Abstract
This study contributes to the debate on the optimal choice between portfolio diversification and concentration under crisis periods by comparing the strategies in terms of risk minimisation and performance optimisation, specifically within the South African context, under the global financial crisis (GFC) of 2008. The study adopts a longitudinal time horizon spanning from December 2005 to November 2010, further divided into the pre-crisis, crisis and post-crisis periods. By using the Mean-Conditional Value at Risk (M-CVaR) optimisation model, the study optimises asset class weights to minimise tail risk, measured by the CVaR, at various target return levels. The study emphasises the importance of incorporating tail risk into the portfolio optimisation model, especially during crisis periods, where return distributions significantly deviate from normality. The study uses a broad investment opportunity set with thirteen asset classes, as this enhances risk minimisation and return maximisation opportunities. The asset classes forming the investment opportunity set are: SA large-capitalisation (cap) equities, SA mid-cap equities, SA small-cap equities, non-SA emerging equities, developed equities, commodities, global REITs, SA property, SA inflation-linked government securities, SA bonds, global investment-grade bonds, global high-yield bonds, and cash. The findings of the study reveal that concentrated portfolios consistently demonstrate a superior risk-return trade-off across the full study period and its sub-periods, indicating that the strategy is robust across different market conditions. Notably, the advantages of portfolio concentration are more pronounced during the crisis period, highlighting its superior risk minimisation benefits in times of financial crisis. Additionally, a positive correlation is observed between the diversification index (DI) and the CVaR ratio. This indicates that, while portfolio concentration is superior, an investor would benefit from having a larger learning portfolio, which is a collection of well-researched, high conviction assets/asset classes that the portfolio is biased towards. Even so, the study cautions investors to be aware of and avoid cognitive and behavioural biases which can adversely affect asset allocation decisions under the portfolio concentration strategy.