Abstract
This study examined the persistence of the low-risk anomaly within the Johannesburg Stock Exchange (JSE) Top 50 stocks from 2014 to 2019. It evaluated the influence of net international equity flows (NIEF) on its performance. The low-risk anomaly, where portfolios composed of low-beta or low-volatility stocks generated superior risk-adjusted returns compared to high risks portfolios, contradicted the Capital Asset Pricing Model’s (CAPM) core prediction that higher risk should yield expected returns.
The JSE Top 50 stocks were selected annually by market capitalisation to ensure liquidity. Monthly data on stock returns and NIEF were sourced from Bloomberg data. Beta was estimated using covariance with the market, while volatility was measured through standard deviation. Portfolios were constructed using 30th and 70th percentiles thresholds and rebalanced monthly. Performance was assessed with Sharpe, Treynor, and Jensen ’Alpha, while Ordinary Least Squares (OLS) regressions with Newey-West standard errors tested the link between portfolio returns and NIEF, with extensions including macroeconomic controls.
The findings confirmed the presence of the low-risk anomaly, strongest in 2014-2016 but weakening and reversing between 2017 and 2019. Beta sorted portfolios provided the clearest evidence, as the low beta portfolios consistently outperformed in both absolute and risk adjusted terms. Volatility portfolios showed mixed outcomes, neither group consistently beating the market. Regression analysis revealed that NIEF did not significantly explain portfolio returns, suggesting foreign flows were not key drivers of the anomaly.
The study contributed by confirming the anomaly among South African’s largest stocks, showing beta to be the more effective risk measure, and highlighting the anomaly’s conditional nature, shaped by market dynamics rather than foreign capital flows.