Elsa Yulandri, Dadang Husen Sobana , Vemy Suci Asih, Nugraha, Ikaputera Waspada, Maya Sari

Assessing Returns of IDX Sharia Growth Stocks: Applying The Fama-French Five-Factor Model For Portfolio Optimization

Introduction

Assessing returns of idx sharia growth stocks: applying the fama-french five-factor model for portfolio optimization . Assess IDX Sharia Growth stock returns using the Fama-French Five-Factor model for portfolio optimization. Market return & firm size significantly impact excess returns for Sharia investors.

Abstract

This study examines the influence of the Fama-French five-factor model on the excess return of stocks listed in the Indonesia Stock Exchange Sharia Growth Index and offers recommendations for optimizing Sharia-compliant portfolios. The model includes five independent variables: overall market return, firm size (measured by the return difference between small and large firms), book-to-market value, profitability (difference between firms with strong and weak earnings), and investment strategy (difference between conservative and aggressive asset growth). The analysis uses quarterly data from 2022 to 2023 and selects 14 companies from the index based on data completeness and consistent listing. Multiple linear regression with the Ordinary Least Squares method reveals that only the market return and firm size factors have a significant effect on excess return, with firm size having the strongest impact. Meanwhile, the book-to-market value, profitability, and investment strategy factors do not show significant individual influence. However, when assessed collectively, all five factors explain 93.06 percent of the variation in excess return, indicating the model’s overall strength. The study is limited by its short time frame due to the recent launch of the index and its relatively small sample size. These findings suggest that Sharia-compliant investors should prioritize firm size and market trends in portfolio construction. Future research should incorporate longer time periods, broader index comparisons, and qualitative factors such as investor sentiment or environmental, social, and governance indicators to enhance understanding of return behavior in Islamic equity markets.

Review

This study investigates the applicability of the Fama-French five-factor model in explaining the excess returns of stocks listed on the Indonesia Stock Exchange (IDX) Sharia Growth Index, with a view to optimizing Sharia-compliant portfolios. The research employs multiple linear regression with the Ordinary Least Squares method on quarterly data from 2022 to 2023, analyzing 14 selected companies. A notable strength of this work lies in its focus on the burgeoning and specific segment of Islamic finance within an emerging market, addressing a gap in the literature regarding factor efficacy in Sharia-compliant growth stocks. The primary findings indicate that only the market return and firm size factors significantly influence excess returns, with firm size demonstrating the strongest individual impact. Crucially, despite the non-significance of other factors individually, the model collectively explains an impressive 93.06 percent of the variation in excess returns, suggesting a strong overall explanatory power. While the high collective explanatory power is intriguing, the study's limitations warrant careful consideration. The most significant constraint is the extremely short time frame of analysis, spanning only two years (2022-2023) or eight quarters, which is acknowledged by the authors as due to the recent launch of the index. This limited temporal scope, coupled with a relatively small sample size of 14 companies, significantly restricts the generalizability and robustness of the findings. Factor models typically require much longer historical data to establish stable relationships and avoid spurious correlations, especially when dealing with market dynamics. The non-significance of key Fama-French factors such as book-to-market value, profitability, and investment strategy, while potentially a genuine finding specific to this market, could also be influenced by these data constraints, preventing a clearer discernment of their individual effects. Despite these methodological constraints, the study provides valuable initial insights for Sharia-compliant investors by highlighting the importance of firm size and market trends in portfolio construction within the IDX Sharia Growth Index. The recommendations for prioritizing these factors offer practical guidance, even if provisional. The authors prudently outline directions for future research, including the incorporation of longer time periods, broader index comparisons, and the integration of qualitative factors like investor sentiment and ESG indicators. These suggestions are vital for enhancing the understanding of return behavior in Islamic equity markets and mitigating the current study's limitations. Overall, this paper serves as a foundational exploration into a specialized market segment, laying the groundwork for more comprehensive and robust analyses as more data becomes available, making a modest yet relevant contribution to the literature on factor investing in Islamic finance.

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