Do mutual fund managers beat the market? Evidence from the Johannesburg stock exchange

Thesis submitted in Fulfilment of the requirements for the Degree of Master of Management in Finance and Investment at Wits Business School Faculty of Commerce, Law and Management University of the Witwatersrand 27 February 2017South Africa has been mirroring the global increase in investments made in mutual funds. This rise in assets managed by mutual fund managers has been coupled with rising curiosity among investors, as to whether fund managers are able to outperform the market. The rising curiosity of investors has been translated into a wide debate in literature documented since the early days of Treynor (1965), Sharpe (1966) and Jensen (1968), and most recently Bradfield and Swartz (2001) and Nana (2012). This study adds to the existing literature by using top ten performing equity unit trusts in South Africa. In particular, three questions are asked; (a) are there any fund characteristics that influence fund performance? (b) is there evidence of persistence in performance of funds? (c) do mutual fund managers beat the market? Regression analysis and Jensen’s CAPM model are employed to answer the three questions. The results of this study are therefore three fold. Firstly, it is found that fund risk, find size and fund age have no effect on mutual fund performance. Secondly, evidence of weak short-term persistence is found, since for all of the funds under investigation persistence does not happen regularly. Lastly, and more importantly, the top ten performing equity unit trusts over the decade ranging from January 2006 to December 2015 are able to outperform the market, as represented by the Johannesburg Stock Exchange All Share Index (JSE ALSI). These unit trusts produce superior or abnormal returns which are approximately 0.47% more than that produced by the market. We argue that such marginal outperformance might just be a mere representation of superior skills possessed by the selected fund managers and cannot be extended to the entire South African unit trust industry.MT201

Performance and performance persistance in South African General Equity unit trusts, a test of South African market efficiency

Includes bibliographical references (leaves 65-70).Over the last four decades academics have been concerned with both the factors effecting individual unit trust performance and whether this performance persists going forward. Whilst persistence in performance is of interest to unit trust investors from a practical perspective, it is also of interest to academics due to its inherent implications for the Efficient Markets Hypothesis (EMH). This study employs South African data based on a sample of 35 General Equity unit trusts over the six year period 1st January 1998 to 31 st December 2003. This study discusses both the EMH as well as factors that influence unit trust management style and associated performance. Using Jensen's alpha in both a Capital Asset Pricing Model (CAPM) framework and a 2-Factor Arbitrage Pricing Theory (APT) model, unconditional evidence is presented on the performance of General Equity unit trusts

Style investing effects on the persistence and performance of South African unit trusts.

