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Comparison of Portfolio Selection and Performance: Shari’ah-Compliant and Socially Responsible Investment Portfolios

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This study examines the effect of Islamic screening criteria on Shari’ah-compliant portfolio selection and performance compared to Socially Responsible Investment (SRI) portfolio. Each portfolio constructed from 15 stocks based on FTSE 100 using data from year 1997. Mean-variance portfolio optimization is employed with some financial ratios added as constraints for the Shari’ah portfolio. Annual expected return of each portfolio from 2008 to 2013 is used to calculate Sharpe’s ratio, Treynor ratio and Jensen’s alpha as the performance measurement tools. Macroeconomic variables are assessed using ordinary least square to examine whether they influence the portfolios’ expected returns or not. The result finds that Shari’ah portfolio has a better performance than SRI from year 2008 to 2010 shown by higher value of the measurement tools. However, from 2011 to 2013, SRI portfolio has better performance than Shari’ah portfolio.
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INDONESIAN
CAPITAL MARKET REVIEW
46
Comparison of Portfolio Selection and Performance:
Shari’ah-Compliant and Socially Responsible
Investment Portfolios
Mehmet Asutay* and Nur Dhani Hendranastiti**
Durham University, UK
This study examines the effect of Islamic screening criteria on Shari’ah-compliant portfolio selec-
tion and performance compared to Socially Responsible Investment (SRI) portfolio. Each portfolio
constructed from 15 stocks based on FTSE 100 using data from year 1997. Mean-variance portfolio
optimization is employed with some nancial ratios added as constraints for the Shari’ah portfo-
lio. Annual expected return of each portfolio from 2008 to 2013 is used to calculate Sharpe’s ratio,
Treynor ratio and Jensen’s alpha as the performance measurement tools. Macroeconomic variables
are assessed using ordinary least square to examine whether they inuence the portfolios’ expected
returns or not. The result nds that Shari’ah portfolio has a better performance than SRI from year
2008 to 2010 shown by higher value of the measurement tools. However, from 2011 to 2013, SRI port-
folio has better performance than Shari’ah portfolio.
Keywords: Islamic screening criteria, Shari’ah portfolio, SRI portfolio, portfolio performance, mac-
roeconomic variables
Introduction
Portfolio optimisation remains an important
research area, which has essential consequenc-
es for the practice of it. Theoretically, Markow-
itz (1952) suggests that portfolio optimization
should be determined by mean-variance theory.
Investors will choose asset with higher risk as
long as it is compensated with higher return.
However, investors who consider about invest-
ing in Shari’ah-compliant assets would like to
have an alternative for their investment that
could full Islamic nance principles. The ris-
ing awareness from investors about Shari’ah-
compliant investment and also development
of Islamic nance led to the establishment
of Shari’ah screening processes for assets to
be classied as Shari’ah-compliant assets or
stocks; Dow Jones, S&P, and FTSE established
the Islamic screening criteria and Islamic indi-
ces as guidance for investors to participate in
capital market that complies with their belief.
For assets to be classied as shari’ah-com-
pliant, the assets have to go through screening
process. There are two types of Shari’ah screen-
ing processes: qualitative and quantitative cri-
teria (Derigs & Marzban, 2008). The qualita-
tive criteria is related to the type of products
and business the company engaged with, while
quantitative criteria related to the proportion of
asset, liabilities, equity, and revenues in the bal-
ance sheet and income statement. The former
does not relatively change over time, since it
needs planning and management to change the
products sold by company. Another portfolio
investment that does not only consider about
mean-variance is Socially Responsible Invest-
ment (SRI). There are some requirements to
* Faculty Member, Durham University, UK.
**Graduate Student of Durham University, UK. E-mail: nurdhanihendranastiti@yahoo.com
47
be fullled for a stock to be classied as SRI
stocks. The difference from Shari’ah-compli-
ant stocks is that SRI does not have quantitative
criteria to be fullled.
This research aims to examine the effect
of additional requirements other than mean-
variance theory in Islamic portfolio selection
and performance. In doing so, this study ex-
amines Islamic portfolio by comparing with
SRI portfolio selection and performance,
which then examining the macroeconomic
variables’ effect on portfolio return.
