Abstract
We examine the information content of South African (SA) equity unit trusts to investigate whether risk is heterogeneous between investment objective groups and homogeneous within groups because those characteristics are vital to proper investment decision making. We find risk differences within SA equity groups especially in the Equity-General and Equity-Growth. However, in the other categories, the systematic risk differences depended on the choice of benchmark. Those risk differences may have significant implications for investors. Examination of between-group risk revealed that not all the equity categories were heterogeneous. We also find that the choice of benchmark is critical when measuring and comparing performance characteristics of funds.
Highlights
Finance theory suggests that risk and return are essential elements in selecting investments
Systematic risk (β) was computed by using ordinary least squares regression (OLS) as in Equation 2: ( ) Rp − Rf = α p + β p Rb − Rf + ε where: Rp is the return of the unit trust p; Rf is the risk free rate (STeFI); β p is the systematic risk of the unit trust p with respect to the benchmark b; α p is the excess risk-adjusted return to the unit trust p; and ε is the error term
This paper examines whether the ASISA equity unit trust classification adequately represents risk to investors
Summary
Finance theory suggests that risk and return are essential elements in selecting investments. When presenting the groups in tables, we refer to them, respectively, as General, Value, Growth, Large, Small, Financials, Resources and Industrials; while the Equity-Technology and Equity-Varied Specialist are dropped from further reference due to lack of enough data These changes imply that there were and maybe there are still issues with equity unit trust categorization in South Africa. Sharpe (1966) confirmed this theory and reported that mutual funds select a risk class and invite investors with similar risk preference to invest. Klemkosky (1976) conducted a statistical test over a ten-year period to investigate whether investment objective classifications resulted in groupings with homogenous within-group and heterogeneous between-group risk This is critical, as this would enable investors to select funds based on their classification. We used three different indices following the findings by Brown and Brown (1987) as well as Lehmann and Modest (1987) who reported that the selection of an index can have substantial impact on performance valuation and using multiple indices when computing risk measures helps to ensure that the results are robust
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