Includes bibliographical references. / There is an on-going debate amongst economists as to whether or not markets are efficient. The efficient market hypothesis is predicated on the assumption that investors are rational. The growing body of research in behavioural finance has challenged the rational investor theory, by showing that certain psychological biases affect the behaviour of investors in a manner which causes them to behave irrationally at certain times. The purpose of this paper is to gain further evidence of differential investment performance (which stems from some of these psychological biases) between genders in South Africa. A particular focus is on differences in risk aversion between genders. The data analysed suggests that men tend to hold riskier portfolios than women and tend to be more confident in their abilities than women are. A sample of 2,380 individual investors from a South African asset manager was analysed over ten years (1 January 2003 – 31 December 2012) in order to draw conclusions on the trading behaviour, resultant returns and variances in returns earned by men and women. The results show that there is a statistically significantly negative correlation between trading frequency and investor return. Over the ten year period analysed, there was no statistically significant difference between men and women either in returns earned or the variance of those returns. Further, there was no statistically significant difference between genders in trade frequency. However, in certain age groups and in certain sub-periods of the data, statistically significant differences between genders in both returns and variance of returns is observed, as well as statistically significant differences between the genders of trade frequency. Men had statistically significantly higher variances of their portfolio returns for the period from 1 January 2003 to 28 April 2006 (the period ending before the financial 3 crisis of 2008/9). Given that there is no significant difference in the investment returns earned by men and women in the same period, it follows that women were better investors (on a risk-adjusted basis) in this period. This may be explained by the fact that women are more risk averse than men and tend to hold less risky portfolios. Men had statistically significantly higher returns for their portfolios for the period from 1 May 2006 to 31 August 2009 (the period ending after the financial crisis of 2008/9). Given that there is no significant difference between men and women in respect of the variances of returns over this period, it follows men were better investors (on a risk-adjusted basis) for the period ending after the financial crisis. This could be due to men, being less risk averse than women, re-allocating their portfolio to riskier assets quicker than women after the financial crisis, and being better exposed to the upside of the market recovery. When stratifying the population into age groups to determine whether there is any differential behaviour on this basis, men in the 30 – 39 year old cohort were found to have a statistically significantly higher trade frequency than women. No other significant differences between genders within age groups were measured.

Includes bibliographical references. / Investor focus has shifted in last decade from a mere earnings related attention to a cash emphasis finding its expression in the frequent mention of proverbs such as "Cash is king" in daily newspapers. The realization that reported earnings are in a large extent subject to accounting decisions based on the applied GAAP brought cash increasingly in shareholder focus. Capital commitments in the manufacturing environment, as well as an original equipment manufacturer (OEM) buyer market in the global automotive components industry, cause corporations to focus on inventory management in order to improve their cash position. At the same time, tight delivery targets demand a higher delivery readiness at low stock at low stock levels from corporations. A case study on castings manufacturer Atlantis Foundries (AF) located in Atlantis, South Africa, has been undertaken to prove a historical correlation between inventory developments and a deterioration in the net cash position. Based on that finding, a case specific set of key performance indicators (KPI) has been developed in order to measure improvements in inventory management measures and their impact on cash flow.

Traditionally, it has been widely accepted that current reinvestments leads to future growth, and hence that there exists a negative relationship between dividend payout ratios and subsequent earnings growth at both the company and market level. Surprisingly, more recent research found a positive relationship between these two variables, rationalised in terms of management signalling positive future prospects through higher dividend payouts. Following the methodology developed by Arnott and Asness (2003), this study conducted an analysis in to which hypothesis is supported at the market level (proxied by the All Share Index) in South Africa, and how these findings compared to international market level findings. Furthermore, the findings were analysed within the context of the political and economic conditions unique to the South African market over the 1960-2014 study period. The results indicated a negative relationship between the payout ratio and subsequent earnings growth from 1960 to 2014. When the time period was subdivided into periods before and after 1994 (a year considered to be a structural break in South African political-economic history), a positive relationship was found from 1960-1994, while a negative relationship was found from 1994-2014. The possible explanations for this contradiction were investigated. For the counterintuitive pre-1994 result, several literature-based tests were conducted in order to eliminate possible explanations other than the link between payout ratio and earnings growth. Firstly, the tests were repeated for three and five year earnings growth periods. With regard to the five year period, although the coefficient for the payout ratio was positive from 1960-2014, the results were statistically insignificant. The subdivided regression periods, 1960-1994 and 1994-2014, also indicated less significant results. For the three year earnings growth period, the regression test generated positive coefficients for the payout ratio variable for all the time periods, with both sub-periods being statistically significant. The difference between the ten and three year subsequent earnings growth findings may have been as a result of South Africa companies making better long-term (ten year) than short-term (three year) investments during that time period. In addition, the possible impact of share repurchases, earnings yields as earnings growth predictors (i.e. the market valuation impact), and the possible role of mean reversion were all either considered, or statistically tested. Although the former two played no role, it was found that mean reversion was a statistically stronger predictor of future earnings growth on the index level than payout ratio. As the above result s differ not only from most (but not all) international studies, and also from the one company-level study previously conducted for South Africa, these differences were further investigated. In terms of the latter, it was found that the most likely reason for the discrepancy was that the previous researcher, who confined her study to JSE-listed industrial stocks, used nominal earnings growth data as opposed to real growth data. It is argued that this is an incorrect approach. Nonetheless, given that means reversion is as good, if not a better, predictor of earnings growth at the market level in South Africa, the traditional hypothesis that a higher payout ratio implies reduced future earnings growth, cannot be ruled out for the JSE.