Literature Review
Islamic nance has unique characteristics
in conducting business transactions. Two of
the main principles are to avoid riba and gha-
rar (Kahf, 2009). The prohibition of riba and
gharar affects the operation of capital markets,
and therefore, investors who want to invest in
capital market without violating Shari’ah prin-
ciples need guidance to participate in invest-
ment. Thus, Shari’ah scholars develop Islamic
screening criteria for investing in capital mar-
ket, especially investing in stocks.
As mentioned, Islamic screening criteria
consist of two types, qualitative and quantitative
criteria. The qualitative criteria are that compa-
nies should not be involved in money-lending
and interest transactions, such as banks and in-
surance companies (Ghoul & Karam, 2007).
Other criteria are that the companies should not
involve in the production, distribution, and/or
proting from alcohol, pornography, tobacco,
gambling, weapons, music, entertainment, pro-
cessing pork meat or non-halal meat, hotels, and
airlines which serve alcohol on their premises.
However, there are different requirements
for the quantitative criteria depending on the
institutions issuing the criteria (Derigs & Marz-
ban, 2008). The quantitative criteria are related
to liquidity ratio, interest ratio, debt ratio, and
non-permissible ratio.
As for SRI, it is initially based on religious
reasoning, for example the prohibition of usury
from Christianity and Islam. However, as the
time and knowledge evolves, modern SRI is more
based on the varying personal ethical and social
beliefs of individual investors (Renneboog et al.,
2008). First modern SRI is the Pax World Fund
established 1971 in United States, which aims for
investors who are opposed to Vietnam War.
The SRI screening criteria is divided into
positive and negative. The positive screening
is that investing in company which has strong
labour relations and workplace conditions, in-
volves in recycling, waste reduction, and envi-
ronmental clean-up, concerns about sustaina-
bility, employment diversity, renewable energy,
biotechnology, and community involvement.
On the other hand, the negative screening
results imply that investors should not con-
sider investing in companies which involve in
tobacco, alcohol, gambling, defence/weapons,
irresponsible foreign operations, antitrust vio-
lations, consumer fraud, marketing scandals,
human rights violation, animal testing, devel-
opment of genetic engineering for agricultural
applications, insurance for non-married cou-
ples, healthcare, interest-based nancial insti-
tutions, and pork producers.
To construct portfolio, Markowitz (1952)
introduces the mean-variance optimization for
nding the optimal portfolio. The optimization
problem is solved by minimizing variance of
the portfolio subject to certain expected port-
folio return and the sum of the assets weight
is equal to one. Non-negativity constraint could
be imposed if short sale is not allowed.
There could be many efcient portfolios
according to the expected portfolio return de-
termined. Those portfolios could form efcient
frontier line, as investors decide the portfolio
to invest by maximizing their utility function.
The optimal portfolio is located in the tangent
point between efcient frontier and indiffer-
ence curve formed from the utility function.
Derigs & Marzban (2009) develops the
mean-variance theory by imposing nancial
ratio requirements, as constraints to adjust for
the quantitative Islamic screening criteria. In
addition, Hazny et al. (2011) develops mean-
variance under Islamic framework by imposing
income cleansing or purication to the equation
of portfolio’s expected return and standard de-
viation.
One way to evaluate portfolio performance
is by examining the rate of return and compar-
ing it with other portfolios, which have similar
characteristics. However, this could be better if
the return is adjusted to risk so that the port-
Asutay and Hendranastiti
INDONESIAN CAPITAL MARKET REVIEW VOL.VII NO.1
48
folios are truly comparable. The risk-adjusted
return portfolio performance measurements are
Sharpe’s ratio, Treynor ratio, and Jensen’s al-
pha (Bodie et al., 2009).
In addition, using different kind of dataset,
prior studies show different results. For exam-
ple, Hashim (2008) also nds that Islamic index
has better performance than SRI index. How-
ever, Girard & Hassan (2008) nd that there is
no different performance between Islamic and
non-Islamic index. Moreover they nd that
there is similar reward to risk and diversica-
tion benet for both portfolios. Lastly, Hazny
et al. (2011) nd that the efcient frontier of
Islamic portfolio outperforms for low risk, but
underperforms for high risk.
Research Method
The dataset contains data from 101 com-
panies listed in London Stock Exchange and
included in FTSE 100. The monthly adjusted
stock prices, annual UK interbank 6-month
(risk-free rate of return), FTSE 100 price in-
dex (market return), income statement, and
balance sheet are generated from Datastream.
