Abstract
M.Com. (Financial Economics)
The pressing question on the minds of academics and investment professionals is whether portfolio managers can evidently protect investors’ capital during a period of economic downturn and provide superior returns with a minimum level of risk. This study attempts to answer this question by evaluating the performance of portfolio insurance methods using different asset classes traded on the local Johannesburg Stock Exchange and other global markets. The chosen data period for evaluation starts from 02 June 2004 to 31 December 2013. The study compares insured portfolios (made up of two methods: the Option-Based Portfolio Insurance and the Constant Proportion Portfolio Insurance) with uninsured portfolios made of these asset classes in order to demonstrate the benefit of portfolio insurance in protecting investors’ capital during both bull and bear markets. The study makes use of different asset allocation approaches including buy and hold, risk parity, minimum variance, and momentum in order to build an optimal uninsured portfolio. The results of the study show that the minimum variance approach of the Constant Proportion Portfolio Insurance strategy with a static multiplier of m=2 consistently outperforms uninsured and the Option-Based Portfolio Insurance portfolios. It is argued that this outperformance might be due to holding risky assets with lower volatility.
Furthermore, when a dynamic multiplier is used, it was found that the risk parity approach for the Constant Proportion Portfolio Insurance results in the best-performing asset allocation method due to its lower downside deviation, higher Calmar ratio and fewer months to recover from a maximum drawdown. Both the static and dynamic Constant Proportion Portfolio Insurance strategy methods provided 100% protection of investors’ capital even during the 2008-2009 Global Financial Crisis. In contrast with the Constant Proportion Portfolio Insurance strategy, it was found that an Option-Based Portfolio Insurance strategy with the buy and hold asset allocation approach fails to provide maximum protection for investors’ capital during periods of financial crises, since it lost 9, 45% in 2008. Hence, the Option-Based Portfolio Insurance portfolios (insured) with a buy and hold approach underperform uninsured portfolios.