Contributions to modern portfolio theory

Abstract

Fund managers and investors are confronted with the problem of selecting a single investment portfolio from a large number of possible combinations of available assets. In South Africa the set of possible portfolios has become even larger with the gradual relaxing of the constraints on foreign investment from 1995 to the present day, thereby expanding the investment universe for South African investors. Moreover, portfolio selection in South Africa is being transformed increasingly from being the exclusive domain of high net worth individuals, trustees and their investment managers to being the domain and responsibility of the man on the street. The Unit Trust industry started in South Africa in 1965 and gave the lower net worth individual a vehicle with which to invest in a diverse investment portfolio. This industry has proved very popular and has expanded from only 8 funds in 1980 to 338 funds and 136 billion rands under management in November 2000. Moreover the past two years, 1999 and 2000, has seen a change in the pension fund industry from defined benefit (DB) to defined contribution (DC) pension funds, transferring more of the risk and the responsibility of portfolio selection onto pension fund members. With increasing demand for fund management and investment advice by pension fund members and individual investors alike, the financial services industry in South Africa has also expanded. The consequent competition for assets of all descriptions have led, one hopes, to a more efficient market in equity, fixed income and derivative products. Thus modern portfolio theory has come a long way and will have to go further in meeting the demand to assist investors in their decision making.