The use of 6-month UK interbank does not
violate shari’ah clauses as long as the basic
requirements are being complied, for exam-
ple the screening for shari’ah stocks (Ayub,
2007). In addition, the data for annual in-
terest income and interest expense are taken
from Bloomberg.
Monthly stock prices are generated from
January 1997 up to December 2007 to calcu-
late return employed for portfolio construction.
Then annual nancial ratios calculated from
income statement and balance sheet informa-
tion are applied for constraints in the Shari’ah
portfolio optimization. Moreover, stock prices
at the end of the year of 2008 until 2013 are
used to evaluate the portfolio performance. The
period of the study includes the time of crisis so
that its effect could be examined.
Table 1. Summary Statistics
Share Prices' Returns Mean Std. Dev. Minimum Maximum
WEIR
GKN
MGGT
BNZL
PSN
SHP
CPI
TLW
ANTO
SN.
RR.
AZN
BG.
AAL
RIO
AHT
BAB
SGE
GFS
ITV
WPP
VOD
IMI
TPK
BDEV
0.0136
0.0059
0.0152
0.0119
0.0137
0.0179
0.0236
0.0222
0.0227
0.0115
0.0064
0.0046
0.0212
0.0154
0.0181
0.0171
0.0212
0.0184
0.0154
0.0011
0.0125
0.0135
0.0037
0.0102
0.0097
0.0893
0.0897
0.0936
0.0723
0.0996
0.1043
0.1045
0.1239
0.0982
0.0774
0.0669
0.0753
0.0700
0.1074
0.0958
0.2004
0.1060
0.1292
0.0896
0.1105
0.1024
0.0874
0.0854
0.0867
0.1104
-0.2352
-0.2202
-0.3696
-0.1643
-0.2296
-0.3643
-0.3172
-0.2878
-0.2165
-0.1505
-0.2191
-0.2078
-0.2187
-0.3654
-0.2174
-0.7523
-0.2944
-0.2330
-0.2778
-0.4000
-0.2790
-0.2383
-0.2931
-0.2138
-0.3207
0.2833
0.2120
0.2552
0.3050
0.3313
0.4285
0.5880
0.3333
0.4743
0.3333
0.2073
0.2181
0.2660
0.4724
0.2798
1.0965
0.3118
0.7444
0.2932
0.3440
0.3936
0.2823
0.1988
0.2602
0.3459
49
Asutay and Hendranastiti
For this study, two portfolios are con-
structed: Shari’ah and SRI portfolio. Qualita-
tive screening criteria based on FTSE Shariah
Global Equity Index Series Ground Rules are
used to determine stocks included in Shari’ah
portfolio, while FTSE4Good Index Inclusion
Criteria are employed to determine stocks be-
longing to SRI portfolio. For the SRI portfolio,
companies classied as having risk level of 3
for environmental management are excluded.
After employing qualitative screening
criteria, the next requirements are examined.
Companies which do not have stock price
starting January 1997 and annual report end-
ing in December are excluded. As a result, 21
stocks for Shari’ah portfolio and 50 stocks for
SRI portfolio remained. To construct portfo-
lio, 15 stocks were considered to be included
in each type of portfolio. For Shari’ah portfo-
lio, those 21 stocks divided into 3 parts based
on market capitalisation: small, medium, and
large capitalisation and 5 stocks selected from
each category. For SRI portfolio, companies
which are classied as risk level 1 are selected
rst then followed by the risk level 2 compa-
nies. Table 3.1 shows the list of the stocks.
Markowitz (1952) introduces the mean-
variance theory to construct portfolio optimiza-
tion. It is argued that mean or expected return is
desirable by investors, while variance of return
is not desired by investors. Moreover, the ob-
jective and constraints in constructing the port-
folio are shown in equations from (1) to (4).
Min Variance =XiXj
σ
ij
j=
1
n
i=
1
n
1)
Subject to:
Expectedreturn =Xi
µ
i=
targeted
i=
1
n
2)
Xi=
1
i=
1
n
3)
Xi
0,
i=
1,2,3,
,
n 4)
where Xi is weight of asset i
,
µ
i is the return
of asset i, and
σ
ij is covariance between asset
i and asset j.
