If the equal weighted portfolio is so great, why isn’t it working in South Africa?

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Authors

Taljaard, Byran Hugo
Mare, Eben

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NISC Pty (Ltd) and Informa Limited (trading as Taylor and Francis Group)

Abstract

This paper considers the recent underperformance of the equal weighted portfolio of South African Top 40 stocks relative to the market capitalisation weighted portfolio. It highlights the impact of the increased concentration of market capitalisation weights in the Top 40, which is currently at extreme levels. Furthermore, lower levels in the benefits of diversification, through higher average correlations, has reduced the positive impact of rebalancing. Finally, the turnover in index constituents has been higher than average in recent years and this has caused a further drag on performance. The combination of these effects has had a negative impact on the equal weighted portfolio’s relative performance. A rudimentary linear model, with these factors as inputs, that highlights the importance of monitoring these drivers to improve the equal weighted portfolio’s relative performance is presented.

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Keywords

Equal weight portfolio, Equities, Stochastic portfolio theory, Portfolio optimisation, Diversification, Leakage

Sustainable Development Goals

Citation

Taljaard, B.H. & Maré, E. 2021, 'If the equal weighted portfolio is so great, why isn’t it working in South Africa?', Investment Analysts Journal, vol. 50, no. 1, pp. 32-49, doi : 10.1080/10293523.2020.1870863.