OpenUCT :: Browsing by Subject "Financial and Risk Management"

Browsing by Subject "Financial and Risk Management"

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Open Access
Analysis of South African listed real estate to serve as an inflation hedge versus other asset classes
(2015) Erasmus, Warren; Correia, Carlos
Purpose - The analysis of the South Africa property sector to provide an effective inflation hedge has not been researched to the same extent as other more developed countries. In addition, the South African property sector has been excluded from international studies owing to its underdevelopment and inconsistent legislative environment. However, post 2013 the new SA REIT legislation was promulgated putting it on par with its international counterparts. In addition from 2012-2013 the market capitalisation of the sector doubled. The study reviews inflation's relationship with direct and indirect property, and the study compares this relationship to other asset classes available to investors. It further reviews the difference between inflation hedging versus inflation protection, using different measures of inflation hedging and also reviews the various component parts of inflation being expected versus unexpected inflation. Design/methodology/approach - The methodology in this study is adopted from the extensive research previously applied to other more developed markets. Additionally, technical and fundamental analysis of returns, correlations, risks and returns were applied.
Open Access
An analysis of why SAPPI Limited had to issue foreign denominated debt
(2016) Weimann, Dylan; Holman, Glen
SAPPI Limited ("SAPPI") is a company that was established in South Africa in the 1930's and has grown into a global player in the paper and pulp industry, as well as the chemical cellulose industry. Historical financing decisions made in the growth phases of the company's life cycle left it with the need to refinance debt obligations payable in the early 2010's. In order to meet these obligations, four callable bonds with high coupon rates denominated in Euro and US Dollar were issued in 2011 and 2012 below investment grade. This study examines the cost at which these high yield bonds were issued by SAPPI and discusses the potential reasoning behind the decisions made by SAPPI in the process to obtain further financing. Financing solutions within the South African market are discussed with the conclusion that the South African listed high yield corporate bond market was not adequate for SAPPI, given its credit rating being below investment grade and the value of funding required. In addition, SAPPI's exposure to foreign currencies through global operations made the Euro and US Dollar denominated bond issues favourable to the business. To illustrate the cost of the bonds issued in both Euro and US Dollar, the second part of this study consists of an analysis of the option‐adjusted spreads at which these bonds were issued. Our analysis involved taking into account the probability of the call provisions being exercised by SAPPI at the date of issue through a detailed application of the option‐adjusted spread methodology and the use of a recombining binomial lattice. Through a quantitative example of the process followed and a discussion of the spreads determined, we indicate the true cost at which finance was obtained by SAPPI for each bond issued. A brief discussion on the hedging decisions taken by SAPPI management on the issuance of the debt has also been included. Furthermore, the retrospective performance of the foreign exchange hedging decisions made have been assessed through movements in global financial markets from the time hedging decisions were enacted up until 30 September 2015.
Open Access
Change in corporate debt levels in South Africa from 1994 to 2016
(2018) Slabbert, George Raymond; Holman, Glen
This paper aims to investigate the change in corporate debt levels in South Africa from 1994 to 2016 as well as analyse certain factors that play a role in the decision making of corporates when it comes to the all important decision of capital structure. The study uses data from large capitalisation, retail and food producing firms listed on the Johannesburg Stock Exchange. Four different leverage measures are used to determine the change in capital structure over the period under review as well as six of the most common determinants of capital structure used in literature. The analysis shows that South African corporates have drastically increased their appetite for debt funding compared to equity funding over the last two decades. Large capitalisation stocks reflected the largest increase in the use of debt, whilst food producers showed the smallest yet still significant increase in debt. Analysis has also shown that firms have changed their maturity profile of their debt significantly since the 2008 financial crises. Results from the analysis on determinants varied with some determinants showing statistical significance.
Open Access
Change in Corporate Debt Levels in South Africa from 1994 to 2016
(2020) van der Westhuizen, Kyla; Holman, Glen
This paper investigated the change in corporate debt levels in South Africa from 1994 to 2016. Included is an analysis of factors that companies take into consideration when determining the company's capital structure. This study used data from companies, largely from the mining sector, within sectors listed on the Johannesburg Stock Exchange (JSE), including chemicals, general industries, oil and gas. Four different leverage measures were used to determine the change in capital structure for the period under review, as well as six of the most commonly used determinants of capital structure. A high-level interpretation of the results reflected the following; a slight but relatively consistent increase in the use of debt relative to equity over the period for both the total sample and the mining sector. An increase in the use of long- relative to short term debt was also found, as well as a convergence between the use of current and non-current liabilities. Results from the analysis of the capital structure determinants varied, with some showing statistical significance. Asset tangibility was positively correlated to debt, while profitability and growth had a negative relationship. The relationship between company size, tax and cost of debt and leverage was varied.
