A Fund Flow Study of Investor Migration between Islamic and Conventional Managed Funds in Malaysia

Abstract

The Malaysian managed fund market provides investors with greater choice between conventional and Islamic equity funds. Widening choice also pose challenges to investors in relation to selection of fund type, manager and portfolio optimization. While aggregate market information reveals the extent of investment in funds, not much is known on investors’ migration between fund types in this dual market. Using net fund flow analyses, this paper addresses this paucity through a comparative study of the movement of investable funds between fund types and managers.

Net fund flow studies at individual fund and fund manager level provides a method of overcoming analytical deficiency designed to determine trends in investor’s choice. A sample of large and small Islamic and conventional funds and managers in a new Malaysian economic period is used for the purpose. The methodology compares net fund flows (subscriptions less redemptions) between different classes of funds, expressed through net increase/reduction in cash flow using yearly time intervals. This method follows similar methods in other studies since fund managers are generally loath to provide quantitative data on movements in fund membership for reasons associated with proprietary and management performance. Using reported financial statements and market data, fund flows are determined to evaluate the effect of fund type and size based on market concentration. The analysis is used to determine the extent to which investors’ exercise preference between Islamic and conventional funds.

For the selected period, lagged fund flows indicate large net outflows from conventional funds compared to Islamic funds, while net outflows from Islamic funds are insignificant. The mean inflows to Islamic funds are weak for one year but significant for the two years during which negative flows were recorded against conventional funds. Market concentration ratios indicate that three large Malaysian fund managers collectively manage 57% of total funds invested in the retail equity fund market. They also manage 71% of all Islamic equity funds. The concentration ratios also show that two-thirds (68%) of all funds are controlled by five large fund managers. The remaining twenty small market managers account for a mere 13% of the market.