Department of Business Management

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An empirical investigation into cross-sectional return dispersion on the South African equity market
(Stellenbosch : Stellenbosch University, 2013-12) Van Reenen, Reenen James; De Villiers, J. U.; Stellenbosch University. Faculty of Economic & Management Sciences. Dept. of Business Management.
ENGLISH ABSTRACT: This study examines the role of cross-sectional return dispersion in portfolio management by examining two topics. To begin with, the study considers why return dispersion changes over time. Given the influence of return dispersion on active portfolio return opportunity, it is important for managers to understand why return dispersion changes over time. For a sample of South African listed shares over the period June 1996 to December 2011, univariate time-series analysis reveals significant serial correlation in return dispersion which may be modelled using ARMA (1, 1) and GARCH (1, 1) processes. Further analysis within a rational economic framework reveals that return dispersion is countercyclical to aggregate economic activity and related to both local and foreign economic uncertainty. The study then considers the relationship between return dispersion and the return to investment strategies. If substantial association between return dispersion and any investment strategy exists, then it is possible for managers and fund sponsors to augment an understanding of when active return opportunity is high with strategies for exploiting return opportunities. Continuing within the rational economic framework, the study uses Spearman‟s rank correlation coefficients to show a significant positive relationship between return dispersion and the value premium. In aggregate, these findings suggest that it is possible for South African investors to understand why return dispersion changes over time, as well as how to take advantage of changes in return dispersion.
The equity duration of South African growth companies : a theoretical and empirical evaluation
(Stellenbosch : Stellenbosch University, 2002-12) Barnard, Ian; De Villiers, J. U.; Stellenbosch University. Faculty of Economic & Management Sciences . Dept. of Business Management.
ENGLISH ABSTRACT: This assignment sets out to address the concept of equity duration, where equity duration is viewed as a measure of the interest rate sensitivity of common stock's market value. The traditional use of standard dividend discount models, results in extremely long duration estimates for equities - in the order of 10 years for income stocks to 25 years and more for growth companies whose cash flows are not expected to materialize until some future period. Leibowitz (1986) identified an alternative approach for assessing equity duration empirically. These empirical estimates of actual stock price sensitivity to underlying changes in interest rates imply that equities behave as if they are much shorter duration instruments. Various attempts have been made to reconcile the difference between theoretical predictions of equity duration and empirical findings. The differences in duration of assets in place and growth opportunities are given as a possible reason for the above mentioned differences. It is argued that investment opportunities are similar to options a company has. These option-like characteristics of growth opportunities may alter the basic relationship between equity valuation and interest rate changes. The option framework suggests that the duration of growth companies may be shorter (not longer) than those of assets in place. The results from option theory can however not be applied directly to growth options, since some of the assumptions may not be valid in the case of growth options. The presence of these growth options makes it virtually impossible to calculate equity duration theoretically. This study empirically tests the relationship between growth opportunities and equity duration by focussing the attention on the interest rate sensitivity of South African growth companies. The following hypotheses regarding equity duration and growth companies are postulated: • There is a significant difference in interest rate sensitivity between growth companies and low-growth companies. • There is a significant difference between duration of growth companies measured using nominal interest rates and duration of growth companies using real interest rates. All non-mining companies on the Johannesburg Securities Exchange SA, for the period 1980 to 2000, were analysed. These companies were sorted into different portfolios that reflected their growth opportunities. Market capitalisation, book-to-market and price-earnings ratios were used as proxies to rank companies according to growth opportunities. The results from univariate regressions suggest positive duration for common equities. The negative relationship between equity returns and changes in nominal interest rates are independent of size, book-to-market or price-earnings ratios of the sampled companies. Including the market factor as an independent variable results in markedly different equity duration. The duration is correlated with size, as both coefficients and t-statistics increase when moving from small companies to larger companies. In addition, the small companies have negative not positive duration, as was the case for simple univariate regressions. There is also some evidence that high growth portfolios, as measured by low book-to-market and high price-earnings ratios, are less sensitive to interest rate changes than low growth portfolios. Employing all three Fama and French's factors, there is no longer a cross-sectional dependence on company size, with the mean duration being close to zero and statistically insignificant in virtually all cases. Also, when dividing changes in the nominal interest rate into changes in real rates and changes in inflation, it does not significantly affect the estimates of equity duration. The author found no evidence to support the stated hypotheses, when employing the Fama and French's three factor model. This may mean that the relationships are subsumed in the Fama and French risk factors.