Open Access
Determinants of bank technical efficiency: A South African study
(2021) Abels, Jared; Chamisa, Edward
The purpose of this study is to investigate the determinants of technical efficiency, using data envelopment analysis and the Tobit regression model, of the six largest listed South African banks for the years 2008-2018. An input-oriented intermediary constant-return-to-scale approach was followed to determine technical efficiency scores. After technical efficiency scores were obtained, a binary data set was created by assigning a score of 1 to all observations that were regarded as technical efficient, whereas all observations that were regarded as technically inefficient were assigned a score of 0. Thereafter, a Tobit regression analysis was performed to test the following hypotheses: skimping hypothesis, diversification hypothesis, bad management hypothesis and the funding hypothesis. The results of the regression analysis show that the skimping, diversification, and bad management hypotheses were not relevant for the six largest South African banks over the period under review. Regression results pointed towards the funding hypothesis being applicable to the six largest listed banks over the review period. It can therefore be suggested that the banks under review were generally well managed with a keen focus on expense control and thorough underwriting. To ensure the efficiency of large listed banks, it is proposed that regulators continue to monitor large banks as evidence of the study suggests that as deposit bases grow, a deterioration in technical efficiency is experienced. Generally, the results of the study indicate that the six large listed banks are overall relatively efficient over the review period.
Open Access
Does Pairs trading work on the Johannesburg Stock Exchange?
(2015) Appelbaum, Matthew
In this study it was examined whether Pairs trading is a potentially profitable trading strategy on the Johannesburg Stock Exchange. Pairs trading is a quantitative based trading strategy, in which shares are paired up based on a historic price relationship and traded accordingly, in a contrarian manner, when they diverge from said historical relationship. The essence of Pairs trading is to take advantage of perceived market inefficiencies, which is a direct contradiction of the Efficient Markets Hypothesis (even in its weak form). This study tested Pairs trading on both an unrestricted (any two shares can be paired), as well as a sector-restricted (only pairs within the RESI and the FINDI sectors could be paired), sample of shares (the JSE Top80 - based on market capitalization). Furthermore, a number of different signals (which are based on standard deviations) to open and close pairs were tested, on both the unrestricted and sector-restricted samples. The aim of using different samples of shares, as well as different trading signals, was to determine whether or not different strategies could serve to bolster the performance of a Pairs trading strategy.
Open Access
Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction
(2018) Reddy, Desigan; Huang, Chun-Sung
Using a Principal Component Analysis (PCA) approach, we investigate the sovereign yield spread term structure of the BRICS economies against the U.S. We show that the term structure for these markets are primarily driven by three latent factors which can be classified as the spread level, slope and curvature factors. We further postulate that a country’s yield curve contains valuable information about its future economic state and as such the PCA derived spread factors, which are based on the differences between sovereign yield curves, encapsulates material macro-economic information between the countries. In light of this, we show that augmenting the traditional Uncovered Interest Rate Parity model (UIRP) with these factors improves the models predictive accuracy of exchange rate movements.
Open Access
The impact of rights issues announcements on share price performance in South Africa
(2016) Van Der Merwe, Hein; Toerien, Francois
This study investigates the effect that announcements of rights issues have on abnormal share price returns on the JSE over the period January 2009 to December 2014. This study will focus specifically on the equity element of the capital structure and the issuing of new equity in the form of rights issues. There have been a few studies done in this regard in the South African context but the prior papers have been conducted over significantly different time periods and data samples and there is therefore merit in combining all four approaches into a single study focused on one consistent data sample. Secondly, this study also investigates the impact the motivation for the rights issue as provided by the issuer, has on the share price returns of the issuers. Thirdly, this study investigates the effect of the "financial health" of the rights issuer, as measured in terms of the Altman Z-score, has on the abnormal returns of the share prices of the issuers. The final area of investigation is to test the ability of rights issuers on the JSE to time the market when performing rights issues.
