Copy cat unit trust investment strategies in high cost structure environments

Abstract

Copy cat investment strategies exist in the US, where copy cat funds profitably replicate the investing behaviour of larger more renowned funds, leveraging off research completed by the initial fund, without incurring the same level of expenses. Funds, or unit trusts as they are known in South Africa, are mandated to disclose portfolio holdings quarterly, with the intention of enabling investors to track whether funds are meeting their stated objectives, through more frequent access to portfolio holdings. More frequent disclosure has lead to significant controversy internationally, with some researchers providing evidence that more frequent disclosure has lead to copy cat investing strategies. In contrast to the research completed in the US, copy cat funds in South Africa are able to generate similar returns, before costs, but once costs are included t-tests provided evidence that the copy cat fund was not able to generate significantly higher returns than the actual fund, particularly in the long run. These tests hold true when considering the whole general equity market, but interestingly do not hold statistically valid for every fund when considering them in isolation. Certain funds within the general equity classification offer potential for copy cat investing and have successfully proven outperformance in the last decade. Copy cat investors would need to seek out these funds based on the predicted outperformance of each fund, by considering the historical behaviour and then lastly by considering their own, already questionable, risk appetite. Copyright