Greenblatt’s strategy versus the market : a South African perspective

Abstract

Background Greenblatt created an investment strategy premised on the selection of cheap, but good quality shares as an investment strategy. Greenblatt proved the soundness of this strategy by building a portfolio in the United States utilising certain metrics which earned substantial returns for a long-term investor. Aim The aim of the research was to determine if there were inefficiencies on the Johannesburg Stock Exchange that could be exploited using Greenblatt’s strategy. This would have implications on investor behaviour in South Africa. Data on Johannesburg Stock Exchange listed companies was used to form portfolios to determine if the portfolios beat the market for the period 2010–2019. Methods The sample companies were filtered for size and liquidity. They were subsequently ranked according to price-earnings and return on capital employed ratios. These were divided into Top25 and Bottom25 portfolios, which were adjusted annually. The real and risk-adjusted returns of the portfolios were analysed and compared to that of the Indi25, the proxy to the market. Results The Indi25 outperformed the Top25 and Bottom25 generated portfolios, with greater inflation-adjusted mean returns and risk-adjusted mean returns. The difference in means, however, were not significant. The Indi25 had a lower level of volatility than the generated portfolios. Conclusion The actively managed portfolios, generated utilising Greenblatt’s strategy, were unable to beat the market in South Africa. This indicated that, during the time frame analysed, value investors would not have been able to take advantage of inefficiencies within the market utilising the strategy.