Open Access
An initial analysis of African Mutual Fund Fees and expenses
(2015) Wright, Graysen Gordon; Holman, Glen
The core objective of this study is to compile an African Mutual Fund database with a focus on fees charged, expenses borne and fund sizes. Until now, no consolidated database of African Mutual Fund expenses exists. The ancillary goal of the paper is to arrange the dataset in order to perform basic statistical analysis; and to test for the existence or non-existence of a number of internationally established relationships between fund fees, expenses and other variables in an African context. The paper aims to establish both similarities and abnormalities relating to the efficiency of African Mutual Funds in comparison with their international counterparts. No prior work has been produced in the context of African Mutual Funds as the industry has been overlooked, until recently, due to the growing perception of Africa representing the final frontier for investors seeking abnormal returns. The fundamental data utilized in this research paper includes African Mutual Fund Total Expense Ratios, Net Asset Values (NAVs), and mean Total Expense Ratios (TERs) for international mutual funds with no particular geographical limitations. This paper achieves its objective of collating a comprehensive database of African Mutual Fund fees, expenses, size and other variables. Findings include weak evidence confirming the inverse relationship between the level of financial market development and mutual fund expense ratios, the inverse relationship between mean expense ratios per country and the strength of investor protection in the related country, and a positive relationship between fund family size and mean TERs - indicating the presence of scale economies in African Mutual Fund families. All such findings are in line with empirical evidence presented by international studies. Consistent with other exploratory research, the paper includes a number of unexpected findings and observations regarding the general disarray of corporate governance in the African Mutual Fund industry. A foundation for the research of African funds has been built, and is intended to serve as a platform for future research as African financial markets continue to develop.
Open Access
Investigating Nigeria's asset management corporation : a case study of a bad banking solution to banking crises
(2015) Ajewole, Oluseyi Joseph; De Jager, Phillip
This paper provides an assessment of Africa's first "bad bank", the Asset Management Corporation of Nigeria (AMCON) and its role in resolving non-performing loans (NPLs) in the aftermath of the 2008 financial crisis. It is a case study that primarily investigates the effectiveness of AMCON in addressing the banking crisis in Nigeria based on evidence from different sources ranging from economic indicators to media reports and newspaper interviews. The establishment of AMCON in 2010 helped to resolve the non-performing loans crisis in Nigerian banks, through a transparent removal of toxic assets and by providing the affected banks with a fresh start, while eliciting a minimal moral hazard effect as far as financial institutions were concerned . Other African countries such as Ghana are now considering adopting a similar "bad bank" solution. However, the AMCON solution has been at a considerable cost to the Nigerian taxpayers as AMCON has been running at a huge loss, partly funded by the taxpayer through the government. Data analysed in the study cover the period from 2008 to 2013. The analysis showed that the AMCON solution was successful as the balance - sheet sanitization effort helped to neutralize many of the banking sector 's n on - performing loans, and spurred improvements in the sector's aggregate loan book quality with in its first two years . As at December 2012, AMCON had purchased more than 95% of the banking sector's NPLs, leaving the industry's NPLs at less than 5%. This offered banks a fresh start and the leeway to concentrate on building new and sustainable lending models. This outcome of this study supports prior empirical work which only examined bad banks in developed economies (the US A and Europe) and in the Asia Pacific. It should be noted that the "bad bank" concept is new to Africa and so there is very little empirical work on this topic. This study contributes to the discussion by its exposition on the overall positive trends in Nigeria's banking sector post - crisis and the impressive growth in bank credit , GDP and the equity market after the financial crisis.
Open Access
Optimal capital structure and share repurchases: a case study of Anglo American Plc
(2016) Chadderton, Marcus; Thurner, Thomas
During 2006, AAL adopted and implemented its first share repurchase program, which continued up until its suspension in 2008. While management stated that share repurchases would only be done in the interest of shareholders, the repurchase program was disastrous for shareholder value. Management also stated that share repurchases provide the firm with flexibility regarding its capital structure. We investigated the capital structure of AAL for the years 2004 to 2012 from an optimal capital structure perspective. Using a CAPM approach, we find no evidence that AAL targeted or implemented a capital structure, which could be considered optimal.
Open Access
Persistence of alpha in South African general equity unit trusts
(2015) Hoch, Rowan Andrew; West, Darron
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.
