Most of the prior research in the area of Islamic Investments has looked at performance; little attention has been given to the relationship between screening criteria and performance, especially in the GCC region. Therefore, this thesis examines the impact of using different screening criteria on the creation, and hence the performance of, Halal portfolios in Kuwait. In contrast to previous studies, the present study breakdowns Halal stocks in to ‘pure Halal’ (PH) and ‘Mixed Halal’ (MH), and the non-Halal stocks in to ‘Sin’ and ‘Mixed Sin’ (MS). This is to respond to the debate among Shariah scholars about the screening criteria, whether the fatwa on investing in them should be revisited and is it the right time to move towards pure Halal investments only. Specifically, this study explores the impact of tightening the current screening criteria on the creation and performance of Halal portfolios under different market conditions. Hence, broadly speaking, this thesis examine the issues associated with the creation and performance assessment of the Halal and non-Halal portfolios. For the purpose of this study, both quantitative and qualitative methods were employed. Firstly, due to the scarcity of literature, information and issues related to screening and performance were discussed with 58 face-to-face interviews with key figures in the Islamic investment funds industry in the GCC. The interviews explore whether MH are good investments from a Shariah perspective, and if there is a need to revisit the fatwa and the screening criteria. Secondly, different Halal portfolios were constructed based on the screening definitions suggested by the interviewees using a content analysis of companies’ annual reports listed in Kuwait Stock Exchange (KSE). This is to investigate the impact of applying different screens on the size of the Halal asset universe and whether it is possible to create diversified pure portfolios or at least MH that are close to pure Halal portfolios. Thirdly, quantitative methods were employed to examine whether these Halal portfolios are good investments from a financial perspective, using parametric and non-parametric statistical analysis and traditional risk-adjusted performance measures. Performance was first compared with the KSE market and a control portfolio (CP) as benchmarks then a ‘matched pair’ approach was also conducted. Finally, a general linear model (GLM) was applied to inspect whether the Shariah classification of stocks or other factors such as firm size, sector, and the global financial crisis (GFC) impact on performance. The findings from the interviews suggest that PH and MH investee companies are different types of Halal investments, and that there are a growing number of Islamic funds and individual investors that invest only in PH stocks, driven by religious motivations. Further, some interviewees seriously questioned the Shariah-compliance of MH stocks and thought of the fatwa that allows MH stocks should be revisited. Therefore, many interviewees agreed that the financial screening criteria needed to become tighter and that companies in Muslim countries should be treated differently from western ones as noted by Wilson (2005). Interviewees revealed that AAOIFI’s screening criteria are widely adopted in the GCC but most interviewees believed that the change in AAOIFI’s criteria in 2006 from total asset to market capitalization was intended to expand the Halal asset universe. Nonetheless, the analysis of companies’ annual reports finds that the use of AAOIFI (2006) during the GFC resulted in a sizeable number of MH equities being re-categorised as MS stocks, but without harming portfolios’ performance. Further, the statistical analyses suggest that there is no penalty for Halal investments during the full, the bullish or GFC periods, even after halving the screening thresholds. Differences were only identified during the bearish period, showing that some sin portfolios performed better, but overall, Halal portfolios did not underperform either the CP or the KSE index in any of the sample periods. Moreover, the GLM analysis also supports this finding that the Shariah-compliance of stocks is not the main factor affecting performance, but rather the sector they belong to and the GFC period. Hence, Islamic funds should consider allocating their investments more in the non-financial sectors rather than in the financial sector, especially during bearish markets to improve diversification. Nevertheless, there are fewer PH non-financial stocks, so, a ban on investment in MH stocks is premature, but ‘tightening’ the MH stocks’ financial screening thresholds is currently a better option. Some interviewees, also suggested that PH investors could diversify their portfolios by investing across all GCC stocks markets. Thus, Islamic fund managers need to be active fund managers focusing on certain sectors and markets in different market conditions. Halving the financial screening thresholds did not hurt MH portfolios’ performance because the loss in the number of MH stocks is compensated for by the lower interest-bearing gearing ratio of the individual companies suggested by the halved thresholds. This is supported by previous studies that report a negative relationship between stock returns and firms’ gearing, especially during market downturns (Penman et al., 2007; George and Hwang, 2010; Bhatt and Sultan, 2012). Finally, the screening analysis reveals an inadequate level of disclosure for assessing Sharia-compliance from companies’ annual reports. This highlights the need for harmonizing the Shariah screening criteria, and the development of accounting and auditing standards based on Islamic values rather than western ones to reflect the unique characteristics of Halal investment.