Master of Commerce in Finance. University of KwaZulu-Natal. Durban, 2016.Style investing is considered the holy grail of investment finance and portfolio management, as it avails numerous options to the portfolio manager to simply and persistently beat the market. This research investigates the impact of style investing on the performance of South African unit trusts, from the view of funds which remain true to their investment styles (consistent funds) against funds which drift their styles (drifters) over the period 2005 to 2014. The study examines the extent to which South African unit trusts drift from, or maintain, the styles stated in their mandates, and also explores which set of unit trusts deliver superior and persistent returns between the style consistent funds and the drifters. The Returns Based Style Analysis (RBSA) model is employed on a sample of 42 South African unit trusts, from seven of the most significant style-based strategies (style indices) on the JSE, to establish the true styles of the funds, that is, whether the funds are correctly classified as stated in their titles. The extent of drift amongst the unit trusts is then ascertained using the Style Drift Score (SDS) method, which derives its existence from the RBSA model. The Style Drift Score is calculated as the square root of the sum of the variances of style weights obtained from the RBSA model. Subsequently, the risk adjusted performances of the funds are evaluated using three models, which are, the Capital Asset Pricing Model (CAPM), Fama-French 3 factor (FF3F) model and also the Sharpe ratio, whereas market timing ability is examined using the Treynor-Mazuy model. Furthermore, performance persistence of the funds is tested using contingency tables over 6 months, one year, two years and three years holding periods and, lastly, the chi-square test is employed to test predictability of future performances based on past performances. The study finds that the styles of the funds are, on average, correctly classified. With respect to the extent of drift, 62 percent of the funds are found to remain true to their styles (consistent), whereas 38 percent of the funds drift their styles. In evaluating performance, the consistent funds are found to outperform the drifters on two of the three models used (namely, the CAPM and FF3F). However, neither the consistent funds, nor the drifters, are able to successfully time the markets. Additionally, the drifters exhibit a higher relative performance persistence, albeit a negative one (that is, loser-loser persistence), over the short term period (6 months) which diminishes considerably as the holding period lengthens to one year. Persistence disappears completely at two years and three years holding periods. The study does not find any conclusive evidence of the predictability of future returns based on past performances. It is observed from the results that drift causes an undesirable utility loss to investors as the drifters underperform the consistent funds and also exhibit negative performance persistence. This research finds similar results to the majority of studies done in style investing and concurs with most literature on the South African market. Therefore, the results have implications to both policy makers and the investment industry. Policy makers may have to regulate the unit trust industry more vigilantly to identify drift and also propose regulations to the investment industry for periodic disclosures of funds’ stock holdings in order to curb drift in those funds which claim to be following consistent investment strategies yet stray from their mandates. Likewise, plan sponsors may have to liaise more frequently with portfolio managers to swiftly root out drift and ensure that portfolio managers meet the pre-set investment targets. Regulators of the unit trust industry may also need to advise investors to be more careful, when investing in drifting funds, since drifting is also an investment strategy that is considered profitable under variable economic cycles in the investment industry

Persistence of alpha in South African general equity unit trusts

The ability of active managers to produce consistent benchmark-beating returns is a topic that has been widely debated with increasing interest over the past decade. The majority of previous studies in which persistence of performance is tested consider a fund's ability to maintain its relative ranking over various time periods amongst its peer group. This study adds to the literature by considering the persistence of alpha, where alpha is defined as the out- or under-performance of a market-related benchmark. Persistence of alpha for South African general equity unit trusts is tested over six-month, one-, two- and three-year formation and holding periods using a similar methodology to that of Collinet & Firer (2003). Alpha is found to persist most prominently in tests of one-year periods, with other period lengths yielding less significant results. Additionally, using the methodology of Malkiel (1995), certain funds which have demonstrated statistically significant persistent alpha over various periods are identified

Performance evaluation of actively managed mutual funds

Motivated by the growing attraction of the mutual fund industry worldwide, this research seeks to explore the economic benefits contributed by the South African equity unit trust managers over the period from 6 January 2002 to 2 September 2012. The performance statistics of selected equity unit trusts are examined for the overall examination period and two sub-periods: 6 January 2002 to 6 May 2007 and 7 May 2007 to 2 September 2012. The first sub-period captures the bullish performance of the unit trusts before the 2008 global financial crisis. The second sub-period captures the global financial crisis and the European debt crisis before the European Central Bank (ECB) subsequently implemented the outright monetary transactions (OMT) to curb the yields in Eurozone. The risk-adjusted performance measures employed by this study include the Sharpe ratio, M-squared, Treynor measure and Jensen's alpha. Regardless of the different applications of risk-return parameters employed to evaluate fund performance, the results reveal that, on average, most of the equity unit trust managers in South Africa do not outperform the market proxy on a consistent basis. The majority of the unit trust managers show good performance before the crisis, with subsequent inferiority in performance in turbulent times

South African General Equity Unit Trust Funds:Fund Performance and Characteristics

