety issues (Lamb et. al., 1995; Sparkes, 2002;

and Fung et. al., 2010). All of these factors, together with the increasing awareness

toward environmental and sustainability issues in the recent years, helped to shape what

todays people recognized as SRI.

II.2. DEFINING SRI

As a concept SRI has been around for at least several hundred years. However, as a

terminology, SRI is a more recent phenomenon compares with the term ethical

investment which, arguably, used to describe similar practices. Sparkes (2002), Beal et.

al. (2005), and Valor and de la Cuesta (2007) argued that the term SRI is equivalent to

the term ethical investment and thus can be used interchangeably. Even though some

authors preferred the use of ethical investment (Schaefer, 2004), there is a definite trend

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for SRI to replace ethical investment as the standard term, starting in the US market

(Sparkes, 2002). Sparkes (2002) argued that many people feel uncomfortable to use the

word ethical to describe investment, particularly when it relates to the profit maximizing

activities in it. Moreover, Fung et. al. (2010) suggested that, in term of criteria, SRI is more

objective and standardised compares with ethical investment, and therefore tends to be

more popular and even being used to embrace the term ethical investment in recent

period.

One of the earliest attempts to provide a precise definition of SRI was done by Russell

Sparkes in 1994. His first attempt on defining SRI saw him used the term ethical

investment which he defined as an investment philosophy that combines ethical or

environmental goals with financial ones (Sparkes, 2002). However, Sparkes (2002)

acknowledged in his book, Socially Responsible Investment, that his early attempt to

define SRI lacked the emphasis on the use of both ethical and social criteria in the

selection and management of investment portfolios, as well as the importance of financial

return. Those aspects are expressed in Cowton (1994) definition of ethical investment.

Therefore, in 2002, Sparkes revised his definition and more importantly suggested the

use of the term SRI rather than ethical investment. SRI, according to Sparkes (2002),

has key distinguishing features which lie in the construction of equity portfolios in which

investment objectives combine social, environmental and financial goals. He further

added that in practice this means attempting to obtain a return on invested capital

approaching that of the overall stock market (Sparkes, 2002).

However, it was not until 2012 that SRI had an industry standard definition. Global

Sustainable Investment Alliance (GSIA), which members including: The Association for

Sustainable and Responsible Investment in Asia (ASrIA), The European Sustainable

Investment Forum (Eurosif), Responsible Investment Association Australasia (RIAA), UK

Sustainable Investment and Finance Association (UKSIF), The Forum for Sustainable

and Responsible Investment (US SIF), and The Dutch Association of Investors for

Sustainable Development (VBDO), released the first Global Sustainable Investment

Review in 2012 which mentioned the definition of SRI recognized as the industry

standard. GSIA (2012) defined SRI as an investment approach that consider

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environmental, social, and governance (ESG) factors in portfolio selection and

management (GSIA, 2012). There are 7 (seven) activities and strategies of SRI

according to GSIA:

1. Negative/exclusionary screening

Negative/exclusionary screening is related to the exclusion of particular sectors,

companies, or practices based on specific ESG criteria from investment portfolios or

funds (GSIA, 2014). Research by Hughey and Villareal (2009), and Viviers and Eccles

(2011), as well as GSIA findings in Global Sustainable Investment Review 2014

showed that this is the most apparent and widely used SRI strategy. The avoided

sectors in this strategy include the usual sin industries (alcohol, tobacco, and

gambling), weapon industry, and also industries which are considered to be non-

environmental friendly such as fossil fuel industry and nuclear industry (Hughey and

Villareal, 2009; and Social Funds, 2015).

2. Positive/best-in-class screening

Positive/best-in-class screening is related to the investment in particular sectors,

companies, or projects which have positive ESG performance compared with their

peers (GSIA, 2014). This is a proactive strategy that requires investors to not only

exclude sectors or companies with unacceptable ESG performance, but also actively

support the ones with positive ESG performance (Social Funds, 2015). Moreover, this

strategy requires a complete analysis on various criteria such as products, products

safety, pollution level, policies regarding employees, and workplace conditions (PRI,

2013; and Social Funds, 2015).

3. Norms-based screening

Norms-based screening strategy screens out investment from companies which have

below minimum standards business practice according to international norms set by

internationally recognized institutions such as United Nation (UN) Draft Human

Rights Norms for Business and Global Compact Principles, International Labour

Organisation (ILO) Tripartite Declaration of Principles concerning Multinational

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Enterprises and Social Policy, and Organisation for Economic Co-operation and

Development (OECD) Guidelines for Multinational Enterprises (PRI, 2013; and

GSIA, 2014). To some extent, due to the similarity in nature, this strategy can be seen

as a sub-set of negative/exclusionary screening (PRI, 2013)

4. Integration of ESG factors

Integration of ESG factors refers to the systemic and explicit inclusion of ESG factors

into traditional financial analysis by investment managers (GSIA, 2014). The ESG

factors have to be material issues which directly affect a companys business model

and or share price, such as: environmental impact, resource access, and safety

standards for mining companies; labour and social issues for retail/manufacturing

companies; product liability and bribery for health care companies; and corporate

governance for companies in general (Bos, 2014).

5. Sustainability-themed investing

Sustainability-themed investing refers to the investment in assets which are

particularly related to sustainability issues (GSIA, 2014). Sustainability-themed

investing includes investment in clean energy, green technology and building,

sustainable agriculture and forestry, retail micro finance and Small Medium

Enterprises (SME) financing, community development, affordable housing, education,

as well as global health (PRI, 2012; and GSIA, 2014)

6. Impact/community investing

Impact/community investing is targeted investments which are intended to solve

social or environmental problems, whether in the form of community investing where

capital is directed to particular individuals or communities that are traditionally

underserved, or direct financing to businesses which have clear social or

environmental purposes (GSIA, 2014). According to PRI (2012), there are 2 distinct

types of impact/community investing investors: financial first and impact first. While

impact first investors focus on optimization of social or environmental impact before

financial return target, financial first investors seek optimization of financial return

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before setting minimum target for social and environmental impact (Rockefeller

Philanthropic Advisors, 2009, as taken from PRI, 2012)

7. Corporate engagement and shareholder action

Corporate engagement and shareholder action refers to the use of shareholder power

to influence a company behaviour (GSIA, 2014). It can be in the form of direct

engagement, filing or co-filling shareholder proposals, and proxy voting (PRI 2013;

and GSIA, 2014).

GSIA definition of SRI, along with the detailed explanation on what are considered as SRI

strategies or activities, is not only fully comprehensive and all encompassing, but also in

line with the recent development and trend in society.

II.3. DEFINING ISLAMIC/SHARIA-COMPLIANT INVESTMENT IN INDONESIA

Law No. 8 Year 1995 regarding Capital Market (Capital Market Law) defines Capital

Market in Indonesia as an activity concerned with public offering and trading of securities,

the Public Company relating to the issuance of securities, as well as the institutions and

professions related to securities (OJK, 2015). Securities, in accordance to this law,

include the acknowledgment of indebtedness, commercial paper, stock, bond, loan

evidencing, mutual fund, futures contract, and every derivative of securities (ibid).