Evaluating value based financial performance measures
(Stellenbosch : University of Stellenbosch, 2008-03) Erasmus, Petrus Daniel; De Villiers, J. U.; University of Stellenbosch. Faculty of Economic and Management Sciences. Dept. of Business Economics.
The primary financial objective of a firm is the maximisation of its shareholders’ value. A problem faced by the shareholders of a firm is that it is difficult to determine the effect of management decisions on the future share returns of the firm. Furthermore, it may be necessary to implement certain monitoring costs to ensure that management is focused on achieving this objective. A firm would, therefore, benefit from being able to identify those financial performance measures that are able to link the financial performance of the firm to its share returns. Implementing such a financial performance measure in the valuation and reward systems of a firm should ensure that management is aligned with the objective of shareholder value maximisation, and rewarded for achieving it. A large number of traditional financial performance measures have been developed. These measures are often criticised for excluding a firm’s cost of capital, and are considered inappropriate to be used when evaluating value creation. Furthermore, it is argued that these measures are based on accounting information, which could be distorted by Generally Accepted Accounting Practice (GAAP). Studies investigating the relationship between these measures and share returns also provide conflicting results. As a result of the perceived limitations of traditional measures, value based financial performance measures were developed. The major difference between the traditional and value based measures is that the value based measures include a firm’s cost of capital in their calculation. They also attempt to remove some of the accounting distortions resulting from GAAP. Proponents of the value based measures present these measures as a major improvement over the traditional financial performance measures and report high levels of correlation between the measures and share returns. A number of studies containing contradictory results have been published. On the basis of these conflicting results it is not clear whether the value based measures are able to outperform the traditional financial performance measures in explaining share returns. The primary objectives of this study are thus to: • Determine the relationship between the traditional measures earnings before extraordinary items (EBEI) and cash from operations (CFO), and shareholder value creation; • Investigate the value based measures residual income (RI), economic value added (EVA), cash value added (CVA) and cash flow return on investments (CFROI), and to determine their relationship with the creation of shareholder value; • Evaluate the incremental information content of the value based measures above the traditional measures. The information content of the traditional measures and the value based measures are evaluated by employing an approach developed by Biddle, Bowen and Wallace (1997). The first phase of this approach entails the evaluation of the relative information content of the various measures in order to determine which measure explains the largest portion of a firm’s market-adjusted share returns. The second phase consists of an evaluation of the incremental information content of the components of a measure in order to determine whether the inclusion of an additional component contributes statistically significant additional information beyond that contained in the other components. The study is conducted for South African industrial firms listed on the Johannesburg Securities Exchange for the period 1991 to 2005. The data required to calculate the measures investigated in the study are obtained from the McGregor BFA database. This database contains annual standardised financial statements for listed and delisted South African firms. It also contains EVA, cost of capital and invested capital amounts for those firms listed at the end of the research period. Including only these listed firms in the research sample would expose the study to a survivorship bias. Hence these values are estimated for those firms that delisted during the period under review by employing a similar approach to the one used in the database. The resulting sample consists of 364 firms providing 3181 complete observations. Since different information is required to calculate the various measures included in the study, different samples are compiled from this initial sample and included in the tests conducted to evaluate the information content of the measures. The results of this study indicate that the value based measures are not able to outperform EBEI in the majority of the relative information content tests. Furthermore, the measures EVA, CVA and CFROI are also not able to outperform the relatively simple value based measure RI. The results from the incremental information content tests indicate that although some of the components of the value based measures provide statistically significant incremental information content, the level of significance for these relatively complex adjustments is generally low. Based on these results, the claims made by the proponents of the value based measures cannot be supported. Furthermore, if a firm intends to incorporate its cost of capital in its financial performance measures, the measure RI provides most of the benefits contained in the other more complex value based measures.
Foreign investment and South African real estate investment trusts (REITs)
(Stellenbosch : Stellenbosch University, 2018-12) Carstens, Margaretha; Freybote, J.; De Villiers, J. U.; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Business Management.
