Behavioural factor investing in the South African equity market

Abstract

Periods of heightened market volatility test the robustness of investment strategies and investor behaviour. This study examines the performance and downside resilience of behavioural factor-based portfolios on the Johannesburg Stock Exchange (JSE) during turbulent market conditions, including the COVID-19 pandemic and the subsequent monetary tightening cycle. Two behavioural portfolios, the Cognitive Investment Portfolio (CIP) and the Ethical Decision-Making Portfolio (EDMP), are constructed using environmental, social, and governance (ESG) metrics as proxies for cognitive and expressive investor preferences. Their performance is evaluated relative to traditional factor-based portfolios using rolling five-year return windows over the period 2010 to 2022. Employing a quantitative research design, the study applies descriptive statistics, volatility and downside-risk measures, and rolling-return analysis to assess relative portfolio performance, stability, and resilience across market fluctuations. The results indicate that while behavioural portfolios generated returns broadly comparable to traditional factor strategies, they exhibited lower volatility, reduced drawdowns, and more favourable tail-risk characteristics during periods of market stress. In particular, the CIP demonstrated improved resilience in rolling periods that include the COVID-19 shock, while the EDMP displayed comparatively stable performance across both pre- and post-pandemic environments. These findings suggest that incorporating behavioural and ethical considerations into portfolio construction can improve portfolio stability and downside protection without materially sacrificing long-term returns. The study contributes to the behavioural finance and factor-investing literature by providing emerging-market evidence that behavioural factor-based portfolios can complement traditional investment strategies, with particular relevance for long-term investors operating in volatile market environments.