With regards to Indonesian market, Islamic capital market is not considered as a separate

entity to the existing capital market system. Thus, according to Indonesia Financial

Services Authority (OJK) (was known as Bapepam-LK before 2013), Islamic capital

market is defined as the activity in the capital market as described by the Capital Market

Law that does not go against Islamic principles (OJK, 2015). The difference between

Islamic capital market and the conventional one is the application of Islamic or sharia

principles to the products and transaction mechanism on the former (ibid). In term of

instruments, sharia investment includes all the securities defined in Capital Market Law,

as long as the contracts, methods, and business activities are issued in accordance to

Islamic or sharia principles. This means Indonesian market acknowledged various types

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of sharia investments (IDX, 2015). Unlike conventional securities, sharia securities have

to have a fatwa foundation along with the legal foundation such as Laws or regulations

by the regulators. The fatwa regarding sharia principles for capital market purposes is

issued by the National Sharia Board of Indonesian Ulema Council (DSN-MUI).

In general, sharia principles cover the issues regarding to business activities or industry

sectors, products or services, contracts, as well as corporate governance aspects.

According to DSN-MUI (2001) the type of businesses or business activities that are not

in accordance with sharia principles are as follows:

1. Gambling and other illegal activities;

2. Conventional financial institutions, including conventional Bank and Insurance;

3. Producing, distributing, and or selling of religiously prohibited food and drink (such as

alcohol); and

4. Producing, distributing, and or selling/providing products and services that are

considered to cause moral impairment.

All in all, the history of SRI, the industry standard definition of SRI, and the nature of

Islamic/sharia-compliant investment in Indonesia suggest that Indonesian Islamic/sharia

compliant investment can be considered as SRI. Although Forte and Miglietta (2008)

argued that Islamic/sharia investments in general have different characteristics when

compared with SRI, both in term of asset allocation and economic profile, GSIA definition

of SRI allows Islamic/sharia-compliant investment to be recognized as an SRI. The

screening used by Islamic/sharia-compliant investments complies with the definition of

negative/exclusionary screening by GSIA. Moreover, the inclusion of Islamic/sharia-

compliant assets in GSIA and ASrIA Reviews further strengthen the recognition of

Islamic/sharia-compliant investment as SRI.

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II.4. SRI DEVELOPMENT IN INDONESIA

As ASrIA review 2014 indicated, 99.14% of the total USD 1.142 billion of Indonesias SRI

assets 2013 were in the form of Islamic or sharia-compliant funds. Therefore, based on

that figure, it is only appropriate to study the development Islamic capital market and

Islamic/sharia-compliant investment in order to explain the development of SRI in

Indonesia.

Indonesia is the country with the largest Muslims population in the world. According to

national population census 2010 by Indonesian Central Body of Statistic (BPS), there

were just over 207 million Muslims in Indonesia (BPS, 2015). This amounted to 87.2% of

the total Indonesian population at that period (ibid). Looking at the demographic situation,

it is understandable for Islamic or sharia-compliant investments to be the dominant

instruments in Indonesian SRIs market. However, it was not until the second half of 1990s

that Islamic/sharia-compliant investment, particularly in Indonesian capital market, started

to develop in Indonesia.

Historically, Indonesian capital market itself has been existed since 1912, which was long

before the independence of Indonesia in 1945 (IDX, 2005). However, due to several

factors such as World War I and World War II, as well as the political situations before

and after independence, Indonesia capital market underwent a long period of inactivity

(ibid). It was not until 1977 before Indonesian government reactivated its capital market

(ibid). In 1995, Indonesian government issued the Law No. 8 Year 1995 regarding Capital

Market (Capital Market Law) (ibid). After that, Indonesian capital market continued to grow

rapidly (ibid).

The beginning of Indonesian Islamic capital market development, which also the

beginning of SRI development in Indonesia, was marked by the issuance of the first sharia

mutual fund by a State Owned Investment Management company, PT Danareksa, in

1997 (OJK, 2015). Mutual fund, according to Indonesian Capital Market Law is an

instrument used to collect funds from the investors to be invested in securities portfolio

by investment managers. Sharia mutual fund, in another hand, is a mutual fund that are

operated in accordance to Islamic or sharia principles, in the form of a contract between

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the investors and the investment managers, as well as between the investment managers

and investment users (DSN-MUI, 2001).

The development of sharia mutual fund market in Indonesia is encouraging. As of May

2015, there were a total of 80 sharia mutual funds consisted of several types including

equity funds (23), balanced funds (18), protected funds (18), fixed income funds (11),

money market funds (8), index fund (1), and exchange traded fund (1) (OJK, 2015). The

80 sharia mutual funds equalled to 8.27% of the total numbers of mutual funds in

Indonesia (OJK, 2015). Compared with the conventional mutual funds, the number of

sharia mutual funds is still very small. However, the growth speed of sharia mutual funds

outperformed that of the conventional ones. In the last 5 years period (2010 2014),

sharia mutual funds recorded 9.04% Compound Annual Growth Rate (CAGR) compared

with 7.77% CAGR of conventional mutual funds.

Chart 1. Number of Sharia Mutual Funds as of May 2015

(Source: OJK, 2015)

8

23

11

18

18

1 1

Money Market

Equity

Fixed Income

Balanced

Protected

Index

Exchange Traded

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Chart 2. NAV of Sharia Mutual Funds as of May 2015 (in Billion Rupiah)

(Source: OJK, 2015)

In term of value, as of May 2015, the total net asset value (NAV) of sharia mutual funds

had reached Rp11.8 billion, which equalled to 4.42% of total NAV of Indonesian mutual

funds (OJK, 2015). Even though relatively small in value, sharia mutual funds NAV

displayed a positive growth over time. From 2010 to 2014, sharia mutual funds NAV had

grown by a massive 115.02%. This positive trend of sharia mutual funds growth in the

last 5 years, both in number and NAV, suggests that the development of Indonesias

sharia mutual fund will likely to continue further to the next period.

885.2

6,272.53

594.66

1868.49

1433.94

172.98

568.56

Money Market

Equity

Fixed Income

Balanced

Protected

Index

Exchange Traded

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Chart 3. Development of Indonesian Sharia Mutual Funds 2003 May 2015 (in billion

rupiah)

(Source: OJK, 2015)

Table 1. Comparison between Sharia and Conventional Mutual Funds in Indonesia

Year

Number NAV (in billion rupiah)

Sharia

MF

Conventional

MF Total % Sharia MF

Conventional

MF Total %

2003 4 182 186 2.15 66.94 69,380.06 69,477.00 0.10

2004 11 235 246 4.47 592.75 103,444.25 104,037.00 0.57

2005 17 311 328 5.18 559.10 28,846.63 29,405.73 1.90

2006 23 380 403 5.71 723.40 50,896.68 51,620.08 1.40

2007 26 447 473 5.50 2,203.09 89,987.54 92,190.63 2.39

2008 36 531 567 6.35 1,814.80 72,251.01 74,065.81 2.45

2009 46 564 610 7.54 4,629,22 108,354.13 112,983.35 4.10

2010 48 564 612 7.84 5,225.78 143,861.59 149,087.37 3.51

2011 50 596 646 7.74 5,564.79 162,672.10 168,236.89 3.31

2012 58 696 754 7.69 8,050.07 204,541.97 212,592.04 3.79

2013 65 758 823 7.90 9,432.19 183,112.33 192,544.52 4.90

2014 74 820 894 8.31 11,236.50 230,225.59 241,462.09 4.65

2015

Jan 73 821 894 8.17 11,260.39 231,857.79 243,118.18 4.63

Feb 74 838 912 8.11 11,451.32 237,671.29 249,122.61 4.60

Mar 75 854 929 8.07 12,035.97 242,743.24 254,779.21 4.72

Apr 78 874 952 8.72 11,606.25 244,374.35 255,980.60 4.84

May 80 887 967 8.27 11,796.36 254,942.14 266,738.50 4.82

19 | P a g e

3 years after the issuance of the first sharia mutual fund, Indonesia Stock Exchange (IDX)

in co-operation with PT Danareksa launched the Jakarta Islamic Index (JII) (OJK, 2015).

