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Portfolio Opportunity Distributions (PODs) for the South African market : based on regulation requirements

Nortje, Hester Maria (2014-04)

Thesis (MComm)--Stellenbosch University, 2014.


ENGLISH ABSTRACT: In this study Portfolio Opportunity Distributions (PODs) is applied as an alternative performance evaluation method. Traditionally, Broad-Market Indices or peer group comparisons are used to perform performance evaluation. These methods however have various biases and other problems related to its use. These biases and problems include composition bias, classification bias, concentration, etc. R.J. Surz (1994) introduced PODs in order to eliminate some of these problems. Each fund has its own opportunity set based on its style mandate and constraints. The style mandate of the fund is determined by calculating the fund’s exposure to the nine Surz Style Indices through the use of Returns-Based Style Analysis (RBSA). The indices are created based on the style proposed by R.J. Surz (1994). Some adjustments were made to incorporate the unique nature of the South African equity market. The combination of the fund’s exposures to the indices best explains the return that the fund generated. In this paper the fund’s constraints are based on the regulation requirements imposed on the funds in South Africa by the Collective Investment Schemes Control Act No. 45 of 2002 (CISCA). Thousands of random portfolios are then generated based on the fund’s opportunity set. The return and risk of the simulated portfolios represent the possible investment outcomes that the manager could have achieved given its opportunity set. Together the return and risk of the simulated portfolios represent a range of possible outcomes against which the performance of the fund is compared. It is also possible to determine the skill of the manager since it can be concluded that a manager who consistently outperforms most of the simulated portfolios shows skill in selecting shares to be included in the portfolio and assigning the correct weights to these shares. The South African Rand depreciated quite a bit during the period under evaluation and therefore funds invested large portions of their assets in foreign investments. These investments mostly yielded very high or very low returns compared to the returns available in the domestic equity market which impacted the application of PODs. Although the PODs methodology shows great potential, it is impossible to conclude with certainty whether the PODs methodology is superior to the traditional methods based on the current data.

AFRIKAANSE OPSOMMING: In hierdie studie word Portefeulje Geleentheids Verdelings (“PODs”) bekendgestel as ‘n alternatiewe manier om die obrengste van bestuurders te evalueer. Gewoonlik word indekse en die vergelyking van die fonds met soortgelyke fondse gebruik om fondse te evalueer. Die metodes het egter verskeie probleme wat met die gebruik daarvan verband hou. Die probleme sluit onder andere in: die samestelling en klassifikasie van soortgelyke fondse, die konsentrasie in die mark, ens. R.J. Surz (1994) het dus Portefeulje Geleentheids Verdelings (“PODs”) bekendgestel in ‘n poging om sommige van die probeleme te elimineer. Elke fonds het sy eie unieke geleentheids versameling wat gebaseer is op die fonds se styl en enige beperkings wat op die fonds van toepassing is. Die fonds se styl word bepaal deur die fonds se blootstelling aan die nege Surz Styl Indekse te meet met behulp van opbrengs-gebaseerde styl analise (“RBSA”). Die indekse is geskep gebaseer op die metode wat deur R.J. Surz (1994) voorgestel is. Daar is egter aanpassings gemaak om die unieke aard van die Suid-Afrikaanse aandele mark in ag te neem. Die kombinasie van die fonds se blootstelling aan die indekse verduidelik waar die fonds se opbrengs vandaan kom. In die navorsingstuk is die beperkings wat van toepassing is op die fonds afkomstig uit die regulasie vereistes wat deur die “Collective Investment Schemes Control Act No. 45 of 2002 (CISCA)” in Suid-Afrika op fondse van toepassing is. Duisende ewekansige portefeuljes word dan gegenereer gebaseer op die fonds se unieke groep aandele waarin die fonds kan belê. Die opbrengs en risiko van die gesimuleerde portefeuljes verteenwoordig al die moontlike beleggings uitkomste wat die fonds bestuurder kon gegenereer het gegewe die fonds se unieke groep aandele waarin dit kon belê. Die opbrengs en risiko van al die gesimuleerde portefeuljes skep saam ‘n verdeling van moontlike beleggings uitkomste waarteen die opbrengs en risiko van die fonds vergelyk word. Hierdie proses maak dit moontlik om die fonds bestuurder se vermoë om beter as meeste van die gesimuleerde portefeuljes te presteer te bepaal. Die aanname kan gemaak word dat ‘n bestuurder wat konsekwent oor tyd beter as meeste van die gesimuleerde portefeuljes presteer oor die vermoë beskik om die regte aandele te kies om in die portefeulje in te sluit en ook die regte gewigte aan die aandele toe te ken. Die Suid-Afrikaanse Rand het heelwat gedepresieer tydens die evaluasie periode en daarom het fondse groot porsies van hul beleggings oorsee belê. Die beleggings het dus of heelwat groter of heelwat kleiner opbrengste gehad in vergelyking met die opbrengste beskikbaar in die plaaslike aandelemark en dit het die toepassing van PODs beïnvloed. PODs toon baie potential, maar dit is egter onmoontlik om met die huidige data stel vas te stel of dit ‘n beter metode is.

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