Open Access
Separation of precious metal beta from a JSE multivariate model with macroeconomic variables
(2015) Mzobe, Thabani Bonginkosi; Holman, Glen
This study examines a multifactor model of the Johannesburg Stock Exchange (JSE) framed within the Arbitrage Pricing Theory (APT). The APT has been set up such that it can be able to separate the beta for the precious metal factor within the model. The process goes via the investigation of macrovariables (with precious metals used as one of the macrovariables) and their effect on market (JSE) returns. A complete analysis and modeling of this relationship is likely to yield unparalleled rewards and cost-effective risk management, monitoring and mitigation. Using monthly data for the period 31/07/2002 to 30/04/2013 the dissertation focuse d on using a market (JSE) representative index as a basis for creating a wholly functioning APT model. This included creating a more liquid representative of the JSE All Share Index (A LSI) by using the top 100 stocks by market capitalization. Principal Components Analysis (PCA) was applied to the variables to ascertain a proper model for the JSE return structure. However, in the end an appropriate econometric structure in the form of Autoregressive Conditional Heteroscedastic (ARCH) and Generalized Autoregressive Conditional Heteroscedastic (GARCH) models was used and applied to test and create the APT model to address the objective. The other purpose of this dissertation was to separate beta attributable to the precious metal macrovariable within the model. This is based on the establishment of the JSE in the late 1880s being primarily due to the discovery of precious metals in the former Transvaal (North West) and Pretoria, Witwatersrand and Vereeniging (PWV) region now Gauteng. This is to ascertain whether these metals still have as much influence on the JSE as they did for over half a century. The results show that macroeconomic variables do influence the return generating process of the JSE, explaining almost 80% of variation in returns. The results show that the ALSI is characterized by a seven factor APT with, industrial production, money supply, SA consumer price index, ZARUSD exchange rate, crude oil, MSCI ACWI and precious metals statistically significant.
Open Access
A Shariah compliant private equity fund : compatibility in South Africa
(2015) Cajee, Mohsin Ebrahim; Thurner, Thomas
There is no doubt that the equity market plays a central role in the growth and the sustainability of an economy. Equity and capital markets allow companies to access increased levels of accessibility to capital. Besides the traditional models to access for corporate finance, new opportunities have appeared which offer interesting alternatives. The accumulated wealth from the Islamic community became accessible through new vehicles, built on the Islamic Shariah laws in as far as money and banking is concerned. The Islamic concepts of money and banking, emphasise the relationship between profit and risk as well as responsibilities of institutions and individuals. Many of the guiding principles of corporate finance and banking would not be pegged on religious provisions and doctrines. The Western, conventional economic system holds opposing views to Islamic economics and a key question arises, could principles of Islamic finance feed into a Western economic system and be maintained on a sustainable basis? Proponents and supporters of a Shariah compliant economic system argue that religion is meant to affect every other aspect of life and so would be the economic principles one stands for. As such, remaining committed and observing Islamic law in business and economic activities would be inevitable for all those who take pride in prophesying the Islamic faith. More recently, regulators in South Africa have taken a number of steps to promote Islamic finance in South Africa. The country has one of the more efficient and advanced financial systems, legal and tax frameworks as well as governance structures and regulations on the continent. This gives South Africa a competitive edge and first mover advantage over other African countries in promoting and advancing the Islamic finance industry. The main goal of this mini thesis is the study of what constitutes an Islamic Shariah compliant Private Equity Fund (IPEF). At a secondary and more basic level its viability is considered within a South African context. It also examines the key challenges and potential solutions for such a fund to exist in an economy based largely on Western principles, particularly with reference to the legal frameworks, interest treatment, taxation laws, regulatory and supervisory bodies as well as basic conceptual understandings. Of great attention to the researcher would be the differences between the conventional economic principles that guide equity and finance in South Africa and how Shariah compliance has affected the trade instruments. The author of this thesis has vast experience in the area of Private Equity and Islamic finance as it pertains to this field. In this work, the author builds on his own experience and critically reflects it against the dominant literature in the field. This work does not focus on the risk/return profile or provide any consideration as to the likely performance of such Islamic Private Equity Funds.
Open Access
The relative value relevance of book values, operating cash flows, EVA and earnings: A South African perspective
(2018) Muzhingi, Taurai; Chamisa, Edward
Most investors would want to know what is included in the price of a share and how far accounting data explain the share price. This study uses the most common measures of financial performance to measure what is explained by the share price. Most analyst briefings use these financial performance measures: book value per share, cash flow per share, earnings per share and most recently the market performance measure, the economic value added (EVA) in the share valuations. The objective of the study is to examine the relationship between the above measures of financial performance as presented in financial statements and the share prices and share returns. If there is a relationship, which measure is most closely related to both share prices and share returns? The study uses data obtained from a balanced sample of 87 companies listed on the Johannesburg Stock Exchange (JSE) during the ten-year period (2005-2014). Both the price and the returns models were used to analyse this financial data to find out which accounting measure has the greatest explanatory power on the share prices and share returns (measured by the R-squared or R 2metric). For the price model, share prices 3 months after the financial yearend were used to allow for the release of financial information. Using the price model, earnings have the highest overall R2 at 56.4%, with book values at 18.4%, EVA at 2.18% and lastly operating cash flows at 1.18%. This effectively means that earnings per share is more value relevant in determining firm value than either book value of equity, EVA and operating cash flows, respectively. Using incremental value relevance, equity book values and earnings explain 65% of the share prices. However, changes in EVA deflated by price have the greatest explanatory power (R 2 at 30%) using the returns model and none of the other measures(earnings and operating cash flows) have a significant relationship with share returns. Overall the results show that both accounting based (book value of equity and earnings) and market based measures (EVA) are value relevant in determining firm value. The results also show that a consideration of more than one variable in determining firm value is more informative than considering each variable separately. EVA should also be used in determining value as it has shown that it explains some of the share prices and returns.
