JSE All Share Index driven by top 20% of its performers, research finds

The JSE All Share Index has been a key indicator for market performance in South Africa, but according to recent research conducted by Mahir Jakoet, a Portfolio Manager at Old Mutual Investment Group, the index is largely influenced by the top 20% of its performers. Jakoet's research was inspired by a study conducted by a professor from the University of Arizona in the US market, which found that only 4% of stocks outperformed the market over the span of seven decades. This led Jakoet to delve into the South African market and analyze the performance of the JSE All Share Index in comparison to the All Bond Index. The study focused on a subset of 186 stocks within the JSE All Share Index, identifying 88 'permanent resident' shares that had consistently been part of the index. Surprisingly, out of these 88 shares, only 35 managed to outperform the All Bond Index. This raised questions about the effectiveness of passive investing and index tracking strategies, leading Jakoet to explore the benefits of active portfolio management. Key findings from the research highlighted the importance of actively managing a portfolio to achieve better performance results. Jakoet emphasized three critical arguments in favor of active management: performance, opportunity cost, and volatility. By actively selecting winning stocks and avoiding underperforming ones, investors can significantly enhance their portfolio returns. Additionally, the study demonstrated that a concentrated portfolio of top performers could provide higher returns with lower volatility compared to an index-tracking approach. Jakoet's research challenges the notion that passive investing is always the most cost-effective strategy. While index tracking may offer lower fees, the study suggests that active management, particularly focusing on top performers, can lead to superior outcomes. By carefully selecting and managing a concentrated portfolio of high-performing stocks, investors can potentially achieve higher returns with reduced risk. The findings also underscore the importance of balancing risk and return in investment decisions. Jakoet's research indicates that a mix of bond and equity investments, particularly with a focus on top performers, can optimize returns while mitigating volatility. By strategically allocating resources to both asset classes, investors can create a well-rounded portfolio that maximizes returns while managing risk effectively. In conclusion, Jakoet's research sheds light on the significant impact of top performers on market performance and the benefits of active portfolio management. By actively selecting and managing high-performing stocks, investors can enhance their portfolio returns and achieve better outcomes than traditional index-tracking strategies. The study highlights the value of strategic decision-making in investment management and challenges investors to rethink their approach to portfolio construction for optimal results.