A comparison of returns of portfolios formed using technical analysis and fundamental analysis in South Africa

A research report submitted in partial fulfilment of the requirements for the degree of Masters of Management in Finance and Investment, University of the Witwatersrand, Johannesburg, 2017In a market where it has become difficult to find value, it has become very important for portfolio managers and analyst to find approaches to investing that still hold value and are less correlated with market returns. In this research project a strategy, which combines technical analysis strategies and fundamental analysis strategy was studied to find out if it is possible for an investor who uses both strategies to earn better returns than an investor who relies only on one strategy. Three technical analysis strategies were combined to form one strategy. The three strategies were also studied separately so as to see if they produce returns that are significantly better than a fundamental analysis strategy that uses Piotorski’s (2002) F_score approach to invest. It was found that individual technical analysis strategies do not produce returns that are significantly better that the fundamental analysis strategy. However, it was found that a strategy that uses both fundamental analysis and technical analysis produces average returns that are better than average returns produced by any of these strategies used independently. Technical analysis strategies produced returns that showed very little correlation with an equally weighted benchmark when regressed on the CAPM. Equally weighted portfolios of the strategies showed no conclusive evidence of the presence of abnormal returns. The success rate of the technical analysis strategies was found to decline over time, which suggested that the Johannesburg Stock Exchange (JSE) is becoming weak form efficientMT 201