Portfolio Opportunity Distributions (PODs) for the South African market : based on regulation requirements

[摘要] ENGLISH ABSTRACT: In this study Portfolio Opportunity Distributions (PODs) is applied as an alternative performanceevaluation method. Traditionally, Broad-Market Indices or peer group comparisons are used toperform performance evaluation. These methods however have various biases and other problemsrelated to its use. These biases and problems include composition bias, classification bias,concentration, etc. R.J. Surz (1994) introduced PODs in order to eliminate some of theseproblems.Each fund has its own opportunity set based on its style mandate and constraints. The stylemandate of the fund is determined by calculating the fund's exposure to the nine Surz Style Indicesthrough the use of Returns-Based Style Analysis (RBSA). The indices are created based on thestyle proposed by R.J. Surz (1994). Some adjustments were made to incorporate the uniquenature of the South African equity market. The combination of the fund's exposures to the indicesbest explains the return that the fund generated. In this paper the fund's constraints are based onthe regulation requirements imposed on the funds in South Africa by the Collective InvestmentSchemes Control Act No. 45 of 2002 (CISCA).Thousands of random portfolios are then generated based on the fund's opportunity set. The returnand risk of the simulated portfolios represent the possible investment outcomes that the managercould have achieved given its opportunity set. Together the return and risk of the simulatedportfolios represent a range of possible outcomes against which the performance of the fund iscompared.It is also possible to determine the skill of the manager since it can be concluded that a managerwho consistently outperforms most of the simulated portfolios shows skill in selecting shares to beincluded in the portfolio and assigning the correct weights to these shares.The South African Rand depreciated quite a bit during the period under evaluation and thereforefunds invested large portions of their assets in foreign investments. These investments mostlyyielded very high or very low returns compared to the returns available in the domestic equitymarket which impacted the application of PODs. Although the PODs methodology shows greatpotential, it is impossible to conclude with certainty whether the PODs methodology is superior tothe traditional methods based on the current data.

[发布机构] Stellenbosch University