JII is aimed to provide guidance for investors who want to invest in sharia compliant stocks

(OJK, 2015). It is also used as a benchmark to measure the performance of sharia stocks

(Cahyaningsih, 2008). JII consists of 30 sharia stocks which are listed in IDX (IDX, 2015).

The criteria for a stock to be considered sharia are based on the sharia principles defined

in the fatwa by DSN-MUI. Aside from sharia principles, JII has additional filtering activity

as follows:

1. The sharia stocks have to be listed for more than 3 months, except for the ones with

top 10 market capitalisation;

2. Selecting companies (stocks) which have debt to equity ratio of a maximum 90%

based on their annual or mid-term financial report;

3. Selecting 60 stocks based on the average size of their market capitalisation in the

last 1 year period; and

4. Selecting the final 30 stocks based on the liquidity for the last 1 year period.

In the last 2.5 years period (1 January 2013 30 June 2015), JII had grown by 9.12%

(Yahoo Finance, 2015).

To further support the development of Islamic/sharia-compliant investment market, in

2007, OJK (or Bapepam-LK at that time) launched the first Sharia Securities List (DES)

(OJK, 2015). It is a bi-annual list, published every May and November, which records the

current sharia compliant securities. At launch, there were 174 sharia stocks listed in DES.

As of Mei 2015, there were a total of 331 shares listed in DES, a 90% increase in 6 years

time (OJK, 2015).

20 | P a g e

Chart 4. Development of Indonesian Sharia Stocks

(Source: OJK, 2015)

In term of products, Indonesian Islamic capital market continued to develop with the

issuance of the first Islamic (Corporate) Bonds, or Sukuk in 2012. The first Sukuk was

issued by then-State-Owned-Telecommunication-Company, PT Indosat, with the total

value of Rp175 billion (OJK, 2015). According to monthly statistics by OJK (2015), at the

end of May 2015, there were a total of 73 corporate Sukuks that had been issued with

the nominal value of Rp13,579 billion. From end of 2010 to May 2015, the corporate

Sukuk market in Indonesia had grown by 55.3% in number of issuance and 73.8% in

nominal value (OJK, 2015). However, in total, Sukuk only amounted to less than 0.1% of

the total corporate bond market in Indonesia. Therefore, for the purpose of this study,

sharia bond or Sukuk was not used to represent Indonesian SRI in the analysis.

21 | P a g e

Chart 5. Development of Indonesian Corporate Sukuk

(Source: OJK, 2015)

All in all, the current situation shows that Indonesias sharia investment market size only

amounted to less than 10%. However, past performance and growth rate indicate a

positive trend and reveal that this particular type of market is experiencing a rapid and

significant grow which is likely to continue further into the future.

II.4. PREVIOUS RESEARCH

In term of SRI/sharia related Index, a research by Hakim and Rashidian (2004) regarding

the correlation between Dow Jones Islamic Market Index (DJIMI) and Dow Jones World

Index (DJWI), using Capital Asset Pricing Model (CAPM) method, revealed that there is

no significant performance difference between them. Hakim and Rasidian (2004) further

added that according to their findings, Islamic screening has no significant effect toward

the risk and return characteristic of an investment portfolio. Meanwhile, in a similar topic,

Hassan and Girard (2011) examined the performance of Dow Jones Islamic Index and its

Outstanding Nominal Value

Number of Outstanding Number of Issuance

22 | P a g e

seven index vis--vis their non-Islamic counterparts using several methods including

Sharpe, Treynor, Fatmas selectivity, net selectivity, and diversification as well as

Carharts four factor pricing model. They also used co-integration to study how Islamic

index related to their non-Islamic index counterparts. Hassan and Girard (2011)

conducted a testing on 120 samples from the period that started in January 1996 and

ended in December 2005. They found that there is no performance difference between

Islamic and non-Islamic index. In general, they recognized an identical risk and return

characteristic of Islamic and conventional index. Rosly (2005) conducted a study on the

daily price movement of sharia index and composite index on Kuala Lumpur Stock

Exchange within the period of June Juli 2000. He found that sharia index and

conventional index is positively correlated. The price movement of composite index is

similar to sharia index. However, composite index appears to be more volatile compared

with sharia index. In a more recent research, Khamlichi, et. al (2014) who studied global

Islamic indices performance suggested that Islamic indices can be as attractive as

conventional ones since both indices tended to move together and had similar long run

diversification benefits. However, the authors also noted that both Islamic and

conventional indices do deviate from market efficiency. In addition, Schroder (2004),

Kreander, et. al. (2004), and Beer, et. al. (2014), all found that SRI stock indices do not

exhibit a different level of risk-adjusted return than conventional benchmarks. However,

Beer, et. al. (2014) further added that many SRI indices have a higher risk figure relative

to the benchmarks. All in all, these research suggested that there may not be a significant

performance difference between SRI/sharia index and conventional index.

In term of SRI mutual funds performance, a study by Hamilton, et. al. (1993) on socially

conscious funds and conventional funds from 1980 to 1990 showed that, during the

period, the return of socially conscious funds outperformed that of the conventional funds.

Another research by Statman (2000) on 31 socially conscious funds by Morningstar from

May 1990 to September 1998 also suggested that the social funds outperforms the

conventional funds on a risk-adjusted basis. Meanwhile, Blanchett (2010) found that SRI

funds could be outperforming or underperforming their conventional peers depended on

the basis of measurement, whether it is a risk-adjusted basis or a pure return basis.

23 | P a g e

Nevertheless, all of these researchers suggested that the differences in performance

between SRI funds and conventional funds are actually not statistically significant.

According to Diltz (1995a, 1995b), based on his research on 14 socially screened stock

portfolios and 14 unscreened portfolios during 1989 1991 period, there is no statistically

significant difference in returns between those investments strategies (SRI vs

conventional). Viviers and Eccles (2001)s study on SRI-related researches conducted in

1975 2009 discovered that the majority of the researches during that period indicate a

neutral performance of SRI funds compared with conventional (non-SRI) funds, and also

with stock market indices in general. The research by Humprey and Lee (2011) on

Australian market also found that there is no significant difference in performance

between SRI funds and conventional funds. The result of their research suggested that

there is no financial penalty or benefit for investors that invest in SRI funds relative to

conventional funds. Furthermore, the most recent research by Revelli and Viviani (2015)

who meta-analysed 85 studies and 190 experiments on SRI also pointed out that there is

no real cost or benefit to invest in SRI.

Minor (2007), on the other hand, argued that even though the difference in returns

between SRI and conventional funds may not be significant, still there must be a net

additional financial cost to SRI compared with conventional investments. Fitzpatrick, et.

al (2012) research on selected SRI, specialty mutual fund, and general mutual fund also

suggested that SRI funds exhibit a higher risk per return compared with general mutual

funds and do not generate a higher return.

Minor (2007), however, also noted that investment managers skills might contribute to the

performance of SRI funds which negate the cost of investing in them. A previous research

by Geczy, et. al. (2005) also suggested that fund managers skills affect the cost of SRI.

