The sources of South African equity fund performance

Lester, N. ; Corubolo, D. (2015)

CITATION: Lester, N. & Corubolo, D. 2015. The sources of South African equity fund performance. In Actuarial Society 2015 Convention, 17–18 November 2015, Sandton Convention Centre, Sandton, Johannesburg.

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Conference Paper

ABSTRACT This paper aims to quantify some of the sources of South African equity fund performance. In particular, it aims to provide insights into the relative importance of sector allocation and stock selection as factors to consider in constructing actively managed portfolios. This analysis is done considering the constraint of a concentrated South African market environment. To partially account for this constraint, an assumption of three equity “super sectors”—financial, industrial and resources—is made. To quantify the sources of equity fund returns, a geometric attribution analysis was conducted on the returns of seven South African equity unit trust funds. An attribution decomposition of the seven funds’ tracking error and volatility was also performed to enable a risk adjustment to be made. The results of these attribution analyses indicated that it is possible to source excess returns through both selection and allocation efforts. Furthermore, the attribution analysis also revealed different levels of success at earning excess returns per sector. South African equity fund managers also demonstrated skill in reducing risk over the sample period, as the majority of the managers were able to reduce portfolio risk relative to the benchmark portfolio, but still source excess returns. It is, however, important to note that these results are influenced by market structure and manager practices.

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