Derigs & Marzban (2009), as an extension,
impose quantitative criteria of Islamic screen-
ing as constraints in constructing portfolio opti-
mization shown in equation (5) to (9).
ri
(
g
)
T
(
g
),
ri=financial ratio
,
T=permissible threshold
Xi=0if ri(g)>T(g)
Zi=
1
if it is compliant
0
otherwise
6)
Thus, the additional constraints are:
Xizi
i=
n
ri
g
ziT
g
i=
n
8)
9)
The next step is determining different val-
ues of expected return so that there are many
portfolios, which then construct minimum-var-
iance set line. The line above minimum global
variance is known as efcient frontier since
it has higher return for the same risk. Having
the efcient frontier, indifference curve should
be drawn to determine the optimal portfolio,
which is the intersection point between those
two curves. This procedure is repeated for the
following years to determine the portfolio com-
position and examine the performance.
In this research, nancial ratios established
by FTSE are used, since it has more require-
ments than other institutions and it uses total
assets as denominator rather than market val-
ue which represent the true value of company.
After constructing the portfolio optimization,
the portfolio performance is examined. There
are three portfolio performance measurements
used: Sharpe’s ratio, Treynor ratio and Jens-
en’s alpha. The reason of using these ratios for
measuring shari’ah portfolio performance is the
same as using 6-month UK interbank rate for
the risk-free rate of return mentioned before.
Sharpe’s ratio indicates that portfolio with
higher ratio value has higher excess return by
having the same risk meaning that this portfolio
has better performance. Treynor ratio indicates
that portfolio with higher ratio value has higher
excess return by having the same systematic
risk meaning that this portfolio has better perfor-
mance. As for Jensen’s alpha, portfolio which has
positive Jensen’s alpha indicates that this portfolio
could generate abnormal return compared to re-
turn calculated using Capital Asset Pricing Model
(CAPM) assuming that CAPM holds.
INDONESIAN CAPITAL MARKET REVIEW VOL.VII NO.1
50
Macroeconomic variables could be ex-
amined whether they have any effect on the
portfolio return or not. Based on the previous
studies, multiple regression using Arbitrage
Pricing Theory (APT) with ordinary least
square procedure could be used to examine
the macroeconomic effects (Brooks, 2002).
Table 2 explains the variables and their de-
nition.
Result and Discussion
In constructing the portfolio optimization,
expected return and covariance matrix of the
assets are estimated using historical data. The
rst portfolio is constructed at the end of year
2007 by using historical data from January
1997 until December 2007.
After calculating the expected return and
covariance of the assets in the previous sec-
tion, optimal portfolio could be obtained.
The next procedure in the analysis is to draw
Table 2. Macroeconomic Variables and Denition
Variable Denition Calculation
rshar Shari'ah portfolio return
rshar =Xi
µ
i
i
1
n
rsri SRI portfolio return
rsri =Xi
µ
i
i
1
n
dInd Change in Industrial production
index dIndt=IndtIndt
1
dExch Change in Exchange rate (£/$) dExch
t=Exch
tExch
t
1
dUnemp Change in Unemployment rate
dUnempt=
(
UnemptUnempt
1)
100
dTerm Change in Term structure
dTermt=
(
LTGBtTbillt
)
(
LTGBt
1
Tbillt
1)
12
x
100
dInation Change in Ination
dInflationt=
(
CPItCPIt
1)
CPIt
1
(
CPIt
1
CPIt
2)
CPIt
2
dM1 Change in Money supply dM
1
t=In
(
M
1)
tIn
(
M
1)
t
1
dOil Change in Crude oil price dOilt=In
(
Oil
)
tIn
(
Oil
)
t
1
Notes: LTGB is Long-term Government Bond, CPI is Consumer Price Index
minimum-variance set, which contains opti-
mal portfolios. After obtaining the efcient
frontier, indifference curve is required to de-
termine the portfolio preferred by investors.
Having all the data, optimal portfolio, which
is preferred by investors could be determined.
Since the nancial ratios change every year,
it is required to evaluate the portfolio composi-
tion annually for Shari’ah portfolio. In addition,
the SRI portfolio is also evaluated annually by
this study to examine the different composition
with Shari’ah portfolio. The procedure of port-
folio optimization is conducted by obtaining the
minimum-variance set, through which establish-
ing efcient frontier, leading to the estimation of
utility function and indifference curve. This pro-
cess is repeated from year 2008 to 2012.
