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Global Portfolio Diversification: A South African Perspective

Global Portfolio Diversification: A South African Perspective. Mike Ward* Chris Muller. *Gordon Institute of Business Science, University of Pretoria, South Africa mchlwrd@gmail.com. Global Diversification. Return. Global efficient frontier. Local efficient frontier. Risk.

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Global Portfolio Diversification: A South African Perspective

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  1. Global Portfolio Diversification:A South African Perspective Mike Ward* Chris Muller *Gordon Institute of Business Science, University of Pretoria, South Africa mchlwrd@gmail.com

  2. Global Diversification Return Global efficient frontier Local efficient frontier Risk

  3. Rank best performers in ZAR 1994-2008 • USA • China • Russia • South Africa • Ireland • Czech Republic • UK • Columbia • Brazil

  4. Research questions • Where in the world should South African investors have invested? • Ex post, perfect information • No exchange controls • Ex ante can one out-perform? • Is there weak-form efficiency in global markets?

  5. Outline of Research Method • Part One (US perspective) • Identify countries which under/over perform • Ex-post • Use the MSCI country total return indices • Convert to USD • Single “Lump-sum” investment at start • Constant value annuity investment each month

  6. Outline of Research Method • Repeat from a South African perspective in ZAR • Part Two (SA Perspective) • Construct Markowitz portfolios • Optimise Markowitz portfolios • Optimal look-back period for co-variance matrix • Optimal look-back period for forecast returns • Optimal re-balancing/holding period for ex-ante

  7. The Data • MSCI TRI country data, monthly, 1969-2008 • USA study used 18 countries from 1970 • SA study used 50 countries from 1994 and included countries as they became available • Use an equally weighted portfolio of ‘available countries’ as benchmark

  8. Results Part One USA Single lump-sum investment

  9. Results USA Monthly Constant Value Annuity

  10. Part Two South African Perspective Lump-sum investment 1994-2008 n=50 countries

  11. Results South African Perspective Monthly Constant Value Annuity

  12. Results South African Perspective Markowitz portfolios

  13. Optimal Portfolio Construction • Start Jan 1975 • Countries that ‘exist’ over previous 5 years • Covariance matrix of past 60 month returns • Use previous 6 months to forecast returns • Use Solver to maximise Sharpe ratio • Weight > zero • Weight <= 20% • Sum(Weight) = 1.0 • Re-optimise portfolio annually, use for next year Select optimal portfolio

  14. South Africa Weights

  15. Summary Results

  16. Concluding thoughts… • Investors should take a global perspective • We do find weak-form in-efficiency • The JSE doesn’t feature • These results could be improved by optimising the look-back and holding period

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