Quality on the Johannesburg Stock Exchange
Date
2022
Authors
Bester, Christian
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Abstract
The quality factor of equity investing has been gaining momentum in recent years. Specifically, recent studies have shown that employing quality investing strategies can deliver superior risk-adjusted returns. This study follows the path paved by Asness, Frazzini and Pedersen (2013) by ranking shares according to a range of proxies used to define and identify quality shares. Asness et al. (2013) focused on shares that are traded solely in developed countries but this study aims to contribute towards the existing body of literature by focusing on shares that are traded on the Johannesburg Stock Exchange. Subsequently, this study aims to determine whether portfolios that are formed on quality proxies deliver superior returns in relation to portfolios that are formed on low quality (junk) proxies.
The shares considered for each portfolio are limited to the top 100 shares on the JSE basedon market capitalisation. At each portfolio formation date, quartile breakpoints are inserted and shares are classified into one of two portfolios, namely: Quality and Junk. Each quality portfolio constitutes shares that are ranked in the top 25% in relation to each quality proxy and each junk portfolio constitutes shares that are ranked in the bottom 25% in relation to each quality proxy. Quality minus Junk (QMJ) factors are constructed as the intersection of four equally-weighted and market-capitalisation weighted portfolios formed on size and quality in order to establish whether a quality premium exists on the Johannesburg Stock Exchange (JSE).
In line with recent international literature, this study finds that profitability proves to produce higher average returns compared to other quality proxies such as capital structure and capital expenditure. Moreover, this study finds evidence to suggest that quality portfolios dominate their low-quality counterparts in terms of raw average returns and buy-and-hold returns over the period 2000-2020. This study also finds evidence of a quality premium on the JSE over the period 2000-2020 when a quality portfolio follows a market-capitalisation weighting scheme. Lastly, evidence is presented in this study which sheds light on the possible hedging advantages that quality investing has to offer during unstable economic conditions.
Description
A research report submitted in partial fulfilment of the requirements for the degree of Master of Commerce (50% Research) in Finance to the Faculty of Commerce, Law and Management, School of Economics and Finance, University of the Witwatersrand, Johannesburg, 2022