However, they added that investors views concerning assets pricing models affect the

cost of SRI as well. According to them, the cost of SRI will be lower for a passive investor

and higher for an investor who disallowed skills but associated higher investment returns

with exposure to size, value, and momentum factors.

24 | P a g e

All those research above conducted on general SRI funds which include broad types of

SRI strategies. With regards to the particular type of SRI in this study, the sharia mutual

funds, Achsien (2003) found that they outperform their benchmarks which include a

conventional fund, RHB Islamic Index, and KLSE Composite Index. Achsiens findings

were based on the performance of sharia mutual funds in Malaysia from January 1997 to

February 1999, analysed using Sharpe, Treynor, and Jensen methods. In another

research, Rahmayanti (2006), using Sharpe, Treynor, and Jansen methods as well,

examined the performance of sharia stocks portfolio investment in Indonesian Stock

Exchange (IDX) over the period of 2001 2002 and found that in 2001, sharia stock

portfolios outperformed conventional stock portfolios on Sharpe and Treynor methods.

Meanwhile in 2002, sharia stocks portfolios outperformed conventional stock portfolios

on all methods. Cahyaningsih (2008)s research on two types of sharia mutual funds in

Indonesia, fixed income and balanced funds, over the period of May to September 2008,

revealed a slightly different result. While fixed income sharia mutual funds recorded a

positive performance measured by Sharpe, Treynor, and Jensen methods, balanced

sharia mutual funds recorded a negative performance on all methods of measurement.

However, she noted that this result might be affected by the length of the observation

period.

All in all, the findings concerning the performance of SRI mutual funds, whether the

general SRI funds or the specific Islamic/sharia-based funds, suggest that there are

several directions for SRI mutual funds to perform when being compared with their

conventional benchmarks.

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CHAPTER III. METHODOLOGY

III.1. RESEARCH METHODOLOGY

For a research to produce a comprehensive result, it is important to select the appropriate

research approach. In a broad sense, there are 2 (two) distinct reasoning approaches in

a research: inductive and deductive (Trochim, 2006). According to Goddard and Melville

(2004) an inductive approach starts with the observations and ends with theory

formulation as the result of the observations. In other words, inductive approach can be

defined as moving from the specific information to the general idea (Trochim, 2006) and

sometimes referred as the bottom up approach (Lodico, et. al., 2010). Therefore, in an

inductive research, the researcher begins with collecting and observing relevant data to

the topic of interest, and then seeks for patterns in the collected data, before finally

develops a theory which can explain the pattern accordingly (Blackstone, 2015). The

outline of an inductive research is described in Figure 1 below.

Figure 1. Inductive Research

Deductive approach, in another hand, is the opposite of inductive research in which it

begins with the general and end with the specific (Trochim, 2006). According to Wilson

(2010) deductive approach is concerned with developing a hypothesis (or hypotheses)

based on existing theory, and then designing a research strategy to test the hypothesis.

26 | P a g e

In a deductive research, the researcher begins with a theory and formulates a set of

hypotheses which then being tested with the analysis on the relevant data or observation

(Blackstone, 2015). Inductive approach sometimes referred to as the top down

approach (Tavakoli, 2012) and thus the outline of a deductive research will be as follows:

Figure 2. Deductive Research

In the case of this study, since the main objective is to describe and compare the

performance of Socially Responsible Investment (SRI) in Indonesia with the relevant

benchmarks, the reasoning of the study followed that of in the deductive approach. The

reason to select this approach was that it could best explain the objectives of this study.

Moreover, the nature of the study itself is in line with the approach. The study started

under the perspective of a theory which suggests that there is a difference in performance

between SRI and its conventional benchmarks. Some critics argued that the screening

and monitoring of ESG performance in SRI would cause the SRI to underperform its

conventional benchmarks (Sjostrom, 2011). Meanwhile, some others argued that

companies with stronger social performance and higher quality of corporate management

within SRIs portfolio would lead to SRI having a superior performance compared with its

conventional counterparts (ibid). Based on this, for the case of Indonesian SRI, this study

27 | P a g e

developed 4 hypotheses as explained in Hypotheses Development section. In the

observation stage, the performance of Jakarta Islamic Index (JII), selected sharia mutual

funds, and conventional benchmarks was analysed based on their daily returns over the

period of 1 January 2013 30 June 2015. The result of the analysis was statistically

tested accordingly.

In term of data analysis, this study used a quantitative method. This method was selected

since not only it was the most suitable method to answer the research questions emerging

from the objectives of the study, but it also offered the necessary tools to analyse the

numerical sample data and test the proposed hypotheses. Creswell (1994) defined

quantitative research as explaining phenomena by collecting numerical data that are

analysed using mathematically based methods (in particular statistics). Creswell (1994)

also explained that the process of quantitative research includes deduction, cause and

effect, static design, generalizations, as well as validation. In term of techniques, a

quantitative research method includes observation, pilot studies, quantitative analysis,

and questionnaire (Brynard and Hanekom, 2005). For research purposes, a quantitative

research is the most suitable to answer or explain the six main types of research

questions or activities as follow:

1. Questions that need a quantitative or numerical answer;

2. Numerical changes on a particular subject;

3. Conducting audience segmentation;

4. Quantifying opinions, attitudes, and behaviours;

5. Explaining phenomena; and

6. Testing hypotheses (Sukamolson, 2007)

The first 4 (four) points are descriptive researches where descriptive statistics are used

to describe a particular situation, while the last 2 (Point 5 and 6) are called inferential

research where inferential statistics are used to explain certain issues (Sukamolson,

2007). In the end, the application of quantitative research method on this study helped to

generalise the truth found in the samples (JII and selected sharia mutual funds) to the

population (SRI in Indonesia).

28 | P a g e

All in all, the general outline of this study is illustrated in Figure 3 below.

Figure 3. The Outline of the Study

III.2. DATA SAMPLE

This study used Jakarta Islamic Index (JII) and selected sharia mutual funds to represent

the Socially Responsible Investment (SRI) in Indonesia. The study analysed the daily

returns data of JII and the selected mutual funds over the period of 1 January 2013 30

June 2015.

The sharia mutual funds for this study were selected based on the following criteria:

1. Equity type mutual funds;

2. The mutual funds had been effective before the start of the study period; and

3. The mutual funds had been operated for a minimum 5 years before the end of the

study period.

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According to OJK (2015), as of May 2015, there were a total of 23 sharia mutual funds.

Based on the criteria above, for the purposes of this study, 7 (seven) sharia mutual funds

were selected for analysis (as shown in Table 2).

Table 2. The Selected Sharia Mutual Funds

For Risk-Free Rate, market, and benchmarking purposes, this study used the followings:

1. Risk-Free Rate

In term of risk-free rate, this study used the rate of Bank Indonesia Certificate (SBI)

which is issued by the Central Bank of Indonesia (BI).

2. Market

Jakarta Composite Index (JCI) is the market index used in this study. JCI represents

the price movement of all the listed stocks in Indonesian Stock Exchange (IDX, 2015).

3. Conventional Benchmark Index

LQ45 Index was selected for benchmark index because it has similar size (45 stocks

in LQ45 index vs 30 stocks in Jakarta Islamic Index) and nature (selection based on

the market capitalisation and the liquidity of the stocks) with Jakarta Islamic Index.

