Do ownership structure and governance matter in asset allocation decisions of Islamic and conventional mutual funds? Empirical evidence from Pakistan

Diversification in asset management companies is the key feature delivered by mutual funds. Fund managers are responsible for allocating assets in the fund's portfolio to improve risk-adjusted performance and decrease risk. This study analyzes the diversification and governance mechanisms of mutual funds in Pakistan. Moreover, it examines the impact of corporate governance on the asset allocation of Islamic and conventional mutual funds. The main findings revealed that the diversification level of mutual funds is quite satisfactory, which means that funds in Pakistan are diversified on average. Surprisingly, Islamic mutual funds are more diversified than their conventional counterparts. The comparative analysis of Islamic and conventional mutual funds shows that Shariah governance supports the equity type, sukuks, and income funds investment, while it negatively affects the bonds, T-bills, and cash investments. It is also observed that conventional mutual funds prefer to invest in equity and cash-type investments. Similarly, domestic, managerial, and foreign ownership increases diversification in conventional mutual funds, while government, trustees, and institutional ownership escalate diversification in Islamic mutual funds. These findings have important implications for the governance set-up, ownership structure, and diversification of the mutual fund industry to improve the efficiency of asset allocation decisions. The findings also guide managers in a strategic direction to identify the fund’s governance features and their impact on the fund’s diversification.