There is optimal portfolio each year for
both Shari’ah and SRI portfolios. These
portfolios are constructed from 15 assets,
which then due to the optimization require-
ments, the portfolios consist of smaller
51
Asutay and Hendranastiti
number of assets with its percentage. Figure
1 shows assets composition of the Shari’ah
portfolio, while figure 2 demonstrates the
assets composition of SRI portfolio.
Figure 1 shows the different portfolio com-
position in every year. In year 2008, WEIR is
Figure 1. Portfolio CompositionShari’ah
Figure 2. Portfolio Composition – SRI
not included in the portfolio, because the ratio
for interest expense and interest income ex-
ceeded the threshold. Moreover, SHP is also ex-
cluded, because it had debt ratio higher than the
required value. As can be seen, for year 2009,
WEIR is included in the portfolio again, be-
INDONESIAN CAPITAL MARKET REVIEW VOL.VII NO.1
52
cause the interest expense and interest income
ratios did not exceed the threshold. This is also
true for SHP, which the debt ratio did not sur-
pass the required value. In addition, there are
two stocks, BNZL and SN, included in portfo-
lio after the two previous years, had debt ratio
higher than the required.
It should be noted that in year 2010, ANTO
becomes part of portfolio after three years of
absence, as it had cash and short-term invest-
ment to total asset ratio higher than the thresh-
old. In year 2012, TLW is included after the
four previous years, as it had interest expense
to total revenue higher than the required value.
Figure 2 shows that the SRI portfolio com-
position tends to be stable for ve years. There
is only change in composition for WEIR and
PSN in certain years because when they have
the lowest return among all assets, they will not
be included in the portfolio.
The next procedure is to examine Sharpe’s
ratio, Treynor ratio and Jensen’s alpha since
they are risk-adjusted performance measure-
ment. To calculate these ratios, monthly port-
folio return, market return (FTSE100 return),
and risk-free rate of return (6-month LIBOR)
are needed. Having the data, annual ratio is cal-
culated to evaluate the portfolio performance,
which can be found in Table 3.
Table 3 shows that Shari’ah portfolio has beta
value greater than 1 for year 2008, 2011, 2012,
and 2013 meaning that this portfolio has higher
Table 3. Portfolio Performance
Portfolio Performance
2008 2009 2010 2011 2012 2013
Shari'ah
Beta
Expected return
Standard Deviation
Sharpe's Ratio
Treynor Ratio
Jensen's Alpha
1.3666
-0.0185
0.0991
-0.2291
-0.0166
0.0228
0.4500
0.0170
0.0417
0.3918
0.0363
0.0085
0.6089
0.0157
0.0391
0.3890
0.0250
0.0104
1.3117
0.0053
0.0572
0.0824
0.0036
0.0108
1.2621
-0.0093
0.0450
-0.2171
-0.0077
-0.0156
1.1672
0.0174
0.0462
0.3677
0.0146
0.0036
SRI
Beta
Expected return
Standard Deviation
Sharpe's Ratio
Treynor Ratio
Jensen's Alpha
0.7712
-0.0125
0.0647
-0.2578
-0.0216
0.0090
0.3958
0.0115
0.0462
0.2346
0.0274
0.0039
0.9028
0.0144
0.0608
0.2296
0.0155
0.0068
0.7616
0.0073
0.0362
0.1855
0.0088
0.0102
0.7084
0.0119
0.0393
0.2899
0.0161
0.0081
0.8433
0.0263
0.0343
0.7569
0.0307
0.0163
volatility than market. However, SRI portfolio al-
ways has beta value less than one meaning that this
portfolio has less volatility than market. Moreo-
ver, both portfolios have negative expected return
for year 2008, which then begins to increase for
the next years. However, Shari’ah portfolio has
negative expected return again in year 2012.
Table 3 also shows that Shari’ah portfo-
lio has higher risk than SRI in 2008, shown
by the standard deviation. However, Shari’ah
portfolio has lower risk than SRI portfolio for
year 2009 and 2010 even though it turns to be
higher again in the following three years. Ta-
ble 3 also explains that both Shari’ah and SRI
portfolios have negative value for Sharpe’s
ratio in year 2008 due to the negative value
of expected return from each portfolio. In ad-
dition, as can be seen, Shari’ah portfolio per-
forms better than SRI portfolio in year 2008,
2009, and 2010, because having higher value
for Sharpe’s ratio means that Shari’ah portfo-
lio has higher additional return for adding one
unit of total risk. However, it has a decreasing
value in year 2011 and 2012, far lower than the
SRI portfolio performance. It increases in year
2013, but not as high as the SRI ratio.