This paper investigates the asset allocation technique known as Risk Parity, whereby assets are allocated such that they contribute equal amounts of risk to the overall risk of the portfolio. It is a relatively new technique and one which has grown in popularity and stature amongst Hedge Fund and asset managers alike. Academics have recently also come to fore, documenting the flaws with the mean-variance framework and have begun looking towards portfolio construction techniques based solely on predicted risk, not expected return. The prior literature on the topic is exclusively done abroad and finds that an unlevered Risk Parity portfolio, despite being inferior to other portfolios from a return perspective, is superior in terms of its risk-adjusted return, or Sharpe Ratio. Many academics propose the idea of levering up the Risk Parity portfolio so that its standard deviation matches that of another, riskier portfolio. This paper analyses five portfolio strategies, namely an unlevered and levered Risk Parity, a traditional 60/40, a minimum variance and a maximum Sharpe Ratio (tangency) portfolio. The first part of the paper will categorise the equity asset class into the FINDI and RESI indices, as well as using the ALBI and South African Property Index (PROP). The second part of this paper, Test 2, will subcategorize the equity portion of the strategies into Value and Momentum, using style indices, thus testing for evidence of style anomalies on the JSE. It will still use the ALBI and PROP as the other asset classes. The key findings are that for both tests, the unlevered and levered Risk Parity strategies underperform the FTSE/ALSI benchmark over the sample period, concluding that at the given level of risk free rates, Risk Parity as an asset allocation technique is not superior. Furthermore, Test 2 provides superior annualized returns for all but one of the strategies, indicating the possibility of style anomalies on the JSE.

Includes bibliographical references. / The “disposition effect” describes the propensity for investors to realise gains sooner than losses through selling profit making investments more readily than loss making investments. This behaviour has been observed in financial markets across the world and across all investor classes, albeit to varying degrees. Such trading behaviour has been found not to be profit or utility maximising. I n the absence of rational motives for the disposition effect, it is concluded as being an irrational feature of investor trading behaviour. In search of the reason behind this behaviour, behavioural finance is turned to. No concrete justification for the disposition effect has been isolated as being the sole cause for this apparently irrational trading behaviour. This study tests for the disposition effect in a South African context across two classes of non-professional investors: those acting in their own capacity, and those acting with the assistance of professional investment advisors. The trade history of a sample of 4 840 investor accounts from a South African stockbroker was analysed over the five year period from October 2008 to October 2013. Three primary issues were addressed: (i) whether South African investors exhibit the disposition effect, (ii) if this behaviour is reduced by non-professional investors through the employment of professional advice, and (iii) if this trading behaviour can be justified based on rational g rounds in a South African context. The results showed, consistent with studies elsewhere in the world, that individual investors in South Africa do exhibit the disposition effect both when acting in their own capacity and when acting with the assistance of professionals . Investors acting with the assistance of professional advisors are found, however, to show the effect to a lesser extent. Further, trading consistent with the disposition effect by investors acting with the assistance of professional advisors is found to be rationally justifiable on the grounds of portfolio rebalancing. It is therefore concluded that professional advice reduces the extent to which this irrational trading behaviour is exhibited, thereby increasing investor profits and utility.

