Low volatility sector-based portfolios: A South African case

Abstract

Portfolios and indices that have been specically constructed to have low risk attributes have received increasing interest in the recent international literature. It has been found that portfolios constructed by targeting low risk assets have predominantly outperformed portfolios constructed to have higher risks. This anomaly has led to renewed interest in constructing low volatility portfolios by practitioners. This study analyses a variety of low volatility portfolio construction methodologies using sectors as building blocks in the South African environment. The empirical results from back-testing these portfolios show signicant promise in the South African setting when compared with a market capitalization-weighted benchmark. In the empirical analysis in the South African environment two techniques stand out as being superior low volatility construction techniques amongst the seven techniques assessed. Furthermore, the low volatility portfolios are blended with typical general equity portfolios (using the Shareholder-Weighted Index (SWIX) as a proxy). It was found that these blended portfolios have useful features which lead to enhanced performance and therefore can serve as eective portfolio strategies.

Keywords: Low volatility portfolios, Minimum Variance (MVP), Low Volatility Single Index Model (SIM), Equal Risk Contribution (ERC), Nave Risk Parity (NRP), Maximum Diversication (MDP), Equal Weighting (EW), Covariance Bi-plot