No Sharia Mutual Funds Effective Date

1 TRIM Syariah Saham (TRIM SS) 16 December 2006

2 Batavia Dana Saham Syariah (Batavia DSS) 16 July 2007

3 PNM Ekuitas Syariah (PNM ES) 26 July 2007

4 CIMB Principal Islamic Equity Growth Syariah (CIMB-

PIEGS)

16 August 2007

5 Mandiri Investa Atraktif Saham (Mandiri IAS) 19 December 2007

6 Cipta Syariah Equity (Cipta SE) 16 March 2008

7 Manulife Syariah Sektoral Amanah (Manulife SSA) 16 January 2009

30 | P a g e

4. Conventional Benchmark Fund

Panin Dana Prima was selected for benchmark fund because it was the best

conventional fund with the asset above Rp 1 trillion for the period of 3 years according

to Investor magazine 2014 (Beritasatu, 2014) and had been effective before the

beginning of the study period (Panin Dana Prima was effective in December 2007).

All the data used in this research was secondary data taken from the following sources:

Table 3. Data Source

No Source Data

1 Yahoo Finance Daily data of Indices: Jakarta Composite Index (JCI),

Jakarta Islamic Index (JII), and LQ45 Index for the

period of 1 January 2013 30 June 2015

2 Portal Reksadana

(www.portalreksadana.com)

Daily data of sharia mutual funds (TRIM Syariah

Saham, Batavia Dana Syariah Saham, PNM Ekuitas

Syariah, CIMB Principal Islamic Equity Growth

Syariah, Mandiri Investa Atraktif Syariah, Cipta Syariah

Equity, Manulife Syariah Sektoral Amanah) and

conventional benchmark fund (Panin Dana Prima) for

the period of 1 January 2013 31 December 2013

3 Kontan

(pusatdata.kontan.co.id)

Daily data of sharia mutual funds (TRIM Syariah

Saham, Batavia Dana Syariah Saham, PNM Ekuitas

Syariah, CIMB Principal Islamic Equity Growth

Syariah, Mandiri Investa Atraktif Syariah, Cipta Syariah

Equity, Manulife Syariah Sektoral Amanah) and

conventional benchmark fund (Panin Dana Prima) for

the period of 1 January 2014 30 June 2015

4 Tempo

(bisnis.tempo.co)

Several missing daily data on sharia mutual funds and

conventional benchmark fund for the period of 1

January 2013 30 June 2015

5 Indonesian Sock Exchange

(idx.co.id)

Several missing daily data on Indices (Jakarta

Composite Index, Jakarta Islamic Index, and LQ45

Index) for the period of 1 January 2013 30 June 2015

6 Indonesia Central Bank

(www.bi.go.id)

Risk free rate (Bank Indonesia Certificate/SBI rate)

31 | P a g e

III.3. HYPOTHESES DEVELOPMENT

Based on the objectives, research questions, and literature review of this study, the

hypotheses were developed as follows:

Ha1: The performance (non-risk-adjusted and risk-adjusted) of Jakarta Islamic Index (JII)

is different from that of market index

Ha2: The performance (non-risk-adjusted and risk-adjusted) of Jakarta Islamic Index (JII)

is different from that of conventional benchmark index

Ha3: The performance (non-risk-adjusted and risk-adjusted) of the sharia mutual funds is

different from that of market index

Ha4: The performance (non-risk-adjusted and risk-adjusted) of the sharia mutual funds is

different from that of conventional benchmark fund

In order to prove the hypotheses of this study, hypothesis testings were conducted.

According to DeFusco, et. al. (2007) hypothesis testing is conducted in order to create

judgments about population based on observed sample. Hypothesis testings were

performed using t-Test with 95 percent significance level.

III.4. RESEARCH ANALYSIS METHODS

There are 3 (three) main analysis methods used in this study as follows:

1. Descriptive Statistics

In this study, descriptive statistics was conducted on JII and the selected sharia

mutual funds daily returns, as well as on their respective conventional benchmarks

daily returns. The aim for descriptive statistics is to give basic statistical summary and

basic analysis on risk and return aspect of the observed investment instruments.

2. Performance Measurement

In this study, the performances of JII and the selected sharia mutual funds was

measured from two aspects: non risk-adjusted return and risk-adjusted return. The

32 | P a g e

non-risk-adjusted performance was analysed from the raw daily returns of JII and the

selected sharia mutual funds. The non-risk-adjusted performance of JII and the

selected sharia mutual funds then compared with the non-risk-adjusted performance

of market index and conventional benchmarks (index and fund).

The risk-adjusted performance measurement was performed using 3 (three)

methods:

a. Sharpe Ratio

Sharpe ratio is one of the popular methods to measure the performance of mutual

funds and other investment portfolios. The Sharpe ratio measures the reward to

volatility trade-off of a portfolio (Bodie, et. al., 2003). It is considered to be a

comprehensive performance measurement since it recognizes the risk free rate

return aspect in asset portfolios (Eling and Faust, 2010). In general, using Sharpe

ratio as a risk adjustment, the performance of one portfolio can be compared to

other portfolio (Investopedia, 2015).

Sharpe ratio is calculated using the formula as follow:

Where,

Sp = Sharpe ratio of the portfolio

rp = return of the portfolio

rf = risk-free rate

p = standard deviation of the returns on the portfolio

b. Treynor Index

Similar to Sharpe ratio, Treynor Index or Treynors measure allows the

performance of one portfolio to be compared to other portfolio by measuring the

excess return per unit of risk (Bodie et. al., 2003). However, it uses beta of the

33 | P a g e

portfolios returns (systematic risk) instead of standard deviation of the portfolios

returns (total risk). According to Wilson (2010) beta of the portfolio expresses the

systematic risk of the portfolio against the relevant benchmark (market).

The formula for Treynor Index is described as follows:

Where,

Tp = Treynor Index of the portfolio

rp = return of the portfolio

rf = risk-free rate

p = beta of the portfolio

c. Jensen Alpha

According to Bodie, et. al. (2003) Jensen alpha or Jensens measure is the

average return on the portfolio over and above that predicted by the CAPM, given

the portfolios beta and the average market return. Jensen alpha measures

portfolios performance relative to the market and thus allowing portfolios

performance to be compared accordingly.

The Jensen alpha formula is expressed as follows:

Where,

Rp = portfolio return

Rf = risk free rate

RM = market return

= Jensen alpha

= portfolio beta

34 | P a g e

For the purpose of this study, Jensen alpha was calculated using the regression

analysis tool on Microsoft excel software.

3. T-Test

T-test was selected for hypotheses testing because it is a robust statistical tool, does

not require a large amount of data, easily calculated using computer software, and

relatively simple to interpret. T-test compares the means difference between two

samples. In this way, t-Test was used to compare the performance of JII, selected

sharia mutual funds, and conventional benchmarks from statistical significance point

of view. Based on t-Test result, the hypotheses of this study can be proven whether

they are correct or incorrect. Under the 95 percent significance level, if p-value based

on the result of t-Test is greater than 0.05 the null hypothesis cannot be rejected

which means that there is no performance difference between the compared

instruments. Meanwhile, if p-value is lower than 0.05 the null hypothesis can be

rejected and therefore the hypothesis that there is performance difference between

the compared instruments should be accepted. For the purposes of this study, the t-

Test was conducted using data analysis tool on Microsoft excel software.

