The application and testing of smart beta strategies in the South African market

Viljoen, Jacobus (2018-03)

Thesis (MCom)--Stellenbosch University, 2018.

Thesis

ENGLISH SUMMARY: Smart Beta portfolios have recently prompted great interest both from academic researchers and market practitioners. Investors are attracted by the performances produced by these portfolios compared to the traditional market capitalisation weighted indices. The question that this thesis attempts to answer is: Do smart beta portfolios outperform the traditional cap-weighted indices in the South African market? According to BlackRock’s smart beta guide (Ang, 2015), the smart beta strategies aim to capture stock return drivers through rules-based, transparent strategies. They are generally long only and usually implemented within an asset class, in the case of this assignment, only equity. Smart beta is thus an investment strategy that positions itself between active and passive investing. Smart beta strategies are active in the sense that they invest in factors that drive return to improve risk-adjusted returns. In the same way, these strategies are closely related to passive strategies in that they are transparent, systematic and rules based. In this assignent five different fundamental factor portfolios (value, quality, momentum, volatility and a combination of the four, called multi-factor) were created based on the smart beta methodology. The factors that were used are well researched in the market and have been proven to provide investors with excess return over the market. Firstly, stock selection was done using two different techniques (time series comparison and cross-sectional comparison). The best stocks were selected based on their fundamental factor characteristics. Secondly, two different smart beta weighting strategies as well as a market-cap weighting strategy were applied to the selected stocks in order to create the various portfolios. The risk and return characteristics of the created portfolios were compared to those of the two benchmarks (JSE All Share Index and the JSE Shareholder Weighted All Share Index). The smart beta portfolios created in this thesis outperformed the benchmarks as well as the market-cap weighted portfolios. Lastly, the estimation of the macroeconomic exposure of the smart beta portfolios using a methodology outlined in a Citi Research paper is presented (Montagu, Krause, Burgess, Jalan, Murray, Chew and Yusuf., 2015).

AFRIKAANSE OPSOMMING: Akademiese navorsers en beleggers het in die laaste aantal jare al hoe meer in Smart Beta portefeuljes begin belang stel. Beleggers is veral beïndruk met die opbrengste wat die portefeuljes asook indekse relatief tot die bestaande markkapitalisasie geweegde indekse gelewer het. Die werkstuk probeer dus die vraag beantwoord: Gaan die smart beta portefeuljes die tradisionele markkapitalisasie geweegde indekse uitpresteer in die Suid-Afrikaanse mark? Volgens BlackRock se smart beta gids (Ang, 2015) is die doel van die strategie om sodoende die faktore vas te vang wat die opbrengste van aandele dryf deur gebruik te maak van ‘n stel vaste reëls en ‘n deursigtige belegging strategie. Die smart beta portefeuljes laat oor die algemeen net die koop van aandele toe en fokus meestal op een bateklas. In die geval van hierdie werkstuk was daar gefokus op aandele. Die smart beta belegging strategie word gesien as ‘n kombinasie van aktiewe en passiewe beleggings strategieë. Dit word aktief bestuur deur in die faktore te belê wat obrengste dryf om sodoende die risiko-aangepaste opbrengs te verbeter van ‘n portefeulje. Hierdie strategieë word ook passief bestuur deurdat dit deursigtig, sistematies en op ‘n stel vaste reëls gebaseer is. In die werkstuk is daar vyf smart beta portefeuljes geskep wat elkeen gefokus het op ‘n spesifieke fundamentele faktor naamlik: waarde, kwaliteit, momentum, volatiliteit asook ‘n portefeulje wat gefokus het op die kombinasie van die vier faktore en benoem was, die “multi-factor” model. Die faktore wat ingesluit is in die tesis is al intensief nagevors in die mark en daar bestaan betekenisvolle resultate dat die faktore die mark kan uitpresteer. Aandele seleksie is die eerste stap in die proses en dit is toegepas deur middel van twee metodes (tydreeks vergelyking asook wat genoem was “cross-sectional” vergelyking). Die beste aandele was geselekteer gebaseer op die fundamentele faktor waarde wat gekoppel is aan ‘n aandeel. Die tweede stap was om gewigte toe te ken aan die geslekteerde aandele. Dit is gedoen deur middel van smart beta strategieë asook ‘n markkapitalisasie gewigstoedeling strategie. Die risiko en opbrengs eienskappe van die portefeuljes is vergelyk met die van die twee mark indekse naamlik die JSE Alle Aandele Indeks asook die JSE Aandeelhouer Geweegde Alle Aandele Indeks. Die smart beta portefueljes wat geskep is in die tesis het die twee mark indekse uitpresteer asook die markkapitalisasie geweegde portefeuljes. Laastens was die blootstelling wat die smart beta portefeuljes gehad het aan die makro-ekonomiese faktore beraam deur gebruik te maak van ‘n metodologie omskryf deur Montagu, Krause, Burgess, Jalan, Murray, Chew en Yusuf. (2015).

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/103749
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