THE RELATIONSHIP BETWEEN CROSS-SECTIONAL VOLATILITY, TRACKING-ERROR AND ACTIVE POSITIONS: THE CASE FOR SOUTH AFRICA

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Abstract

International research suggests that tracking-error is influenced mainly by two components, namely market volatility and a portfolio manager’s active positions. Of these components, market volatility cannot be controlled by a manager while active positions can be adjusted to maintain a desired or mandated level of tracking-error. Focusing on the South African market, this study found that a strong positive relationship exists between cross sectional volatility and the level of tracking-error, and that active managers respond to changes in cross sectional volatility by adjusting their active positions. Based on these findings, this study firstly suggests that in order to outperform the market during times of low cross sectional volatility whilst maintaining desired tracking-error levels, stock picking skills becomes more important than ever. Secondly this study suggests that being able to identify those factors leading to a decrease in cross sectional volatility may enable investors to proactively increase their exposure to more passively managed funds in order to decrease management fees, thereby shifting their focus to alternative sources of alpha.

Keywords: Market Volatility, Investors, South Africa

How to cite this paper: van Heerden, J. D. (2010). The relationship between cross-sectional volatility, tracking-error and active positions: the case for South Africa. Corporate Ownership & Control, 7(3-1), 219-227. https://doi.org/10.22495/cocv7i3c1p6