The provision of assurance services, most notably the audit function, is an activity of public protection that requires a high degree of independence between the auditor and the audit client to ensure audit quality is achieved. Internationally, especially in the European Union, there is a legislated move towards mandatory audit firm rotation (MAFR) to ensure auditor independence. South Africa is currently faced with the decision of whether to change legislation and follow suit. Using a qualitative and descriptive methodology, through the use of semi-structured and open interviews with experienced South African audit partners, the direct and indirect effects of mandatory firm rotation on the audit profession was explored. This study will therefore present the opinions of the regulator and a small group of experienced audit partners, most being regional or national managing partners, from audit firms that perform public interest entity audits. Of particular interest will be the opinions of the respondents around (1) the state of independence in South Africa, (2) whether mandatory audit firm rotation will increase audit quality, (3) whether there are better alternatives to mandatory audit firm rotation, and (4) what the perceived direct and indirect effects of mandatory rotation will be within the South African legal and regulatory context. A particular emphasis is also placed on the argument from the national audit regulator that mandatory audit firm rotation, in addition to strengthening independence, will also reduce market concentration (promote competition) in the South African audit industry, as well as promote black economic transformation. The results show significant disagreement by the audit practitioners against the arguments in favour of mandatory audit firm rotation, with most claiming that it will not achieve an increase in audit quality and will produce many unintended consequences that will in their opinion actually reduce audit quality. There is a significant amount of agreement amongst the audit partners on the key issues and no partner interviewed is fully in favour of changing legislation to require MAFR. A number of alternative means for improving audit quality are suggested, which in the opinion of many of the partners, will be less damaging to audit quality and the audit profession.

In the weak form, the Efficient Market Hypothesis (EMH) states that it is not possible to forecast the future price of an asset based on the information contained in the historical prices of that same asset. Under this assumption, the market behaves as a random walk and as a result, price forecasting is impossible. Furthermore, financial forecasting is a difficult task due to the intrinsic complexities of any financial system. The purpose of this study is to examine the potential of developing an international investment strategy using future index price predictions and offsetting predicted price declines by investing in negatively correlated international markets. Therefore, the first objective of this study was to examine the feasibility and accuracy of using a machine learning technique to model and predict the future price of stock market indices of South Africa (All Share Index) and a variety of other developed and developing international markets, which included South Africa, Brazil, Russia, India and China of the BRIC countries and Italy, France, Netherlands, Switzerland, Germany, Nigeria, Australia, Hong Kong, Saudi Arabia, Japan, the U.S., Turkey and the U.K., which were identified as South Africa’s major trading partners. Secondly, an analysis of market correlation between each country’s equity index and South Africa’s ALSI was conducted to determine which of these international indices were positively and negatively correlated to the South African ALSI. This allowed an extrapolation of potential international diversification opportunities. By using machine learning to predict future price trends of the South African All Share Index (ALSI) within a specified time period, the market correlation aspect of this study was able to suggest possible negatively correlated safe haven markets to invest in to offset predicted losses in an expected declining local market. The study’s major limitations include a single method for regression analysis (GARCH(1, 1)) and a limited number of variables in the feature space when predicting future prices. Additional parameters could prove a more robust modelling technique. The data used was a series of past closing prices of each country’s major index. The data was split into five periods, where each period was assigned an overarching theme based on the prevailing market conditions at the time. The ALSI data set was subjected to a unit root test and found to be non-stationary. The analysis thereafter followed a two-step test, with the first being the determination of market correlation of the South African equity market with other markets, using a generalised autoregressive conditional heteroskedasticity (GARCH (1: 1)) approach given the non-stationary nature of the ALSI historic data. The results showed strong positive market correlations between South Africa and China, India, Nigeria, Russia and Saudi Arabia, and strong negative correlation between South Africa and Australia, Germany, the Netherlands, and the United Kingdom. Secondly, the specific area of machine learning employed in this study was support vector machines, as implemented using Python programming. The results compare the actual index price with those predicted by the model and showed that this technique has the ability to predict the future price of the Index within an acceptable accuracy. The accuracy measure used was the mean relative error which in most cases was calculated to be between 95 and 98 which is considered relatively high. However, the results of the investment approach described above was considered to be too inconsistent to consider this diversification strategy viable. From a South African perspective, this approach has not been documented previously.

