Faculty & Research -Does Islamic Investing Modify Portfolio Performance? Time-varying optimization strategies for conventional and Shariah energy-ESG-utilities portfolio

Does Islamic Investing Modify Portfolio Performance? Time-varying optimization strategies for conventional and Shariah energy-ESG-utilities portfolio

The main idea of the article is to compare the performance of Islamic ESG-utilities portfolios vis-a-vis their conventional counterparts across two distinct periods: the pre-COVID-19 era and the COVID-19 era.
Departing from prior studies, this study makes a novel contribution by employing an extensive array of 18 portfolio optimization techniques.

Extensive literature exists that endeavors to compare the risk and performance attributes of Islamic and conventional indices. While numerous Islamic indices have been established to cater to the increasing demand for compliant investments, relatively limited research has been conducted to assess the performance disparities between Islamic and conventional stock indices.
Based on this empirical gap, the principal aim of our study centers on an incisive evaluation of the performance exhibited by Islamic ESG portfolios vis-a-vis their conventional counterparts within the context of the pre-COVID-19 and COVID-19 eras.

Construction of the Hypothesis

Risk management in the realm of Islamic finance poses a complex and intricate challenge, characterized by its distinctive elements encompassing Islamic financial contracts, governance framework, and liquidity infrastructure of Islamic financial institutions. These unique components contribute to the unparalleled nature of risk within the context of Islamic finance. An essential consideration in understanding the dynamics of risk in Islamic finance is the compliance of the Islamic stock index with the principles of Islamic law. As adherence to religious rules is a fundamental requirement, the construction of an Islamic stock index inherently carries a heightened level of risk compared to conventional indices.

The construction of an Islamic stock index inherently carries a heightened level of risk compared to conventional indices.

Consequently, investing in Islamic products and services presents an opportunity for significant profits. This can be attributed to the fact that the Islamic stock index is exposed to a higher degree of risk, which in turn generates potentially greater returns for investors. Another contributing factor to the increased risk and subsequent higher returns observed in the Islamic stock index is the prevalence of small Islamic companies, which face inherent challenges in raising funds for their operations. In contrast, there exists a differing viewpoint among researchers who contend that Islamic indices exhibit lower risk exposure and, therefore, provide more stability, leading to relatively lower returns for investors compared to conventional indices. This perspective is based on the unique characteristics of Islamic stock indices, such as their compliance with the Shariah screening criteria mentioned earlier. Contrary to the aforementioned arguments, some scholars maintain that Islamic investments carry a risk-return profile similar to that of conventional indices.

Higher degree of risk generates in turn potentially greater returns for investors.

The central hypothesis of this study posits a significant disparity in the performance between these two kinds of stocks. By comprehensively examining the unique features and risk profiles associated with Islamic finance, we aim to shed light on the distinct nature of risk and its impact on investment performance within the Islamic financial framework.


The findings incontrovertibly demonstrate the unequivocal better performance of Islamic portfolios across an array of performance measure ratios and risk aversion thresholds throughout the entire sample period, including periods of crises and stability. These findings are further corroborated by the performance trajectories of the two kinds of studied portfolios, commencing from an initial value of $1000,000, thus emphatically underscoring the enduring ascendancy of Islamic portfolios. Additionally, our results poignantly underscore the efficacy and effectiveness of portfolio optimization methodologies such as EWMA, GM, DCC, and SHC. Lastly, the findings compellingly illustrate that the inclusion of ESG-related stocks in portfolios comprising energy and utility assets elicits a substantial augmentation in average returns.


In summary, the institutional and managerial implications suggest the inclusion of Islamic stocks, the adoption of robust portfolio optimization methods, and the integration of ESG considerations into investment strategies. Policy recommendations encompass creating an enabling environment for Islamic financial markets, promoting responsible investing practices, and ensuring market stability. By implementing these recommendations, institutions, managers, and policymakers can enhance investment outcomes, foster sustainable practices, and support the growth of inclusive and resilient financial systems.


Utilizing a comprehensive dataset comprising daily data from the S&P Global 1200 Index, we examine the conventional Energy (ENE), Utilities (UTI), and ESG (ESG) indices, as well as their Islamic counterparts, namely Shariah Energy (SENE), Shariah Utilities (SUTI), and Shariah ESG (SESG) indices. The dataset covers the period from September 30, 2010, to January 20, 2022. The analysis highlights certain methods, namely EWMA, GM, DCC, and SHC, which produce portfolios exhibiting superior performance relative to alternative methods, as assessed by risk-adjusted metrics.

Applications and beneficiaries

The findings of this study have profound implications for institutional and managerial decision-making and offer valuable recommendations for policymakers. Indeed, institutional investors and portfolio managers should consider the inclusion of Islamic stocks in their investment strategies. The better performance of these stocks during both crisis and calm periods indicates their potential as a valuable asset class. Allocating a portion of investment capital to this kind of stock can enhance portfolio diversification, mitigate risk, and potentially yield higher returns. Managers should conduct thorough due diligence and incorporate Islamic stocks that align with their investment objectives and risk tolerance.

Reference to the research

GHAEMI ASL, M., RASHIDI, M., TAVAKKOLI, R., REZGUI, H. (2024). “Does Islamic investing modify portfolio performance? Time-varying optimization strategies for conventional and Shariah energy-ESG-utilities portfolio”. The Quarterly Review of Economics and Finance, Vol 24 N.1 pp 37-57.

Consult the research paper