Figure 4. Descriptive Statistics Analysis

Figure 5. Non-Risk-Adjusted Analysis

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Figure 5. Risk-Adjusted Analysis

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CHAPTER IV. FINDINGS AND DISCUSSION

IV.1. DESCRIPTIVE STATISTICS

The descriptive statistics provides the basic statistical summary of JII, selected sharia

mutual funds, market index, and conventional benchmarks (index and fund) based on

their daily returns. It also gives basic description on the risk and return performance of

those variables.

1. Indices

Table 4. Summary Statistics of JCI, JII, and LQ45 Daily Return

The descriptive statistics in Table 4 gives basic statistical summary based on raw

daily returns to describe the risk and return characteristics of Jakarta Islamic Index

(JII) and conventional benchmark index (LQ45) for the period of January 2013 to June

2015. Based on the summary statistics, over the period of January 2013 June 2015,

all the indices generate positive daily returns. From January 2013 to June 2015, LQ45

has the highest daily mean return with 0.000288653. Meanwhile, during the same

period, JII records a 0.000232627 daily mean return which is lower than both LQ45

and market (JCI) daily mean return of 0.000258044.

In term of standard deviation of daily returns, Table 4 shows that JII has the highest

figure with 0.013364104. LQ45 has the second highest standard deviation of daily

37 | P a g e

returns with 0.01329133, while market index (JCI) records the lowest figure with

0.010729838. Overall, it appears that both JII and LQ45 have higher volatility and risk

profile compared with market index (JCI). However, while LQ45 outperforms market

index return, JII risk profile does not translated into a higher return performance. As

shown by the daily mean return figures, JII underperforms market index in term of

return performance.

2. Mutual Funds

Table 5. Summary Statistics of Sharia Mutual Funds, Conventional Benchmark

Mutual Fund, and Market Index

The descriptive statistics in Table 5 gives basic statistical summary based on raw

daily returns to describe the risk and return characteristics of the selected sharia

mutual funds and their conventional benchmark fund for the period of January 2013

to June 2015. In general, based on summary statistics result, market index and

mutual funds (both sharia and conventional benchmark) generate positive returns

during the observed period. In term of daily mean returns, Cipta Syariah Equity has

the highest figure with 0.00371086. The second highest daily mean returns figure is

recorded by market index (JCI) with 0.000258468. Panin Dana Prima as the

conventional benchmark fund has the 4th highest daily mean return figure with

0.000228794, slightly below TRIM Syariah Saham with 0.000241531. The overall

daily returns performance ranking is shown in Table 6 below:

JCI TRIM SS Batavia DSS PNM ES CIMB-PIEGS Mandiri IAS Cipta SE Manulife SSA Panin DP

Mean 0.000258468 0.000241531 0.000225504 3.49245E-05 0.00018057 2.24162E-05 0.000371086 0.000210556 0.000228794

Standard Error 0.00043551 0.000471751 0.00048777 0.000486378 0.000490191 0.000507508 0.000445787 0.000478073 0.00050367

Median 0.001071102 0.000882411 0.000804006 0.00076354 0.000714412 0.000632491 0.001059772 0.000743441 0.000857166

Mode #N/A #N/A 0 #N/A #N/A #N/A #N/A #N/A 0

Standard Deviation 0.010738668 0.011632276 0.012027272 0.01199293 0.012086964 0.012513953 0.010992052 0.011788161 0.012419316

Sample Variance 0.000115319 0.00013531 0.000144655 0.00014383 0.000146095 0.000156599 0.000120825 0.000138961 0.000154239

Kurtosis 3.31220225 2.604767945 3.205139598 2.483476347 2.590398813 3.330970305 2.545436392 2.367419641 4.818294978

Skewness -0.366691009 -0.339314052 -0.344991354 -0.439594221 -0.321232232 -0.436839796 -0.2714249 -0.273343036 -0.022102846

Range 0.102330881 0.111231827 0.11517879 0.097024096 0.109388261 0.119777999 0.101634332 0.105385815 0.124453309

Minimum -0.05584484 -0.056923151 -0.063649631 -0.053041919 -0.056143338 -0.06659543 -0.046751516 -0.053820515 -0.059329491

Maximum 0.046486041 0.054308677 0.051529159 0.043982177 0.053244923 0.053182569 0.054882816 0.0515653 0.065123818

Sum 0.157148571 0.146850801 0.137106708 0.021234125 0.109786669 0.01362906 0.225620414 0.128017846 0.13910674

Count 608 608 608 608 608 608 608 608 608

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Table 6. Daily Mean Return Ranking

In term of risk, which measured by the standard deviation figure of the daily returns,

Mandiri Investa Atraktif Syariah is recorded as the mutual fund with the highest daily

return standard deviation figure with 0.012513953. The conventional benchmark fund

(Panin Dana Prima) has a slightly lower daily return standard deviation with

0.012419316. The rest of the sharia mutual funds, CIMB-Principal Islamic Equity

Growth Syariah, Batavia Dana Saham Syariah,PNM Ekuitas Syariah, Manulife

Syariah Sektoral Amanah, Cipta Syariah Equity, and TRIM Syariah Saham, have

lower daily return standard deviation figures with 0.012086964, 0.012027272,

0.01199293, 0.011788161, 0.011632276, and 0.010992052, respectively.

Meanwhile, market index (JCI) has the lowest daily return standard deviation figure

with 0.010738668. The standard deviation ranking of the mutual funds and market

index is shown in Table 7 below:

NO MUTUAL FUNDS AND MARKET DAILY MEAN RETURN

1 Cipta Syariah Equity 0.000371086

2 Jakarta Composite Index (JCI) / Market 0.000258468

3 TRIM Syariah Saham 0.000241531

4 Panin Dana Prima (Conventional Benchmark) 0.000228794

5 Batavia Dana Saham Syariah 0.000225504

6 Manulife Syariah Sektoral Amanah 0.000210556

7 CIMB-Principal Islamic Equity Growth Syariah 0.000180570

8 PNM Ekuitas Syariah 0.000034925

9 Mandiri Investa Atraktif Syariah 0.000022416

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Table 7. Daily Return Standard Deviation Ranking

Overall, all of the mutual funds appear to have higher daily return standard deviation

figures than that of market index. This suggests that sharia mutual funds and

conventional benchmark funds daily returns are more volatile than market index. This

also implies that sharia mutual funds and conventional benchmark fund have higher

risk profiles compared with market. However, the higher risk profile of the funds does

not necessarily lead to a higher return performance. Mandiri Investa Atraktif Syariah

for example, has the highest risk profile but the lowest return performance based on

the summary of basic statistics.

NO MUTUAL FUNDS AND MARKET

DAILY RETURN

STANDARD DEVIATION

1 Mandiri Investa Atraktif Syariah 0.012513953

2 Panin Dana Prima (Conventional Benchmark) 0.012419316

3 CIMB-Principal Islamic Equity Growth Syariah 0.012086964

4 Batavia Dana Saham Syariah 0.012027272

5 PNM Ekuitas Syariah 0.01199293

6 Manulife Syariah Sektoral Amanah 0.011788161

7 TRIM Syariah Saham 0.011632276

8 Cipta Syariah Equity 0.010992052

9 Jakarta Composite Index (JCI) / Market 0.010738668

40 | P a g e

IV.2. NON RISK-ADJUSTED RETURN PERFORMANCE ANALYSIS

This section of study provides the comparative performance analysis between the JII and

LQ45, as well as the 7 sharia mutual funds and conventional benchmark fund in the period

of January 2013 June 2015. The performances of the indices, sharia mutual funds, and

conventional benchmarks (index and fund) were measured using the non-risk-adjusted

daily returns.

