DOES SHARIAH SCREENING IMPOSE A PERFORMANCE TRADE-OFF? EVIDENCE FROM LARGE-CAP PORTFOLIO STRATEGIES IN MALAYSIA

Abstract

This study examined whether restricting the investable universe to Shariah-compliant equities was associated with a performance trade-off in the Malaysian equity market. Using monthly data from December 2000 to December 2023, the analysis compared unrestricted, non-Shariah, and Shariah stock universes. Within each universe, firms were ranked by market capitalisation, the 30 largest stocks were retained, and three portfolios were formed. They were value-weighted, equal-weighted, and a 10-stock dividend-yield portfolio drawn from the same top-30 group. Performance was evaluated using average return, compound return, the Sharpe ratio, the Treynor ratio, and Fama-French three-factor alpha. Pairwise differences in alphas and Sharpe ratios were formally tested using Newey-West HAC-adjusted long-short spread regressions and the Jobson-Korkie statistic with the Memmel variance correction. The evidence did not indicate a systematic performance trade-off associated with Shariah screening in the Malaysian large-cap segment. Across the full sample, dividend-yield portfolios produced the strongest results, with the non-Shariah dividend-yield portfolio leading on realised-return measures and the Shariah dividend-yield portfolio recording the highest factor-adjusted performance. Formal pairwise tests showed that within each universe, the dividend-yield rule significantly outperformed both value- and equal-weighted portfolios. Across universes, the Shariah and non-Shariah dividend-yield portfolios did not differ significantly. The same distinction remained visible in the later sub-period, even though market conditions were weaker. Additional tests based on alternative portfolio formation months showed that the main results were not driven by the January formation convention. Overall, the findings revealed that relative performance varied with the screen that defined the investable universe, the portfolio construction rule, and the performance measure used in the evaluation.