Open Access
The use of recursive partitioning to build a financial distress prediction for JSE listed companies
(2016) Smit, Candice; Van Rensburg, Paul
The financial crises of 2008 increased the focus around financial distress and even more so on predicting financially distressed companies prior to the fact. This research paper investigates using recursive partitioning to predict financially distressed companies on the Johannesburg Stock Exchange, taking different business cycle periods into account over the time period 1997-2014. The updated as well as longer time period over which the analysis is conducted distinguishes this research paper from prior research. This paper employs both the CART and CHAID algorithm and obtains financially distressed prediction models which have a higher correct classification rate than chance alone and prior literature in South Africa. This paper also makes use of a matched data sample approach and the manner in which missing data is addressed makes a valuable contribution to financial distress prediction research. Furthermore, support is found for prior literature in that financial variables are statistically significant in predicting financial distress.
Open Access
The value of financial advice : an analysis of the investment performance of advised and non-advised individual investors
(2015) Allie, Jahangir; West, Darron
Financial advisors have long been considered a part of the financial market through the advice that they offer investors. Behavioural finance has demonstrated that individual investors do not always behave in a rational manner, unlike financial advisors who seem not be prone to the behavioural biases that individuals experience when investment decisions are made. Furthermore, financial advisors have greater access to information, financial analytical tools, as well as better education in financial markets compared to the average individual. Financial advisors are thus better equipped to assist individual investors and provide them with improved investment results. This study investigated the value added by financial advisors in the investment performance of advised individual investors as opposed to non-advised individuals. The study wanted to establish whether financially advised individuals showed greater return on investments than non-advised individuals. A sample of individual investors from a large South African investment house were analysed across the investment categories of an advised investor and a non-advised investor for a period of 10 years from 1 January 2005 to 31 December 2014. The data was analysed to draw conclusions on returns, trading behaviour, the risk profile of investors and the reasons for differences identified. The results indicated that there is no statistical difference between the returns generated between advised investors, non-advised investors and the fund invested over the period. There was a statistical difference between the number of trades entered into by advised and non-advised investors, with advised investors making statistically more trades than nonadvised investors. There was no significant difference between the risk profiles of the investors based on qualitative data. The results indicate that there is no significant additional benefit of utilising a financial advisor, after the initial decision of which fund to invest in has been made.
Open Access
What are the determinants of non-performing loans in Botswana?
(2016) Tsumake, Gertrude Kgalalelo; De Jager, Phillip
The maintenance of asset quality, efficiency and profitability is a vital requirement for the survival and development of banks. Loans are the main asset class from which banks generate their major portion of income and also signify the greatest risk to banks. There has been significant indication that the financial crises in the USA, Sub-Saharan Africa and East Asia were signalled by high levels of non-performing loans (NPLs). Due to the detrimental effect that these loans have on a bank's revenue and the economic welfare of a country, it is essential to examine and investigate the determinants of NPLs in the banking industry of any country. This study examines Botswana, a developing country in Southern-Africa and is stimulated by the assumption that both the industry level variables and macroeconomic variables have an effect on NPLs. Secondary data of the banking sector was obtained from Botswana's central bank, the Bank of Botswana. Correlation and regression analysis were carried out over a period of ten years (2005-2014), using quarterly data. It was found that the following industry level variables (i.e. credit growth, industry size and profitability) and macroeconomic variables (i.e. real gross domestic product (GDP) growth, inflation, real interest rates and the unemployment rate) have a statistically significant impact on the NPL rate. On the other hand, capitalization and diversification had a statistically insignificant relationship with NPLs. The banking industry in Botswana should carefully monitor the household loan portfolio as well as their credit advancement policies with regard to the aforementioned variables to help lower their NPL ratios. This study is the first of its kind in the Botswana banking industry and therefore will provide scholars with the opportunity to enrich their knowledge and serve as a reference for other researchers in the related area while also providing a foundation for further studies.

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