As for Treynor ratio, Shari’ah portfolio per-
forms better than SRI portfolio in year 2008,
2009 and 2010, because it has higher value of
Treynor ratio meaning that Shari’ah portfolio
has higher additional return for adding one unit
systematic risk. However, its value decreases in
53
Asutay and Hendranastiti
2011 followed in 2012 even though it bounces
back in 2013. Meanwhile, SRI portfolio has a
relatively stable value for Treynor ratio for ve
years, although it has experienced decrease be-
tween 2009 and 2011.
As for Jensen’s alpha, both Shari’ah and
SRI portfolios have positive alpha meaning
that there is excess return that is not anticipat-
ed by the systematic risk. From 2008 to 2011,
Shari’ah portfolio has higher Jensen’s alpha
than SRI portfolio, but it decreases very steeply
in year 2012 even though it bounces back in
year 2013. On the other hand, SRI portfolio has
relatively positive stable value of Jensen’s al-
pha for six years.
In overall, Shari’ah portfolio performs bet-
ter in year 2008 until 2011, but it has the low
value of ratios in year 2012. Looking at the ta-
ble 3, due to having negative expected return
in 2012, it has low performance. This low per-
formance could be due to the stocks composing
the portfolio. Based on the gure 1, the stocks
included are BNZL, PSN, SHP, TLW, SN, AZN,
BG, and RIO.
The assets SHP, TLW, AZN, and BG have
decreasing price trend from year 2011 to 2012.
The decreasing trend means that those assets
have negative rate of return in 2012. Thus, it
contributes to the fact that the portfolio return
is negative. In oil sector, TLW and BG’s per-
formances were hampered as the oil prices fell
gradually from May to November 2012 (Sjolin,
2012).
The fall in 2012 preceded by decrease in
2011, which is not caused by negative value of
portfolio’s expected return like in year 2012.
Based on the information in gure 2, the port-
folio composition in 2011 consists of WEIR,
BNZL, PSN, ANTO, SN, AZN, and BG.
Lastly, Shari’ah portfolio has demonstrated
a better performance in 2008, 2009 and 2010,
because some of the stocks in the portfolio have
a good performance on those years. The annual
composition of stocks is depicted in gure 1.
RIO had an increase in share prices because
there was an increase in gold and copper futures
prices (Turner, 2010).
According to the analysis above, it seems
that macroeconomic variables, such as oil price,
have an effect on the return of stock prices.
Since these companies work within the larger
macroeonomic conditions, it is very normal
that they are affected by the developments in
macroeconomy. To examine such effects, mul-
tiple regression method using Arbitrage Pric-
ing Model (APT) is utilised with ordinary least
square regression procedure by ensuring that
there is no multicollinearity, autocorrelation,
and heteroskedasticity (Brooks, 2002). Table 2
explains the variables and their relevant deni-
tions. The regression starts by calculating the
variables and the lagged variables, as they may
have an effect on the return.
The result shows that Shari’ah portfolio
return at time t is affected by change in oil
price at time t, change in ination at time t and
change in industrial production at the previous
period. The coefcients imply that 1% change
in oil prices will lead to 16.45% increase in
Shari’ah portfolio return, 1% change in ina-
tion will lead to 249.39% increase in the return
and 1% change in industrial production index
in the previous period leads to 1.04% increase
in return.
The positive effect of oil price could be
because some stocks in Shari’ah portfolio are
oil companies, which implies that if the oil
price decreases then the companies have low-
er revenue and it might affect the share pric-
es. Moreover, investing in stocks is one way
to hedge ination meaning that if the prices
decrease then people tend to invest in stocks,
vice versa (Chen et al., 1986). However, the
result shows that the relationship is positive
and signicant. It could indicate that inves-
tors presume that they will buy more stocks
since ination increases meaning that there
is an increase in nominal value of the com-
panies and their revenue. The positive sign
of change in industrial production index is
based on that returns are based on the future
cash ow, which depends on future economic
conditions (Bilson et al., 2001). The result is
supported by James et al. (1985) who report
that current stock returns are related to indus-
trial production lagged by 2 months.