We evaluate performance of general equity unit trust funds in South Africa during the period 2010 to 2017 and identify, if any, characteristics of these unit trust funds that are drivers of this performance. Performance is measured using Jensen’s Alpha with a sample that has not suffered from the full effects of survivorship bias as many other South African research studies have in past years. We used a Weighted Least Squares regression model, after weighting each funds Jensen’s alpha, to determine what characteristics impact the performance of unit trust funds. Our results showed that Beta, Fund Age, Percentage of Top 10 Holdings and Management Fees were all significant in explaining unit trust performance. We found that in the South African general equity unit trust space, funds which take higher risk relative to the market will experience higher levels of performance, younger funds tended to outperform their older counterparts and funds that charge lower management fees will outperform those with higher fees. Funds that on average throughout the period held less Top 10 JSE listed equity stocks tended to outperform those having a larger Top 10 holding exposure. We have thus been able to uncover material performance characteristics that differentiate South African unit trust performance. We have also provided meaningful parameters for investors and investment managers when structuring diversified portfolios, allowing them to improve their ability to provide outperformance consistently over time

The comparative performance of active and passive equity-only funds in South Africa

Thesis (M.M. (Finance & Investment)--University of the Witwatersrand, Faculty of Commerce, Law and Management, Wits Business School, 2017The world has and is still witnessing a tremendous growth in various categories of mutual funds. Active fund managers continue to grow globally with many asking for exorbitant fees for their research and investment services. Equally, passive funds in the form of Exchange Traded Funds (ETF's) and index trackers have also continued to grow. This massive growth does not preclude funds domiciled in South Africa. Passive investments have grown by about 51 percent a year in the last 10 years in South Africa. As at 2016, there are over 3000 mutual funds domiciled in South Africa. Amidst these growing funds is the ongoing debate relating to the question of which fund management style yields the best outcome. The global debate relating to passive versus active fund management has raged for decades with no clear winner. The extant literature provides mixed evidence on the competitive advantage to either investment strategies. Surprisingly, the evidence for South Africa remains scanty, with a handful of authors addressing the issue. This study therefore, sets out to examine the comparative performance of all equity-only active mutual and passive funds domiciled in South Africa. In addition, it analyses the performance persistence of active and passive funds in different business cycles. A major contribution of this study is that it examines, for the first time, the applicability of the Fama-French five factor model on South African mutual funds. It also employs a battery of econometric methods to address the issue at hand. Relying on data from 2003 to 2016, the study presents evidence that both active and passively managed mutual funds do not earn abnormal returns but rather underperform the benchmark. However, the active portfolio performs relatively better than the passive portfolio, although both underperform the market. The study also documents evidence of time-varying performance; both active and passive funds record their worst underperformance during periods of financial crisis. The study also shows that passive portfolios tend to track the market performance more than active portfolios and that both fund categories tend to be sensitive to global market movements, suggesting that global factors matter for the riskiness of these funds. Finally, it is shown that in terms of driving factors, both active and passive fund managers generally give more preference to small cap returns than large cap returns. In addition, they are more growth oriented, as indicated by the negative coefficients for the HML factor.MT201

The Persistence Of Malaysian Unit Trusts Performance By Using Odds Ratio Analysis

This study seeks to analyze the persistency of Malaysian unit trusts for the long term periods. The period measured was from January 1995 to December 2004. The main focus is to explore whether there is persistency of performance either positive (hot hand or cold hand) or negative (reversed) persistence among Malaysian unit trusts. Indeed, the persistency performance also will be measured by different benchmarks with various intervals of time

Do Managers Of Global Equity Funds Outperform Their Respective Style Benchmarks? Evidence From South Africa

The results of our prior research on internationally-domiciled global equity funds suggest that active managers do not provide economic benefits, in addition to their underlying investment style benchmarks. This finding implies that the performances of global equity funds are derived mainly from the broad investment styles followed by the active managers rather than the stock-picking activities of the managers. We replicate our earlier research to investigate the performances of the six well-established global equity funds in the South African unit trust industry. Our results indicate that four out of the six South African fund managers under examination substantially underperform their passively-replicated style benchmarks. Our prior study results indicate that there is no significant difference between the performances of the internationally-domiciled global equity funds and their respective style benchmarks. By contrast, the stock-picking decisions of the South African fund managers are found to destroy value created by their respective style benchmarks in this study. Our findings suggest that investors who wish to follow particular investment styles would be better off by investing in exchange traded funds (ETF) that passively track the performances of their mandated investment styles in the global equity market with minimal costs