1. Indices

Looking at the daily mean returns figures during the period of January 2013 June

2015 (Table 4 above), the conventional benchmark index (LQ45) seems to

outperform both the market (JCI) and sharia index (JII) by 0.000031 and 0.000056,

respectively. Meanwhile, not only outperformed by LQ45, JII also underperforms

market index by 0.000025. However, statistical analysis on those figures yields a

different result. The t-Test was conducted to find any significant statistical differences

in the return performance of JII, LQ45, and market index. The result (as shown in

Table 8) reveals that the differences in return performance of JII and LQ45 relative to

the market are statistically insignificant (p-value > 0.05). In term of JII return

performance, compared with LQ45 as the conventional benchmark, the t-test result

(as shown in Table 9) also indicates that there is no statistically significant difference

between them (p-value > 0.05). Thus, it can be stated that there is no difference in

non-risk-adjusted return performance between JII and market index, as well as

between JII and conventional benchmark index.

Table 8. T-Test: Assuming Unequal Variances (Market)

JII LQ45 JCI

Mean 0.000233 0.000289 0.000258

Variance 0.000179 0.000177 0.000115

Observations 609 609 609

Hypothesized Mean Difference 0 0

Df 1162 1164

t Stat -0.0366 0.044195

P(T

41 | P a g e

Table 9. T-Test: Assuming Unequal Variances (Benchmark)

2. Mutual Funds

The daily mean return figures in the period of January 2013 June 2015 (Table 6

above) shows that out of 7 sharia mutual funds, only 1 manages to outperform the

market (JCI) return. In that period, Cipta Syariah Equity outperforms market index

return by 0.000112618. All of the other sharia mutual funds: TRIM Syariah Saham,

Batavia Dana Saham Syariah, Manulife Syariah Sektoral Amanah, CIMB-Principal

Islamic Equity Growth Syariah, PNM Ekuitas Syariah, and Mandiri Investa Atraktif

Syariah, underperform market return by 0.000016937, 0.000032964, 0.000047912,

0.000077898, 0.000223543, and 0.000236052, respectively. At the same period,

conventional benchmark mutual fund (Panin Dana Prima) also underperform market

return slightly by 0.000029674.

In relation to conventional benchmark fund (Panin Dana Prima) performance, 2 out

of 7 sharia mutual funds manage to outperform the benchmark return. Cipta Syariah

Equity outperforms Panin Dana Prima by 0.000142292 and TRIM Syariah Saham

outperforms Panin Dana Prima by 0.000012737. Meanwhile, Batavia Dana Saham

Syariah, Manulife Syariah Sektoral Amanah, CIMB-Principal Islamic Equity Growth

Syariah, PNM Ekuitas Syariah, and Mandiri Investa Atraktif Syariah all underperform

conventional benchmark fund return by 0.000003290, 0.000018238, 0.000048224,

0.000193869, and 0.000206378, respectively.

JII LQ45

Mean 0.000233 0.000289

Variance 0.000179 0.000177

Observations 609 609

Hypothesized Mean Difference 0

Df 1216

t Stat -0.07333

P(T

42 | P a g e

For statistical purposes, t-Test was conducted to see whether the different in return

performance between the sharia mutual funds and market, conventional benchmark

fund and market, as well as between the sharia mutual funds and conventional

benchmark fund, have statistical significances. With regards to the relative return

performance against the market, the result of t-Test (Table 10) suggests that there is

no statistically significant difference (p-value > 0.05) between the mutual funds

returns (both sharia and conventional benchmark fund) and market return. The

comparison between the sharia mutual funds and conventional benchmark fund also

reveals a similar result where the test found no statistically significant difference (p-

value > 0.05) in return performance (Table 11). Therefore, it can be concluded that

there is no difference in non-risk-adjusted return performances of the 7 sharia mutual

funds, whether compared to the market index or to the conventional benchmark fund.

This finding differs with Mansor (2012)s finding on Malaysian sharia mutual funds

performances over 1997 2007 period which suggested that sharia mutual funds

outperform their conventional benchmarks based on pure returns basis. However, the

difference in findings may be resulted from the differences in the observed market

and duration of the study.

Table 10. T-Test: Assuming Unequal Variances (Market)

TRIM SS Batavia DSS PNM ES CIMB-PIEGS Mandiri IAS Cipta SE Manulife SSA Panin DP JCI

Mean 0.000241531 0.000225504 0.000034925 0.000180570 0.000022416 0.000371086 0.000210556 0.000228794 0.000258468

Variance 0.00013531 0.000144655 0.00014383 0.000146095 0.000156599 0.000120825 0.000138961 0.000154239 0.00011532

Observations 608 608 608 608 608 608 608 608 608

Hypothesized Mean Difference 0 0 0 0 0 0 0 0

df 1206 1199 1199 1197 1187 1213 1204 1189

t Stat -0.026380066 -0.050410516 -0.342403944 -0.118799107 -0.352971932 0.180705594 -0.07408728 -0.044565868

P(T

43 | P a g e

Table 11. T-Test: Assuming Unequal Variances (Benchmark)

IV.3. RISK-ADJUSTED RETURN PERFORMANCE ANALYSIS

This part of study analyses the comparative risk-adjusted performances between JII and

LQ45, as well as between the 7 sharia mutual funds and their conventional benchmark

fund (Panin Dana Prima) in the period of January 2013 June 2015. The risk-adjusted

performance of the indices and mutual funds was measured using 3 (three) methods:

Sharpe Ratio, Treynor Index, and Jensen Alpha.

1. Indices

As shown in Table 12, the conventional benchmark index (LQ45) performs better than

both market index (JCI) and JII in the period of January 2013 June 2015. Based on

Sharpe Ratio figures, LQ45 outperforms market index risk-adjusted performance by

0.0009553. LQ45 also outperforms JII by 0.0042342. JII, on the other hand, performs

the worst by underperforming both LQ45 and market index risk-adjusted

performances by 0.0042342 and 0.0032789, respectively.

Table 12. Sharpe Ratio on Daily Return of JCI, JII, and LQ45

TRIM SS Batavia DSS PNM ES CIMB-PIEGS Mandiri IAS Cipta SE Manulife SSA Panin DP

Mean 0.000241531 0.000225504 0.000034925 0.000180570 0.000022416 0.000371086 0.000210556 0.000228794

Variance 0.00013531 0.000144655 0.00014383 0.000146095 0.000156599 0.000120825 0.000138961 0.000154239

Observations 608 608 608 608 608 608 608 608

Hypothesized Mean Difference 0 0 0 0 0 0 0

df 1209 1213 1213 1213 1214 1196 1211

t Stat 0.018456771 -0.004691657 -0.276886733 -0.068613708 -0.288633896 0.211551249 -0.026263608

P(T

44 | P a g e

In order to find the statistical significance on the different in Sharpe Ratio figures of

the indices, statistical test in the form of t-Test assuming unequal variances was

conducted. The result of the test (Table 13) reveals that, relative to market index, the

p-values for both JII and LQ45 are higher than 0.05. Furthermore, the p-value for JII

Sharpe Ratio figure relative to LQ45 Sharpe Ratio figure is also higher than 0.05

(Table 4). These results suggest that there are no differences in risk-adjusted

performance between JII and market, as well as between JII and LQ45 for the period

of the study.

