The performance of sector-specific equity funds in South Africa

M.Com. (Finance)Abstract: There is an abundance of research relating to the performance of actively managed funds such as unit trusts and passive exchange traded/index funds. This research stems from the investors’ dilemma as to which fund type should be selected to ensure best returns. An actively managed fund has the potential to outperform its market benchmark, but higher investment costs can cause these funds to underperform. Passive funds provide a lower cost alternative but only track the market benchmark. Current related research in the South African context is limited, and even more so within sector-specific funds. This study further develops the existing research through analyses of the performance of actively managed sector-specific equity funds in South Africa. The analysis is conducted on data over the time frame of 2003 to 2015 using various methods (cumulative, random, rolling and risk-adjusted). Results of this study varied by sector; the best performing was the industrial sector where industrial funds outperformed their benchmark both before and after costs. Financial sector funds performed the worst and, whilst mostly outperforming their benchmark before costs, always underperformed after costs. Resources sector funds provided mixed results but mostly outperformed the benchmark both before and after costs. Whilst this study does not provide information relating to the optimal composition of an investment portfolio, it does add to the current “active versus passive” research. The study provides the investor with additional insight as to which fund type to select for a portfolio when investing specifically in South African equity-based funds