Browsing by Subject "efficient market hypothesis"

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    Open Access
    Constructing low cost core-satellite portfolios with multiple risk constraints: practical applications to Robo advising in South Africa using active, passive and smart-beta strategies
    (2020) Smith, Jacques; van Rensburg, Paul
    Risk and tracking error budgeting was originally adopted by large institutional investors, including pension funds, plan sponsors, foundations, and endowments. More recently, risk and tracking error budgeting have gained popularity among financial advisors, multi-managers, fund of funds managers, high net worth individuals as well as retail investors. These techniques contribute to the portfolio optimisation process by limiting the extent to which a portfolio can deviate from its benchmark with regards to risk and tracking error. This is an ambitious paper that attempts to determine the optimal strategy to practically implement risk and tracking error budgeting as a portfolio optimisation technique in South Africa. This study attempts to bridge the gap between active, passive, and smart-beta investment management styles by introducing a low-cost portfolio construction technique, for core-satellite portfolio management, which contributes to the risk and tracking error budgeting process. Core-satellite portfolios are designed to expose the portfolio to a low-cost primary “core” consisting of passive and enhanced index funds, thus systematic risk “beta”, limiting the tracking error of the portfolio. The secondary “satellite” component is allocated to active and smart-beta managers to exploit expected excess return “alpha”. The primary aim of this research is to construct a rule-based product range of core-satellite portfolios called “replica portfolios”. The product range builds on the foundation of the Association for Savings & Investments South Africa (ASISA) framework. The study identifies three “target portfolios” from ASISA's framework, namely (1) High Risk: SA General Equity, (2) Medium Risk: SA Multi-Asset High Equity and (3) Low Risk: SA Multi-Asset Low Equity. Through this framework, active managers from each category are shortlisted using a Sharpe and Information Ratio filter. A secondary filtering technique, namely Returns Based Style Analysis (RBSA) is used to determine the style, R-squared and alpha-generating ability of active managers versus the passive asset classes and style indices they seek to replicate. Applying Euler's theorem for homogenous functions, we decompose the risk of the coresatellite portfolio into the risk contributed by each of its components. The primary mandate of the core-satellite portfolios in the product range is to allocate risk and tracking error efficiently across several investment management styles and asset classes in order to maximise returns while remaining within the specified risk parameters. iii The results highlighted that active managers, after fees, predominantly failed to outperform their benchmarks and passive building blocks, as identified through RBSA over the sample period (October 2009 – September 2019). However, only a small number of active managers generated superior risk-adjusted returns and were included in the core-satellite range of products. This study recommends to investors that they exploit the “hot-hands effect” by investing in specialised, benchmark agnostic active managers who consistently produce superior risk-adjusted returns. By blending active, passive and smart-beta strategies, investors are exposed to less total risk, less risk per holding and a lower tracking error. The three coresatellite portfolios developed in this study generated absolute and risk-adjusted returns that are more significant than their active and passive counterparts. Fee arbitrage was derived through the range of core-satellite products, resulting in tangible alpha over the sample period. The study encourages investors to use smart-beta strategies alongside active and passive funds since it improves Sharpe and Information ratios while enhancing the original portfolio's characteristics.
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    Open Access
    Long memory in bond market returns: a test of weak-form efficiency in Botswana's bond market
    (2021) Muzhoba, Gorata; Majoni, Akios
    Using the ARFIMA-FIGARCH model, this dissertation examines the efficiency of Botswana's bond market. It focuses on the properties of the return and volatility of the Fleming Asset Bond Index (the main aggregate fixed income benchmark index in Botswana) over the period September 2009 to May 2019. The weak-form version of efficient market hypothesis (EMH) is used as a criterion to investigate the existence of long memory in both bond returns and volatility. The results of our study indicate that the Botswana bond market data follow, to a great extent, the long-range dependence which negates the precepts of the efficient market hypothesis. Furthermore, policy reforms intended to stimulate bond market reform and related efficiency gains appear not to have produced the desired outcomes as the existence of long memory is found across all sample periods. Further remedial policies are suggested to enhance market dynamism.