Department of Statistics and Actuarial Science

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Browsing Department of Statistics and Actuarial Science by browse.metadata.advisor "Conradie, WJ"

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    Using valuation based on fundamental analysis to design an enhanced index based on the JSE Top 40 Index
    (Stellenbosch : Stellenbosch University, 2023-12) Gounder, Nathan David; Conradie, WJ; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Statistics and Actuarial Science.
    ENGLISH SUMMARY: The idea of the index fund originated in the 1970s and while it was not popular back then, its popularity rose and today many investors have placed their trust in this investment product. The returns, mostly due to low fees, are the main attraction for investors to this product. Active managers have since tried to come up with ways to outperform these funds after fees with little success. Enhanced index funds were then designed to outperform their respective indices. The idea is to use active management methodologies applied to an index to outperform the index. This assignment designs an enhanced index based on intrinsic valuation to adjust the market weights of the JSE Top 40 to outperform the index while maintaining a low tracking error. Valuation is based mainly on cash flows but its adjustment depends on what industry the company is in. The weights are adjusted iteratively by 0.5%, 1% and 2%. Overvalued companies were underweighted while undervalued companies were over-weighted resulting in a net effect of 0. The results from this showed that before fees, the JSE Top 40 and the Satrix Top 40 fund were beaten at the 1% and 2% adjustment levels while after fees with reinvestment, the Enhanced index outperformed the JSE Top 40 index at all adjustment levels but only outperformed the Satrix Top 40 fund at the 2% adjustment level. After fees and without reinvestment, the Enhanced index outperformed the Satrix Top 40 fund at the 1% and 2%% adjustment levels but failed to outperform the JSE Top 40 at all levels.