In performance evaluation, consistent funds were found to outperform drifters in two of the three models used (namely CAPM and FF3F). The study finds no conclusive evidence of predictability of future returns based on past performance.
- Background
- The Mutual Fund Industry
- Problem Statement
- Research Objectives
- Research Questions
- Significance of the research
- Scope of the study
- Limitations of the study
- Structure of the research
- Chapter summary
Which of the two alternative fund management approaches (style consistent and style shifting) produces sustained results relative to the benchmark index. The study intends to examine South African unit trusts' performance from the perspective of the Yield Based Style Analysis (RBSA) investment technique created by Sharpe (1992).
Theoretical Framework
Gurley and Shaw (1954) suggest that, as per capita income rises, bilateral borrowing and lending becomes more important. 2011) observes that, in the view of Gurley and Shaw, rising per capita income and increasing financial depth reinforce each other.
Style Investing
- Value Style Investing
- Growth Style Investing
- Market Oriented Investing
- Size Style Investing
- Momentum Style of Investing
In numerous studies of the mutual fund industry, researchers have confirmed that anomalies, such as the value factor and the size factor, are indeed valuable descriptors of style (Jame and Tong, 2014). Growth investors, on the other hand, emphasize the growth outlook of the underlying investment, and thus make use of stable earnings growth and momentum strategies (Cronqvist et al., 2015).
Returns Based Style Analysis
Asset class categories are derived by evaluating the characteristics of the assets in question. The RBSA model measures the fund's exposure to changes in factor returns.
Style Drift and Style Consistency
From their discovery that managers largely fail to time their styles, Chan et al. 2002) recommend that style drift is an unavoidable fund characteristic that requires monitoring. Chen and Wermers (2005) and Van Gelderen and Huij (2014) support the idea of increasing returns based on the style operation perspective of investment.
Traditional Measures of Portfolio Performance
- The Capital Asset Pricing Model (CAPM)
- Jensen’s alpha
- The Sharpe Ratio
- The Treynor Ratio
- The Arbitrage Pricing Theory (APT)
- The Fama-French 3 Factor Model
- The Carhart 4 Factor Model
- The Fama-French 5 Factor Model
𝑅𝑀𝑡 = the market's return measured by the relevant market index 𝑅𝑓𝑡 = the risk-free rate. 𝑅𝑀𝑡 = the market's return measured by the relevant market index 𝛽2𝑖 = the sensitivity of the fund's return to the size factor.
Market Timing
- The Treynor-Mazuy Model
- Henrikson - Merton Model
The two most common market timing tests used in the literature are those of Treynor and Mazuya (1966) and Henrikson and Merton (1981). 2011) argues that if the market time coefficient is strongly positive, then it represents a convex, upward-sloping regression line and.
Style Analysis and Stock Selection Ability
- Strengths of Style Analysis
- Weaknesses of Style Analysis
In other words, Henrikson and Merton (1981) advocate that the beta of a portfolio has only 2 values. Style analysis is based on the assumption that there is a linear relationship in the investment strategy of the analyzed fund.
Unit Trusts Performance
2008) and Wahal and Yavuz (2013) claim that, although it is often the case that funds follow non-linear strategies, this usually creates misclassifications in the results of the analysis. Lae (2012) analyzed unit trust performance in the Malaysian market using the net asset values of 65 unit trusts, the 91-day Malaysian treasury bill for risk-free proxy.
Evidence of Persistence
Akinjolire and Smit (2003) analyzed the performance of South African mutual funds and their strategies in a changing economic environment from 1989 to 2002. Thomas (2012) improves on an earlier study by Collinet and Firer (2003) that investigated the characteristics of performance persistence among South African general equity mutual funds.
Survivorship Bias
Chapter Summary
Introduction
Unit Trust Data and Sample Selection
Therefore, all funds in the study have at least 6 years of data available for persistence testing using a 3-year formation period and a 3-year holding period. The sample selected for the study is highly representative in terms of the general share index on the JSE.
Share Return Data
𝑃𝑡−1 = NAV price at the end of the previous month 𝑑𝑡 = Distribution per unit paid during the month 𝑃𝑡𝑟 = Price at which the distribution was reinvested. These monthly returns are then converted into rolling returns by taking the log of the value related, i.e. the natural log of (1+𝑅𝑡).
Benchmark Return Data
- Description of the Selected JSE Indices
- Risk Free Rate
The seven published JSE index data are compiled over a 10-year period from 1 January 2005 to 31 December 2014, by McGregor BFA, to be used as sector proxies for the market benchmark when evaluating the performances of various unit trusts . As previously mentioned, this is based on the fact that the JSE introduced two important style indices, the value (J330) and growth (J331) style benchmarks in August 2004, so early 2005 is seen as the right time. to start. analyzing their performances.
Portfolio Data
The selected indices will be used to represent large caps, small caps, value stocks, growth stocks, industrial stocks, financial stocks and also resources (Gladysek and Chipeta, 2012). Similarly, for the value factor, it is defined as the difference between high book-to-market stocks and low book-to-market stocks. High book-to-market stocks are called value stocks and their index is the value index (J330).
Stocks with a low book-to-market are called growth stocks and their index is the growth index (J331).