Les fonds d'investissement islamiques et conventionnels se retrouvent dans la mesure où ils ont la même finalité. En revanche, à la différence des fonds conventionnels, les fonds islamiques se doivent d'investir conformément à un ensemble de règles de sélection. Cette thèse s'intéresse à élaborer un cadre d'analyse théorique et empirique permettant d'expliquer les frais de gestion, ainsi que la performance et le risque des fonds d'investissement. Ainsi, ce travail commence par élaborer une analyse théorique autour des contrats de partage des pertes et des profits (venture contracts) confrontés aux problèmes d'asymétrie d'information. Un modèle théorique, en présence de problème de sélection adverse entre le gérant et l'apporteur de fonds, montre que les degrés d'aversion au risque respectifs du gérant et de l'investisseur ont un impact sur la négociation des frais de gestion indexés sur la performance périodique du fonds (carried interest). Les conclusions de ce modèle nous incitent à expliquer empiriquement le choix des partenaires du fonds concernant les clauses de rémunération, la performance et le risque des fonds d'investissement. Pour ce faire, nous élaborons une base de données unique qui comporte un échantillon international de fonds islamiques et conventionnels regroupés par société de gestion. En distinguant les fonds islamiques des fonds conventionnels, le cadre légal, les conditions politiques et économiques expliquent leurs frais, leurs performances et leurs risques. / Islamic and conventional investment funds have the same purpose. However, unlike conventional funds, Islamic funds offer different investment contracts and have to invest in accordance with a set of selection rules. This dissertation focuses on developing theoretical and empirical analysis framework to explain the fixed and performance fees, the performance and the risk of investment funds. Thus, we begin by developing a theoretical analysis about profit and loss-Sharing contracts (venture capital) that face agency problems. Based on this theoretical framework, a theoretical model, in the presence of adverse selection problem between the fund manager and the investor, shows that the risk aversions of the fund manager and the investor have respectively an impact on the periodic performance fees (carried interest) during the bargaining stage. The conclusions of this model lead us to empirically explain the terms of compensation and profit-Sharing, the performance and the risk of funds. To achieve our objective, we create a unique database that has an international sample of Islamic and conventional funds grouped by management company. By distinguishing between Islamic and conventional funds, the legal, political and economic conditions explain their fees, performance and risk.

Corporate governance practice differs regionally and nationally, depending on how each legal environment protects minority investors, capital markets and company ownership structure. Governance can also change spectacularly in regions or countries with comparatively high levels of institutional investment. The notion of institutional investors' activism is increasingly important in developed markets as the ideal corporate governance mechanism to monitor corporate managers and overcome agency problems arising from dispersed corporate ownership in modern companies. These institutions can work together on an improved corporate governance framework more effectively than individual investors, monitoring corporate controllers of listed companies in emerging and developing markets, using their influence more vigorously and in ways more fitting to a concentrated ownership environment such as that in Saudi Arabia. Consequently, the role of institutional investors in emerging and developing markets will depend strongly on institutional investors' activism and the arrangements determined and undertaken by the corporate governance regulatory framework in these markets. In considering the influential role of institutional investors to improve corporate governance practice, a high level of minority shareholder protection thus remains an indicator of good corporate governance and regulatory pressure of rights and incentives, which are necessary to empower non-controlling shareholders in these concentrated ownership markets to exert a strong activist influence in monitoring corporate activities, thus improving the corporate governance practices of investee companies. In this context, this thesis contends that in Saudi Arabia in particular, shareholder involvement in corporate governance is inadequate, as a result of a variety of economic and regulatory obstacles. It goes on to identify what improvements are necessary and where, to ensure a sound framework for effective institutional investor activism and to improve the level of minority shareholder protection. It also cautions Saudi legislators against erecting hurdles to the future engagement of Saudi and foreign institutional investors in monitoring corporate activities which may affect the conditions for access, allocation and monitoring of equity, which is so important for value creation and sustainable economic growth. The main benefit to be derived from this research is that it facilitates a fuller understanding of the Saudi approach to corporate governance, the corporate ownership environment and trends in the capital market. The analysis also deepens knowledge of corporate governance regimes, including the role of institutional investors, and of their characteristics and investment behaviours. In short, it considers whether institutional investors are willing or have been encouraged to use their power to engage in the companies in which they invest and whether they are qualified to solve the agency problem.