Abstract
Developments in portfolio performance evaluation have been one of the intriguing
topics in the field of finance since the introduction of Modern Portfolio Theory. This is
of increasing importance, given the rapid growth of the unit trust industry, where more
investors wish take advantage of asset diversification and access to a pool of
knowledge capacity through professional portfolio managers. The objective of the
current study is portfolio performance analysis under dynamic systematic risk changes
in the South African unit trust market. In particular, the study takes into consideration
the constantly changing economic environment in which unit trusts operate. The focus
of the study is to ascertain whether South African unit trust managers can outperform
the market and demonstrate market-timing abilities. The main motivation for the
current study is that traditional performance measures such as the Capital Asset
Pricing Model fail to capture the real nature of risk and returns by using static beta to
measure risk. This miss-specifies the model, as the unit trust portfolios are operating
in the setting of dynamic financial markets and this could lead to wrong interpretations
of the performance results. The current study addresses this gap by adopting
conditional performance models that capture time-varying beta as well as economic
factors in the same model to improve performance analysis.
This study adopts and modifies three popular performance models of performance and
market timing using dynamic beta. The GARCH model is used to generate timevarying
beta. In addition, the beta is conditioned simultaneously on time and
predetermined economic variables. In so doing, full conditioning enables more
accurate measure of the dynamic risk and returns. The sample size selected in this
study includes 86 unit trust funds of the multi-asset class that existed from 2010 to
2019. In order to validate the data series, tests for Normality, Multicollinearity,
Stationarity, Heteroscedasticity and Autocorrelation were satisfied. The single
conditioning shows positive results and even better results are obtained from the dual
conditioning model. The findings of the study are that South African unit trust
managers have superior stock selection abilities. In addition, there is also evidence of
market-timing abilities in the South African unit trust market....