Thesis (MComm (Business Management))--University of Stellenbosch, 2009. / Measuring the performance of any financial portfolio is only relevant if
compared relative to another similar portfolio. Over the years the norm in the
industry has been to use market capitalisation indices as benchmarks to
measure performance.
Market capitalisation indices, such as the FTSE/JSE ALSI, create a natural
return drag because of the overweighting of overvalued stocks and the
underweighting of undervalued stocks. It is this return drag that led to the
creation of the Fundamental Indexing concept by Research Affiliates in 2005.
Fundamental Indexing weights stocks based on their economic footprint in the
market rather than their market capitalisation. The Fundamental Indexing
approach uses four metrics, namely sales, book values, dividends and cash
flows to calculate this economic footprint. The Fundamental Index is referred
to as the RAFI (Research Affiliates Fundamental Index) Index
The Fundamental Index concept delivered very good results when applied to
the South African stock market. The South African RAFI Composite Index
outperformed the FTSE/JSE All Share Index by 5.55% p.a. compounded
annually during the period 1995 to 2006. This return was achieved with a
similar risk profile as the FTSE/JSE All Share Index. This index also had
similar turnover rates relative to the FTSE/JSE All Share Index. The South
African RAFI Composite Index also outperformed the FTSE/JSE All Share
Index by 5.48% p.a. compounded during the measurement period when
investment income is included.
The Fundamental Index outperformance clearly disproves the efficient market
hypothesis. According to modern portfolio theory it is impossible to earn
abnormal profits in excess of a market capitalisation index. The success of
Fundamental Indices proves that market capitalisation indices are not optimal
and deliver sub-optimal returns. Specifically, it can be seen that the South
African market is inefficient and that the FTSE/JSE All Share Index is not the
best tool for measuring the performance of the financial markets in South
Africa.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:sun/oai:scholar.sun.ac.za:10019.1/3022 |
| Date | 03 1900 |
| Creators | Ferreira, Rickus |
| Contributors | Krige, J. D., University of Stellenbosch. Faculty of Economic and Management Sciences. Dept. of Business Management. |
| Publisher | Stellenbosch : University of Stellenbosch |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Rights | University of Stellenbosch |
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