3. Electronic Theses and Dissertations (ETDs) - All submissions
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Item The viability of using markowitz portfolio theory as a passive investment strategy on the JSE(2015) Els, Tilo UdoMarkowitz Portfolio Theory (MPT) and related research was studied. Objectives were then formulated around whether an MPT model could outperform the returns of the Johannesburg Securities Exchange (JSE) and other financial instruments such as unit trusts. An MPT model was then created in Matlab using the information learnt from the theory and other appropriate sources. The model was used to generate a range of results depending on different inputs into the model. The model outputs were further analysed in Excel and results in the form of tables and graphs were created. It was found that the MPT model considerably outperforms the JSE ALSI and JSE Top 40. There were many positive Sharpe Ratios for various different inputs and model parameters. The JSE ALSI had a 1 year return of 17.13% and 3 year annualised return of 12.83%. The MPT model had 1 year returns of between 17.07% and 37.81%. The MPT model had 3 year annualised returns of between 11.81% and 26.24%. The MPT model outperformed the JSE ALSI with 5 out of 6 portfolios created. The JSE Top 40 had a 1 year return of 18.37% and 3 year annualised return of 13.02%. The MPT model had 1 year returns of 21.49% and 24.24% and 3 year annualised returns of 18.53% and 20.72%. The MPT model for Top 40 data thus outperformed the JSE Top 40 over 1 year and 3 years annualised. The MPT model had two out of its eight portfolios in the top four of the best performing unit trusts over 3 years of total returns. Over a 1 year return, two of the MPT portfolios were the top two performers compared to other unit trusts. This research has thus shown that an MPT model using historical data can outperform the JSE and can perform competitively with other unit trusts.Item Volatility and the asset allocation decision(2017) Schwalbach, Joao BrunoThis dissertation investigates the inclusion of volatility into the asset allocation decision, first as an asset class, and second as a tool for dynamic equity allocation. An examination on whether volatility exposure as an asset class has the necessary characteristics to form part of the broader investment universe is conducted. This is accomplished by comparing the risk-return characteristics of three naked option-selling strategies, a bull put spread strategy and a VIX futures strategy with the S&P 500 Index. Each volatility strategy is also included as part of a 30/30/40 volatility/equity/bond portfolio and compared to a traditional 60/40 equity/bond portfolio. Historically, the results indicate that all individual volatility strategies generated superior Sharpe ratios and exhibited less severe drawdowns than the S&P 500 Index, particularly during the 2008 Global Financial Crisis. Additionally, all volatility blended portfolios experienced better tail-risk profiles than the 60/40 equity/bond portfolio, with the naked option-selling strategies also generating similar returns as the 60/40 portfolio both over the full sample period as well during the period of recovery following the 2008 Global Financial Crisis. The results suggest that the returns associated with option-selling strategies are consistent, and have resulted in strong long-run risk-adjusted performance, qualifying short volatility exposure attained through option-selling strategies as an asset class. It however remains unclear whether the VIX futures strategy qualifies as an asset class given that it aims to exploit a market anomaly in the form of potentially non-priced volatility clustering in the S&P 500 Index. While the strategy generated considerable outperformance from 2004 to 2009, it underperformed from 2009 to 2016 suggesting that much of the non-priced volatility clustering has since been traded away. Drawing on the evidence of volatility clustering in equity markets, a managed volatility trading rule that regulates portfolio exposure between cash and equity based on how high the prevailing volatility level was relative to historical volatility levels is developed. Although transaction costs were not accounted for, the results indicated that the managed volatility trading rule has historically generated considerably superior Sharpe ratios than equity in developed and developing markets. In conclusion, volatility exposure attained through option-selling strategies has proven to be an attractive asset class, and historical evidence suggests that its inclusion into a traditional 60/40 equity/bond portfolio is likely to reduce the risk of future risk-adjusted underperformance relative to what had been achieved in the past. Additionally, the managed volatility trading rule remains an attractive alternative to investors who are precluded from investing in volatility as an asset class.Item The optimally diversified equity portfolio in South Africa: an artificial intelligence approach(2017) Block, Aaron EliyahuDiversification has remained a central tenet in investment theory over multiple decades due to its demonstrated value as a risk mitigation technique. Increasing the number assets in a portfolio, where the magnitude of correlation is relatively slim, increases the amount of diversification while also encountering increased costs in the form of transaction costs, taxes and the like. Thus, it is imperative to solve for the optimal point of diversification to ensure an investor does not encounter unnecessary costs. This study aims to solve for the point of optimal diversification in an equity portfolio, focusing on the South African environment. This is achieved by employing a framework using both the traditional simulation method as well as more advanced mathematical techniques, namely: genetic programming and particle swarm optimisation. Marked improvements are realised in this study with regards to the methodology and results through the application of advanced mathematical approaches in addition to removing the restriction of equal weightings being applied to each share in the portfolio. The results revealed that an optimal portfolio can be constructed using up to only 15 shares. Secondly, the genetic programming approach demonstrated increased strength compared to the traditional simulation and particle swarm optimisation approaches, obtaining a greater level of diversification with fewer shares. Finally, although the aim of the study is focused on modelling the relationship between the number of shares in a portfolio and the achievable diversification benefits, it is also established that the portfolios indicated as being optimally diversified achieved market beating returns.Item The effectiveness of value style investing in South Africa(2016) Langa, Senzo InnocentStyle investing is a well-documented global phenomenon that refers to the manner in which investors formulate their capital allocation decisions. The two broad styles of investing to be discussed in this report are the ‘value style’ and the ‘growth style’ investing. Recent empirical research suggests that value style of investing outperforms growth style investing over the long term. Rational theories suggest that a value premium exist because value counters have higher unsystematic risk. However, theories such as behavioural finance attribute the value premium to more psychological social factors such as emotional and heuristic biases. The aim of this study was to determine whether value style investing outperforms growth style investing in South Africa. For the purposes of this study, we evaluated the performance of various portfolios for the period of December 2000 to December 2015. In addition, the study determined the relative risk of the two styles, by testing whether value outperforms growth during periods of financial crisis, and during a period of slow economic growth. In defining the parameters of our study, we divided the constituents of Financial Times and London Stock Exchange/Johannesburg Stock Exchange (FTSE /JSE) index into growth and value based on their relative Price to book (P/B) going back to December 2000. This created four portfolios; namely, Deep value, Relative value, Relative growth and Super growth. Portfolio Analytics were employed to determine which style outperforms over the period. Regression analyses was used to ascertain which portfolio generated abnormal risk adjusted returns over the period. Relative risk is also analysed. The results of this research indicate that there is limited evidence of value premium in South Africa over the period of the study, albeit there are some periods where one style is dominant over the other. Regressions suggest that none of the portfolios constructed using market capital weighted generate abnormal returns. However, deep value, relative value and relative growth portfolios generate abnormal returns when constructed on equalweighted basis. On a relative risk basis, deep value outperforms during the financial crisis, whereas relative value outperforms during economic slowdowns.Item The taxation of private equity carried interest in South Africa(2016) Kraut, RyanIn this research report the South African taxation of carried interest in a private equity context is examined. The extent to which reform of that taxation should be considered is also presented in this report. The nature of carried interest in the South African private equity context is initially examined. Thereafter, a discussion of the relevant provisions of the Income Tax Act and related South African case law that would likely apply to the taxation of carried interest is set out. An analysis and determination of how appropriate and adequate the taxing provisions and relevant principles from case law are in the taxation of carried interest is provided. A recommendation for new legislation to deal with the taxation of carried interest has also been made.Item Optimising a portfolio of hedge funds in South Africa(2016-08-10) Naidoo, KaminiThe South African hedge fund industry is reported to have had R52 billion (USD 4.8 billion) assets under management at the end of December 2013. This compares to the global industry which is reported to have surpassed USD 2.6 trillion at the end of 2013. Due to the relative infancy of the local industry, little research exists to analyse the performance of South African hedge fund strategies. This study focuses on the performance of South African hedge fund strategies under different market regimes, taking into consideration market and economic factors specific to South Africa. The analysis shows that the hedge fund strategies offer a diversification benefit to more traditional asset classes, and the results of the study can be used to inform an investor’s allocation decision. The findings of the analysis are used as the basis of a portfolio construction framework for constructing a portfolio of hedge funds. The framework is predicated on the investor having a view on the forthcoming macro environment. The framework enables the investor to identify funds and strategies that have produced a stable alpha over a similar market regime for inclusion in the portfolio of funds. After identifying those funds and strategies most suited to the anticipated macro environment, the number of funds to be included in the portfolio is taken under consideration to determine the optimal number such that the performance and risk characteristics of the portfolio are not compromised. The analysis takes the higher moments of the distribution into account to cater for the non-normal nature of hedge fund distributions.