Equity portfolio optimisation in South Africa under varying market conditions

Abstract

Investors always try to protect their investments under different market conditions (Schinasi and Smith 2000) by finding trends and predicting the future of the market. Investors use different investment strategies. Value and growth strategies are among these popular investment strategies. Some investors such as Bauman, Conover and Miller (1998) believe in superior performance of value over growth strategies. The purpose of this research is to develop a financial model that identifies the optimal equity portfolio in South Africa, which yields positive and significant abnormal return for investors during bull and bear market conditions. The Black and Litterman optimisation approach is implemented on the JSE All share index (J203) to form optimum value and growth equity portfolios on a 10-year period, starting from January 2000 to December 2010. The findings show that between the optimum value and growth portfolio formed based on the Black-Litterman optimisation model, the value portfolio outperforms the growth portfolio in different market conditions. However, statistical tests do not show a significance difference between the performances of these portfolios.