A study of the relative performance of South African unit trust fund managers utilizing the portfolio change measure technique

Master Thesis


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Unit trust funds are one of the fastest growing areas of the financial sector in South Africa today. There are currently over 1 million unit trust fund investors, with their associated management companies controlling over R20 billion in funds. The growing importance of the unit trust fund industry means that, increasingly, both investors in these funds, and those who judge the performance of fund managers, have heightened incentives to ensure portfolio performance is accurately measured. More specifically, there is a growing need · to measure the performance of the individual fund managers themselves, thus enabling the directors of the fund management companies to suitably reward successful portfolio managers, whilst penalizing those who are less successful. A great deal of research has been done on this topic both in South Africa and worldwide; however most of the studies have made use of Betas and 'benchmark' portfolios, both of which have many inherent flaws. This thesis examines the performance of unit trust fund managers using a 'benchmarlt free measurement technique, thus enabling one to avoid the measurement problems previously encountered. Chapter I gives a brief outline on the South African unit trust fund industry. In Chapter 2 the author looks specifically at the controversies which underlie the measurement of risk, and those surrounding risk-adjusted performance measurement. The flaws in previous studies are noted. Chapter 3 traces the development of the Performance Change methodology which is the method used in this dissertation. Chapter 4 describes the Performance Change methodology as applied to South African data; with the results from the tests presented in Chapter 5. Final conclusions and proposals for future research are put forward in the concluding Chapter 6. The author has shown conclusively that when utilizing the Portfolio Change Measure, unit trust managers in general are not able to consistently outperform the market. The author's findings suggest that trust fund managers do not achieve any significant level of additional return for the particular funds under their control. The Portfolio Change Measure has two further particularly important uses: (1) it can act as an additional management tool to aid the directors of unit trust fund management companies in measuring how efficiently portfolio managers are managing their funds; ·and, (2) it enables investors to make a more 'informed' investment decision because the comparative performance of unit trust funds is better analysed.