Optimising the performance of a style-based investment strategy on the Johannesburg Stock Exchange to protect against a market downturn using dynamic, synthetic option-based portfolio insurance

Abstract

Various equity investment styles have been developed and documented extensively in recent history – these styles have, in certain cases, outperformed the broader market. Muller and Ward (2013) have done extensive research into the efficiency of various equity styles on the Johannesburg Stock Exchange (JSE), and made a meaningful contribution to the topic in the South Africa arena by using a sophisticated style engine and good quality data to prove the effectiveness of certain styles in outperforming the JSE All Share Index. This research builds on Muller and Ward’s methodology by combining the style-based investment approach with the concept of portfolio insurance, using synthetic replication of a put option over the style-based portfolio to provide protection. We found that the application of synthetic portfolio insurance is effective in lessening the effect of market downturns, and that optimising the desired level and time period of protection can lead to outperformance of the unprotected style-based portfolio as the implied cost of the synthetic option is negated by the avoidance of large downturns in the market.