ENGLISH SUMMARY : Real estate investment trusts (REIT) were introduced in South Africa in 2013 and follow the global REIT standard that originated in the US during the 1960s. The previously existing South African property investment vehicles, property unit trusts (PUTs) and property loan stocks (PLSs) were transformed to REITs. One of the main motivations for the introduction of REITs in South Africa was to make the listedproperty sector more attractive to foreign investors. This dissertation investigated three research questions in the context of foreign investments in SA REITs. First, it analysed whether SA REITs are attractive to foreign investors from a portfolio point of view. Using quadratic programming and the perspective of a foreign investor with US REIT investments, this study found that adding SA REITs to a portfolio of US REITs has diversification benefits in terms of a reduced portfolio variance and an increased Sharpe ratio. However, SA REITs with predominantly foreign holdings, particularly in Europe, have superior diversification benefits to foreign investors compared to SA REITs with predominantly South African holdings. Second, this dissertation investigated the macroeconomic, capital and property-market factors that drove foreign investments in SA REITs after May 2013 (REIT period) and in the alternative listedproperty vehicles prior to May 2013 (pre-REIT period). The results suggest that the impact of country-specific pull and non-country-specific push factors on foreign REIT investor behaviour changed over time, with push factors driving SA REIT investment in the REIT period and pull factors determining investment in the pre-REIT period. The impact of these factors on foreign REIT investments further differs for REIT market capitalisation (cap), with push factors driving large-cap REIT investments and pull factors affecting small-cap REIT investments. Thus, the attractiveness of SA REITs to foreign investors was not only driven by factors specific to South Africa, but also by factors specific to other countries, particularly the US and Europe. Third, this dissertation aimed to answer whether the introduction of REITs in South Africa has met the objective of attracting more foreign investors and improved the liquidity in the listed-property market. Results suggest that, following the introduction of REITs, foreign investors have indeed had a significant impact on REIT share liquidity as captured by activity measures (turnover and trading volume). On the other hand, the introduction of REITs has eliminated the negative impact foreign investors had on the friction dimensions of liquidity (bid-ask spread and price impact). The findings of the three chapters in this dissertation contribute to the literature on international REIT investment, and investment in emerging markets such as South Africa in particular. In addition, the study has implications for REIT investors, SA REITs and policymakers concerned with attracting foreign portfolio investment and developing listed-property markets. Other emerging economies that are contemplating the adoption of the REIT structure are likely to benefit from the increasing knowledge regarding foreign REIT investments, particularly with regard to liquidity implications and foreign investment drivers.
Offshore investments from a South African resident's perspective
(Stellenbosch : Stellenbosch University, 2003-03) Grant, David Ronald; De Villiers, J. U.; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Business Management.
ENGLISH ABSTRACT: The offshore investment industry has shown tremendous growth (R92,7 billion invested in offshore unit trusts and mutual funds) since the Minister of Finance took the bold step (1 July 1997) availing South African (SA) residents the opportunity to invest offshore. Currently, SA residents, subject to certain criteria, are allowed to invest R750 000 offshore. The primary objective of this assignment is to provide a general overview of offshore investments from a SA resident's perspective. Foreign investment policies as they relate to local residents are reviewed. Investment maxims, truisms and theory are introduced to provide a theoretical framework to accommodate future chapters. The question regarding why South Africans should invest offshore is answered by firstly identifying specific risks that are unique to this country, its people and businesses and, secondly, by looking at market risk. Conclusive empirical evidence states that offshore diversification reduces portfolio risks and enhances returns. Offshore investments, their related costs/fees, investment strategies as well as regulations that offshore investors must adhere to, are also discussed. The most important obstacles to investing offshore, namely the home bias phenomenon and currency or exchange rate risk, are placed in perspective. Important tax implications for investing offshore are also briefly mentioned. In the final chapter conclusions and recommendations are made.
An overview of asset allocation processes and their importance in portfolio management
(Stellenbosch : Stellenbosch University, 2001-04) Gantz, Frederick Albrecht; De Villiers, J. U.; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Business Management.
ENGLISH ABSTRACT: Rapid development of asset pricing models, asset return prediction models, information technologies, and the integration and globalisation of world economic markets, require the investor to have a fundamental understanding of the role of asset allocation (diversification) and the various strategies available in achieving investor's risk and return objectives. Assets are allocated across different asset classes in an attempt to optimise the combination of investment returns and investment risk. In this way your investment will not be subject to the volatility of anyone asset class alone. It is important to note that the movements of one class of assets (stocks, bonds or cash) may be somewhat offset by the non-correlated movement of a different class of assets. The intent of asset allocation is not necessarily to increase return as much as it is to fmd the accepted rate of return, while simultaneously reducing risk or maintaining it at a predefined level. This study explores the underlying theories concerning the relative importance of asset allocation in determining portfolio performance, and the three primary asset allocation strategies available. It also discusses relevant theory of how the predictability of asset returns and the investment horizon of a portfolio can have an impact on which asset allocation strategy to utilize in achieving the necessary risk and return objectives of the investor.

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