South African Unit Trusts: Selection Ability and Information Effects

Abstract

Research into unit trusts are often concerned with the ability of fund managers to achieve superior performance. However, the growing popularity of unit trusts as an investment vehicle may also lead one to question the ability of individual unit trust investors themselves.The main research objective of this study is to establish whether South African unit trust investors display selection ability, i.e. whether investors are smart ex ante, in that they move to funds that will perform better. The secondary research objective is to establish whether investors’ moves (in the form of cash flows into and out of funds) contain information that can be utilised to earn abnormal returns - the so-called information effect.The analysis is based on a performance test introduced by Grinblatt and Titman (1993) and further developed and applied by Zheng (1999). Evidence is presented that confirm that investors display selection ability, although this ability is very weak. There is, however, no significant evidence to support the information effect. Tests conducted to examine the information effect provide some evidence that money flows from funds that subsequently underperform the market.