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Internationally-investing Islamic equity funds from developed Islamic and non-Islamic markets perform in general similar to the market. However, analyzing different market conditions, we provide evidence that funds domiciled in Islamic markets outperform their peers and funds from non-Islamic markets during market turmoil, irrespective of the applied performance measurement model. We suggest that this outperformance is owed to the expertise of fund managers from developed Islamic markets who operate in a financial environment that is driven by Islamic principles. Our results are robust with respect to the standard Fama-French three-factor and four-factor models as well as to the novel five-factor model.

Recent empirical research shows that low volatility stocks outperform high volatility stocks around the world. This study documents that the volatility effect is associated with the quality of the firm using a large sample of international stocks. First, adding a quality factor to the Fama–French model contributes to the explanation of the volatility effect. Furthermore, the negative volatility–return relation is shown to be stronger and significant only among high quality firms which are profitable and have stable cash flows. Second, a fundamental investment strategy that goes long high quality firms and short low quality firms performs like a volatility strategy and cannot be explained by common asset pricing models. However, a low–high volatility factor adds to the explanation of the return difference between high and low quality stocks as volatility and quality strategies have a common component.