Performance evaluation of equity unit trusts in South Africa

Abstract

PurposeThe purpose of this paper is to evaluate the performance of 191 equity unit trusts in an emerging market, South Africa over the period from February 2006 to January 2016, which captures different market conditions (pre-global financial crisis, crisis and recovery periods). Besides testing for managerial ability, both cross-sectional regression and the non-parametric rank correlation test are used to test whether the performance generated by unit trusts does persist.Design/methodology/approachTo evaluate the managerial ability of portfolio managers, two widely used methods, the Treynor-Mazuy (1966) model and Henriksson-Merton (1981) model, are employed. Both models test whether portfolio managers have stock selection and market timing ability. The cross-sectional regression and the rank correlation test are implemented which account for both parametric and non-parametric approaches of persistence testing, respectively.FindingsWeak evidence of stock selection as well as market timing ability was found. Moreover, most of the unit trusts are reported to have insignificant coefficients. When testing for performance persistence using returns, the Sharpe ratio and the Sortino ratio as performance metrics, the overall results also revealed weak evidence of persistence that is equally spread across winning and losing funds.Originality/valueWhile research on unit trusts’ performance has been conducted in emerging economies, little has been done in testing for managerial ability in general and in South Africa in particular. Moreover, the research tends to focus more on one class – Equity General. This paper extends the performance literature by testing whether portfolio managers in the South African equity unit trusts industry have stock selection and market timing ability.