1. Introduction

It is estimated that the size of global Islamic finance assets is $1,033 billion with this figure expected to grow (Ernst & Young, 2011). The global assets under management of the Islamic mutual fund industry count for $58 billion with more than 800 managed mutual funds at the end of 2010 (Ernst & Young, 2011). This is with Saudi Arabia being the world’s largest home market for the Islamic mutual funds industry, in terms of both total assets under management and number of funds, controlling around $20.1 billion with 225 managed mutual funds (Ernst & Young, 2011). Thus, mutual funds in Saudi Arabia represent 35% of the total global Islamic mutual funds’ assets under management.

To meet the growing demand for Islamic finance, conventional banks are also offering Islamic products and services, including universal banks such as HSBC, Lloyds TSB, Barclays, Citibank and Deutsche Bank, as well as investment banks such as Merrill Lynch and Morgan Stanley (Hussein and Omran, 2005; Ghoul and Karam, 2007). Also, several Islamic market benchmarks are introduced by globally reliable mainstream indices’ providers to track the performance of Islamic investment, including FTSE, Dow Jones, MSCI and S&P. According to Ghoul and Karam (2007) there are about 60 DJ Islamic indexes that vary by size, industry and region, with 95 Islamic mutual funds tracking the Dow Jones Islamic Market Index (DJIMI).

Mutual fund managers are perceived as skilled investment managers who are expected to generate superior returns as compared to unmanaged market indices’ benchmarks, or the naive buy-and-hold passive strategy. The managerial investment skills of mutual fund managers are divided into two components: stock selection ability and market timing ability. The former is the ability to identify underpriced securities, whereas the latter is the skill to forecast the overall market movements (whether it is going to rise or fall) and adjusting the portfolio’s composition accordingly. If fund managers possess superior investment skills, they will earn abnormal returns, relative to an appropriate benchmark. Although there is a large body of literature that has investigated the managerial skills of mutual fund managers in developed markets, such an issue has not so far been examined rigorously for the Saudi market.