The required data for the study is retrieved from McGregor BFA library and Bloomberg terminal. Monthly returns and interest rates are continuously compounded, unless stated otherwise. The unit trust data consists of 42 South African domestic equity style (or sector) unit trusts over the period of the evaluation that does not suffer from survivorship bias. The justification of these choices is given below.
These unit trusts are carefully selected from seven significant categories of style indices provided by the JSE. These categories of funds, by sector index in the JSE, were verified using McGregor BFA, Bloomberg and also Fundsdata South Africa.
The style categories of South African unit trusts are formally arranged in their respective indices or industry sectors in these financial portals. From each of these seven core style indices (which are the Large Caps, Small Caps, Growth, Value, Financials, Resources and Industrials), six unit trusts were selected based on a balanced overview of their most recent performances. Of the six selected unit trusts per style index, two are poor performers, two are average performers and the last two are top performers, based on the most recent performance rankings provided by Morningstar South Africa for South African unit trusts. This was done to get a balanced and as normally distributed portfolio as possible, without running the risk of skewness on the data.
In line with previous studies conducted on the persistence and performance of unit trusts in South Africa, such as Thomas (2012), Muller & Ward (2013) and Keywood (2015), this study utilizes a database of purely domestic equity unit trusts listed on the Johannesburg Stock Exchange. Monthly performances of these South African domestic equity unit trusts are acquired and these figures are all-inclusive of re- invested dividends as alluded in the studies of Gill et al. (2010) and Korteweg (2010).
The study covers a 10-year period and uses monthly closing share prices from
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January 2005 to December 2014, which are converted into continuous compounded returns. As suggested in previous studies, e.g. (Collinet and Firer, 2003), the period under review should be as lengthy as possible for sufficient observations and a satisfactory amount of data points.
The beginning date of the study is chosen on the basis that the JSE introduced two important indices, the Value (J330) and the Growth (J331) style benchmarks in August 2004, hence the beginning of the year 2005 is viewed as a proper time to start analysing their performances. Most literature on style analysis documents studies are done for a period of 60 months, like the original style analysis study by Sharpe (1992). Hence, the 120 months used in this study is deemed to be a sufficient period for a thorough analysis.
For persistence to be observed, the period of observation should be broken into two equal parts, being the formation period (also called evaluation period) of the fund and then the holding period (also called ranking period) (Scher and Muller, 2005;
Cuthbertson and Nitzsche, 2013; Porter and Trifts, 2014). Therefore, the study utilizes 6 months, 1 year, 2 years and 3 years formation and holding periods to test for persistence of performance between the formation and holding periods as done in the studies of Collinet and Firer (2003) and also Thomas (2012). In selecting the funds, only unit trusts with a performance history of more than one year at the end of December 2014 are included in the sample. This allows the observation of at least a 6-month formation period and a 6 month holding period. It should be noted that not all the funds have the complete data for the entire 10-year evaluation period, since some of them only came into existence as late as 2009, while other funds were discontinued. These were also included to eliminate survivorship bias in our sample as much as possible.
In order to utilize the Returns Based Style Analysis approach, Sharpe (1992) original study advocates that 60 months is an adequate period for a proper examination. This study has gone a step further and utilized a longer period to thoroughly test the phenomenon of drift, performance and persistence. Hence, all of the funds in the study have at least 6 years of available data to test for persistence, using a 3-year formation- and a 3 year holding period. The databases used encompass all data, even for discontinued funds and fledgling funds, which are still relatively new and
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have incomplete data for the whole 10-year period. These funds were included in the study’s sample to eliminate survivorship bias as much as possible. Funds of funds were removed from the sample to avoid the issue of double counting and, similarly, index tracking funds were excluded, since their performances are highly correlated with benchmark indices (Blitz et al., 2012).
Due to the relative infancy of some of the JSE sector indices and the blurred demarcation between them, some stocks may be found to overlap between two or three different indices. This unclear distinction between indices is sometimes attributed to the characteristics of a stock changing over time, e.g. value stock changing into growth or a small cap stock growing into a large cap stock. Examples of such occurrences are Standard Bank and Anglo American shares, which are found in more than one style index (Bertolis and Hayes, 2014).
Thus, from these seven style indices, six unit trusts under each index are chosen to give us the sample of 42 funds for the study. The sample chosen for the study is highly representative, from a general equity style index perspective, on the JSE. This is because most of the unit trusts in South Africa have various holdings in their portfolios, for example, blended funds, global funds, fund of funds and bond funds, as fund managers attempt to diversify risk.
Table 3-1 below shows the full list of the unit trusts to be used for the study, their JSE codes and the respective sectors from which they were sampled. For simplicity of inputting data to the spreadsheets used for the analyses, these funds were categorised using the letters from A to F (the six funds in each category), since some of them have very long names. Hence Table 3-1 will be constantly referred to for the actual names of the funds. This approach of grouping funds according to their style orientations follows other studies like Bender et al. (2013) and Cronqvist et al.
(2015).
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TABLE 3-1: List of full names of unit trusts to be used
Source: Author’s own. Constructed based on the selected unit trusts used for this study.