Moreover, the result also explains that SRI
portfolio return is only inuenced by change in
oil price at time t. The coefcient shows that
1% change in oil prices will lead to 18.51%
increase in SRI portfolio return. This positive
effect could be because companies included in
INDONESIAN CAPITAL MARKET REVIEW VOL.VII NO.1
54
SRI portfolio are able to offset the bad effect of
oil price increase with the good effect. In under-
standing the results, it is important to state that
based on gure 2, since most of the companies
are business support services, which provide
services even in the condition of increasing oil
prices where costs are rising as well.
Conclusion
To reiterate, this research aims to examine
the effect of Islamic screening criteria to the
portfolio selection and performance by compar-
ing it to SRI portfolio, which also has specic
criteria to determine the investments.
The ndings in this study conclude that
Shari’ah portfolio selection and performance
were inuenced by the Islamic screening cri-
teria, which was shown by the difference in
the Shari’ah portfolio composition and per-
formance from SRI portfolio. Composition of
Shari’ah portfolio could be from oil, mining,
and pharmaceuticals companies, while SRI
portfolio does not allow those types of compa-
nies to be included in the portfolio. In addition,
there are some nancial ratios which have to be
fullled by Shari’ah portfolio, while SRI port-
folio does not have such requirements. This led
to the result that Shari’ah portfolio performs
better in 2008, 2009, and 2010, mainly the -
nancial crisis years, indicating that Shari’ah
portfolio could be used to hedge the crisis.
However, the portfolio returns were inuenced
much by change in oil prices since the portfolio
mostly comprised of oil and mining companies.
In reecting upon further research, it could
be conducted by expanding the data sample,
portfolio size and time period so that a gen-
eralised analysis can be developed in a robust
manner. In addition, by expanding the time ho-
rizon, Gross Domestic Product and Openness
Index could be included, since both data are
available in quarterly which are not suitable
for this research. Regarding the methodology,
more advance portfolio optimization and coin-
tegration methods in examining the macroeco-
nomic variables’ effect could be employed to
obtain broader result and analysis.
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... For example, it is prohibited to sell or serve alcoholic drinks in restaurants, to engage in pork-based business (Wan Ismail et al., 2015). Meanwhile, the SRI stocks only have qualitative screening (Hendranastiti and Asutay, 2015). ...
... For example, Siminica et al. (2019) have found that SRI had non-positive relationship with accounting performance meanwhile Gherghina et al. (2015) and François (2011) showed that SRI could improve corporate values. Also, Hendranastiti and Asutay (2015), Klobukowska (2017), Pulungan et al. (2019), Risalvato et al. (2018) showed that Sharia-based stocks could outperform the SRI stocks. Based on the explanation, the first hypothesis is: H 1 Extension Markowitz portfolio based on Sharia and SRI stocks can outperform the market index. ...
... For example, it is prohibited to sell or serve alcoholic drinks in restaurants, to engage in pork-based business (Wan Ismail et al., 2015). Meanwhile, the SRI stocks only have qualitative screening (Hendranastiti and Asutay, 2015). ...
... For example, Siminica et al. (2019) have found that SRI had non-positive relationship with accounting performance meanwhile Gherghina et al. (2015) and François (2011) showed that SRI could improve corporate values. Also, Hendranastiti and Asutay (2015), Klobukowska (2017), Pulungan et al. (2019), Risalvato et al. (2018) showed that Sharia-based stocks could outperform the SRI stocks. Based on the explanation, the first hypothesis is: H 1 Extension Markowitz portfolio based on Sharia and SRI stocks can outperform the market index. ...
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There has been on-going discussion about the performance of ethical investments. Unlike previous studies, this research used extension Markowitz model to measure the market-based performance of ethical investments in Indonesia. In addition, this research also investigated whether gold was the safe haven instrument for the extension-Markowitz portfolio in Indonesia when the equity market was in extreme turmoil. The stocks from environmentally friendly firms (SRI) and Jakarta Islamic Index (JII) in Indonesia were used as the proxies of ethical investments. The results showed that the extension of Markowitz model could create an optimum portfolio that outperformed the market index. The result of this study supported The Social Impact Hypothesis implying that environmental and social spending could improve stock market performance. Also, based on Quantile Regression (QREG) and Ordinary Least Squares (OLS), this study found that gold was the safe haven and hedging instrument for ethical investors in Indonesia.
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