Includes bibliographical references (leaves 90-96). / An essential part of an economy of developing and less developed nations lies in the establishment of a set of financial markets. In these financial markets companies are able to determine their capital structure by making rational decisions on whether to look internally or externally for financing. The study analysed the capital structures with a view of determining the extent of the applicability of capital structure theories to listed companies that are operating under a hyper inflation. The aim of the study was to verify the theoretical findings and predictions about determinants of capital structure. There is extensive literature on capital structure theories and their validity, Miller and Modigliani (1958), Ross (1977), Myers (1984 and 1977), Myers and Majluf (1984), and others, which have focused on why firms opt for certain capital structures. These studies have been conducted in stable macro economic environments of developed, developing, and least developed countries. There has been no in-depth study on the choices of capital structure that has been done in an unstable economy that is characterised by hyper inflation, such as Zimbabwe. As a step to understanding the rational and choices of capital structure in a hyperinflationary environment, a sample of eight companies listed on Zimbabwe Stock Exchange, which has a total of seventy five listed companies, was selected. Size, tangibility, profitability, and non-tax debt shield were the determinants of capital structure that were used. Debt to equity ratio was also used to analyse the companies, sectors they fall in and an overall analysis. The objective of the research was to test the validity and applicability of the conventional capital structure theories in the Zimbabwean environment between 1998 and 2006. In the literature review, the research presents an overview of four main capital structure theories namely; trade-off, signalling, pecking order and agency theory. The research critically examined capital structures of eight listed companies in Zimbabwe that have been operating under hyper inflation. The comparison of capital structures of companies in different sectors was done to determine if there was any link between the choice of a particular capital structure mix and the sector the company was operating in. The impact of interest rates was also taken into account in the research to determine the effect under the same environment. Zimbabwe has experienced very high levels of inflation from 2000 with recent official statistics indicating inflation to be 100,580.2% as of end of January 2008. This figure is widely perceived as understated as the basket of good used in the calculation is based on government controlled prices. According to the IMF the real inflation figure taking into account the "black market" prices is estimated at 150,000%. This presentation will not delve into the debate of the definition of hyperinflation but the evidence points out a hyperinflationary environment by all accounts. To conduct the research, inflation adjusted financial reports dating from 1998 to 2006 of eight listed companies on the Zimbabwe Stock Exchange were analysed.

The objective of this study is to analyse the impact of the change from Basel II to Basel III on the profitability of the South African banking sector. South African banks are regulated in accordance with the Basel Accords and, as such, this study reviews the literature on bank regulation and specifically the evolution of the Basel Accords. The 2008 global financial crisis exposed certain flaws in the global regulatory framework and paved the way for the introduction of Basel III, of which South Africa commenced implementation on 1 January 2013. As mentioned, the review of banking regulation literature will specifically focus on the changes from Basel II to Basel III, with a further focus on two of the key changes introduced by Basel III: the capital requirement amendments and the new liquidity ratios. The study examines the top five banks in South Africa, as these make up 91.1% of the industry's banking assets (as of December 2012). The top five banks are used to create a representative bank of the South African banking sector and an accounting model is performed using a DuPont analysis in order to measure profitability. With respect to the Basel III capital changes, the results show that a 2% increase in capital by increasing the equity-to-asset ratio and all else held equal will result in a decrease of 0.29% in return on equity (ROE) for the South African banking sector. With respect to the Basel III liquidity measures, a 25 basis decrease in maturity transformation, all else held equal, will translate into a 3.38% decrease in ROE. The study contributes to the recent literature on Basel III and profitability. The results will also benefit the South African banking industry and regulators when assessing the profitability impact of the new Basel regulations.

Includes bibliographical references. / Derivatives have a long history which could be traced as far as in the biblical times, around 1700 B.C when Jacob was granted the right to marry Laban’s daughter, in counterparty of seven years of work, an agreement often presented as one of the first option contract in the human history. However, the use of derivatives really expanded over the last three decades. According to the Bank of International Settlement (BIS), the outstanding notional amount of the global over-the-counter (OTC) derivative market reached USD 708 trillion in June 2011. Derivative markets have a significant role to play in the development of African financial markets. Indeed, through the mechanisms of price discovery and risk transfer; derivative instruments introduce greater market efficiency and provide market participants the opportunity to hedge their exposure to various financial risks. The development of a derivative strong market in Africa presents a compelling case given the nature of several African economies, predominantly composed of primary commodity producers, open small economies inherently vulnerable to commodity price, foreign exchange volatility, and interest rate risks.