Methodology
- Establishing Fund Style
- Returns Based Style Analysis (RBSA) - The Model and its Associated Constraints
- Quantitative Analysis of the RBSA Factor Model
- Selected Style Factors for the RBSA Model
- Determining Style Drift
- The R 2 Statistic
- Tracking Error
- Style Drift Score
- Performance Measurement Models
- The Capital Asset Pricing Model (CAPM)
- Fama - French 3 Factor Model (FF3F)
- Sharpe ratio
- Market Timing: Treynor- Mazuy model (TM model)
- Persistence of Performance
- Contingency Table
- Cross Product Ratio
- Chi-Squared Test
𝑅𝑖𝑡 = return of the fund above the risk-free rate 𝛼𝑖 = abnormal return of the stock. 𝑅𝑖𝑡 = return of fund 𝑖 at time t above the risk-free rate 𝛼𝑖 = abnormal return of fund. 𝑅𝑀𝑡 = market return measured by the relevant JSE market index 𝑅𝑓𝑡 = risk free rate.
This process remained an endeavor to measure the funds' performances, which was part of objective two of the study.
Chapter Summary
A positive, statistically significant chi-squared statistic supports the hypothesis that past abnormal performance can be used to predict future abnormal performance. Forecasting future performance is of interest to both portfolio managers and investors, as they predict the future movement of the market in order to earn positive returns, so the result from the chi-square statistic is of great importance. It should be noted that the chi-square statistic is based on the consistency of performance and thus the chi-square test fulfills the last objective of the study.
The chapter concludes with details on how performance persistence is measured using the contingency table approach and also highlights the use of the chi-square measure to predict future returns based on past performance.
Introduction
- Styles of the Funds (RBSA model)
- Style Factors Selected
- Establishing Styles of the Funds
- Style Analysis Summary
- Results of Fund Drift
- Fund Drift Summary
Justifications of the style weights presented in the tables are detailed in the following analyses. The suspicion that the fund is a drifter is confirmed in the next section, where the degree of drift of the funds is tested. The style charts show that some funds in this sector have a high asset allocation.
For example, 25 percent of the variation in Stanlib Small Cap Fund's return is explained by asset allocation.
Performances of the Funds
- Capital Asset Pricing Model (CAPM) Results
- Fama- French 3 Factor (FF3F) Model Results
- Sharpe Ratio Results
- Market Timing: Treynor-Mazuy Model Results
As expected, none of the funds under the Resource Style factor were able to outperform the market. By analyzing the results from the consistent funds in Table 4-25, it appears that only 19 percent of the funds are able to outperform both the style market proxies and the JSE ALSI benchmark. It has been observed that 25 percent of the funds are able to outperform both their stock market benchmark and the JSE ALSI benchmark.
This performance is better than that of the consistent funds, where only 19 percent of funds can do this.
Persistence of Performance
Investec Growth Fund Klasse A OMKERING Stanlib Resources Fund R Klasse OMKERING Nedgroup Investments Growth Fund A OMKERING Investec Emerging Companies R PERSISTENCE*. Sanlam Industrial Fund A REVERSAL Investec Value Fund Klasse R REVERSAL Stanlib Industrial Fund A Klasse PERSISTENCE* Momentum Value Fund A PERSISTENCE*. Old Mutual Mid & Small-Cap Fund R REVERSAL Stanlib Value Fund A Class REVERSAL Nedgroup Investments Value Fund A REVERSAL.
Momentum Financials Fund A RETURN Stanlib Industrial Fund R Class RETURN Nedgroup Investments Financials Fund A RETURN ABSA Large Cap Fund B Class RETURN.
Summary of Persistence
The percentages shown in the tables give the contribution of the winner-winner and loser-loser categories to the chi-square statistic. However, the overall persistence of consistent funds appears to be lower than that of drivers at 34.62 percent, compared to the 56.25 percent of drivers. The differences in results can be attributed to the size of the data set used, different methodologies used in testing for persistence and in the risk adjustment used in this study.
In summary, it appears that results for studies of performance stability over longer periods of time are very sensitive to the start and end dates selected in the test being conducted and, more importantly, the sample size and methodologies used.
Chapter Summary
The predictability of future returns based on past performance was also evaluated using the chi-square test and the study did not find conclusive evidence of its ability to predict future returns as all chi-square statistics were insignificant. The next chapter will provide an overall conclusion to the study as it will conclude the study with the summary of the findings, recommendations and also the limitations of the study.
Introduction
Summary of Findings
62 percent of funds in the study's sample were found to be consistent, while 38 percent of funds showed volatility. The study further explored its second objective, which was to analyze the performance of the two categories mentioned above, against each other, using three methods, namely the Capital Asset Pricing Model (CAPM), the Fama-French 3 Factor Model (FF3F ) and the Sharpe ratio. However, using the Sharpe ratio, negligible funds have also been found to outperform consistent funds, which is contrary to some literature.
The Sharpe ratio is one of the most widely used performance measures in the asset management industry, therefore, one would expect stable funds to triumph over drifters when using it.
Conclusion
Literature has mixed results regarding the market timing abilities of SA funds, with some studies suggesting that it is possible for fund managers to time the JSE, for example Hsieh and Hodnett (2011), while others such as Cubbin et al. When style benchmarks were used compared to the general market benchmark (JSE ALSI), the performance models were found to be better at capturing more variation in the funds' return patterns. In terms of market timing ability, since none of the funds were able to time the markets, the study can thus infer that South African fund managers do not possess the phenomenon of 'hot hands'.
Furthermore, in general, active fund management in the universe of South African unit trusts does not appear to outperform the markets, as most funds outperformed the markets in all three performance measures used.
Recommendations
Limitations of the Study
Survivor bias and improper measurement: how the mutual fund industry inflates actively managed fund performance. When all risk-adjusted performance measures are the same: in honor of the Sharpe ratio. Tests of the overreaction hypothesis and the timing of mean reversions on the JSE Securities Exchange (JSE): The case of South Africa.
Mutual fund performance: An empirical analysis of talent, style, transaction costs, and stock selection expenses.
