Micro-Economic Determinants of NAV of Islamic Equity Unit Trust Funds in Malaysia: An ARDL-Bounds Tasting Approach

Abstract

The increasing importance of the Islamic unit trust industry requires a more detailed and efficient analysis on the various aspects of the industry. The purpose of this study, therefore, is to investigate the relationship between the NAV of the Islamic equity unit trust funds and microeconomic variables, namely fund dividends, fund Risk, fund historical performance, fund size, fund management experience and hedge fund investment in Malaysian unit trust industry. The analysis based on monthly closing price for a sample of 30 Islamic equity unit trust funds over a period of 7 years, from January 2006 to December 2012, by applying ARDL – bounds testing approach. The results indicate that the NAV of Islamic equity unit trust funds and its microeconomic determinants share long run relationship, but with two variables exception, which are the fund risk and fund management experience. This indicated that fund’s managers in the Malaysian unit trust industry performed poorly in security analyses (stock selection ability) and market entry timing. Hence, the study proposes that the fund’s managers have to focus on and sharpen their abilities of timing skills and stock selecting ability in order to achieve a better performance of their activities in prudently managing their portfolio investments. However, fund managers performed fairly well in risk-adjusted returns and typically maintained well-diversified portfolios. Therefore, the empirical result of this study may present the investors (unit-holders) with new prospective of making right decision investment when they come to select their fund as a part of their portfolio investment. This could be done through considering the microeconomic factors that found to be significantly influence the funds unit prices to either enhance their portfolio return or to mitigate their portfolio risks when they make decisions to invest in the Malaysian unit trust industry.