Table 13. T-Test Assuming Unequal Variances (Market)

Table 14. T-Test Assuming Unequal Variances (Benchmark)

JII LQ45 JCI

Mean 0.003707 0.007941 0.006986

Variance 0.999963 0.999944 0.999934

Observations 609 609 609

Hypothesized Mean Difference 0 0

df 1216 1216

t Stat -0.05722 0.01667

P(T

45 | P a g e

With regards to Treynor Index, the result (Table 15) also confirms that LQ45 has a

better risk-adjusted performance compared with both market and JII over the period

of January 2013 June 2015. Based on Treynor Index figures in Table 15, LQ45 has

a slightly higher risk-adjusted performance compared with market index. Compared

with JII, risk-adjusted performance of LQ45 is convincingly better with 0.0000458

higher Treynor Index figure. Meanwhile, JII, once again, has the worst risk-adjusted

performance. Based on Treynor Index figures, compared with that of market index,

JII has 0.0000325 lower risk-adjusted performances.

Table 15. Treynor Index on Daily Return of JCI, JII, and LQ45

However, even though the calculated Treynor Index figures indicate that JII has the

lowest risk-adjusted performance compared with market index and conventional

benchmark index, the statistical test on Treynor Index figures demonstrates a

different view. In order to measure the statistical significance of Treynor Index values,

t-Test assuming unequal variance was performed. The result of t-test on JII and LQ45

Treynor Index against market Treynor Index (Table 16) shows that there is no

statistically significant difference between JII and market, as well as between LQ45

and market (as indicated by p-values > 0.05). Moreover, the result of t-Test on

Treynor Index figures for JII and LQ45 (Table 17) also reveals that there is an

insignificant statistical difference (p-value > 0.05) between JII and LQ45. All in all, it

appears that although JII Treynor Index figure is lower than that of market index and

conventional benchmark index, there is no difference in risk-adjusted performance

between them.

LQ45 0.0000883 0.0006829 0.0111191 0.0001236 -0.0561119 0.0461149 609

JCI 0.0000750 0.0008755 0.0107295 0.0001151 -0.0560137 0.0463172 609

JII 0.0000425 0.0005898 0.0114681 0.0001315 -0.0549791 0.0491107 609

Maximum NTreynor Ratio Mean Median Standard Deviation Sample Variance Minimum

46 | P a g e

Table 16. T-Test Assuming Unequal Variances (Market)

Table 17. T-Test Assuming Unequal Variances (Benchmark)

In term of Jensen Alpha, the result of this method (Table 18) further indicates that

LQ45 has a better risk-adjusted performance compared with JII. Based on Jensen

Alpha figures, over the period of January 2013 June 2015, LQ45 has a positive

alpha with 0.0000160 while JII has a negative alpha with -0.0000378. The result from

Jensen Alpha method is consistent with the result from Sharpe and Treynor methods

where LQ45 outperforms market return (as indicated by positive alpha figure) and JII

underperforms market return (as indicated by negative alpha figure).

JII LQ45 JCI

Mean 4.25E-05 8.83E-05 7.5E-05

Variance 0.000132 0.000124 0.000115

Observations 609 609 609

Hypothesized Mean Difference 0 0

df 1211 1214

t Stat -0.05098 0.021312

P(T

47 | P a g e

Table 18. Jensen Alpha of JII and LQ45

The Jensen Alpha result also suggests that LQ45 had a slightly higher systematic risk

than JII. This is indicated by the beta figure of LQ45 (1.195) which is higher than that

of JII (1.165). The higher systematic risk of LQ45 might correspond to it having a

better risk-adjusted performance over the period of the study. In general, LQ45 and

JII beta figures that are higher than 1 suggest that both of them are riskier than market

index.

However, even though alpha figures indicate that there are differences in risk-

adjusted performances of JII and LQ45 (compared with the market), the p-values for

both alphas suggest that they are not statistically significant (p-value > 0.05).

Therefore, it can be inferred that based on Jensen Alpha, there is no risk-adjusted

performance difference between JII, LQ45 and market index for the period of January

2013 June 2015.

All in all, all 3 (three) methods of performance measurement suggest that there is no

performance difference between JII and market index, as well as between JII and

LQ45. This is consistent with Hakim and Rashidian (2004) findings which suggested

that there is no significant performance difference between Islamic index (Dow Jones

Islamic Market Index/DJIMI) and conventional index (Dow Jones World Index/DJWI).

The finding also consistent with Hassan and Girard (2005)s finding on their research

on the performance of Dow Jones Islamic Index and its non-Islamic counterparts

which concluded that there is no performance difference between Islamic and non-

Islamic index. Furthermore, this finding also in line with Schroder (2004), Kreander

INTERCEPT (JENSEN ALPHA) -0.0000378 0.0000160

P-VALUE 0.8434274 0.9102523

BETA 1.1653246 1.1953256

P-VALUE 0.0000000 0.0000000

R SQUARE 0.8753616 0.9311453

ADJUSTED R SQUARE 0.8751563 0.9310318

N 609 609

Variable JII LQ45

48 | P a g e

(2004), and Beer et al (2014)s findings which stated that SRI stock indices do not

exhibit a different level of risk-adjusted return compared with their conventional

benchmarks.

2. Mutual Funds

The daily Sharpe Ratio figures (Table 19) reveals that not all of the observed mutual

funds have positive risk-adjusted daily returns during the period of January 2013

June 2015. As shown In Table 19, out of 7 sharia mutual funds, 3 of them: CIMB-

Principal Islamic Equity Growth Syariah, PNM Ekuitas Syariah, and Mandiri Investa

Atraktif Syariah have negative Sharpe ratio figures with -0.0002064, -0.0123523, and

-0.0128376, respectively. Compared with market index, the risk-adjusted

performance of 6 out of 7 sharia mutual funds: TRIM Syariah Saham, Batavia Dana

SahamSyariah, Manulife Syariah Sektoral Amanah, CIMB-Principal Islamic Equity

Growth Syariah, PNM Ekuitas Syariah, and Mandiri Investa Atraktif Syariah, are lower

by 0.0019955, 0.0034930, 0.0046896, 0.0072280, 0.0193740, and 0.0198592,

respectively. Similarly, the conventional benchmark fund (Panin Dana Prima), also

underperforms market index risk-adjusted performance by 0.0033396. Over the

period of the study, only one mutual fund, Cipta Syariah Equity, manages to

outperform market index with Sharpe Ratio figure of 0.0171052 or 0.0100836 higher

than that of market index.

Compared with conventional benchmark fund (Panin Dana Prima), as shown in Table

19, only 2 out of 7 of sharia mutual funds have a better risk-adjusted. Cipta Syariah

Equity outperforms Panin Dana Prima by 0.0134231, while TRIM Syariah Saham

outperforms Panin Dana Prima by 0.0013441. Batavia Dana Saham Syariah,

Manulife Syariah Sektoral Amanah, CIMB-Principal Islamic Equity Growth Syariah,

PNM Ekuitas Syariah, and Mandiri Investa Atraktif Syariah have lower risk-adjusted

performance compared with Panin Dana Prima. In total, based on Sharpe Ratio

figures, they underperforms Panin Dana Prima by 0.0001535, 0.0013500, 0.0038885,

0.0160344, and 0.0165197 respectively.

49 | P a g e

Table 19. Daily Sharpe Ratio of Market Index, Sharia Mutual Funds, and

Conventional Benchmark Fund

At a glance, over the period of the study, the Sharpe ratio figures suggest that sharia

mutual funds have different risk-adjusted performances compared with market index

a