LONDON - BARRA International Inc. is working with 13 indigenous pension funds and investment advisory firms to develop an equity risk model for South Africa.
The model will enable pension funds worldwide and other institutional investors to construct South African index funds and also will provide benchmark criteria for evaluating active managers.
With a $230 billion market capitalization, South Africa is the largest emerging market, although it was neglected by many institutional investors, especially in the United States, until the end of apartheid.
The market has 702 stocks, including different classes of stock that may be listed for the same company, said Hendrik du Plessis, a BARRA International representative based in Durbanville, South Africa.
"Only about 300 stocks would qualify for inclusion in institutional portfolios," Mr. du Plessis said.
"Our intention is to get full institutional coverage, so it probably means having 300 stocks in the model, although securities firms there don't follow that many," added Andrew Cauldwell, managing director in the London office of BARRA International, which is a unit of BARRA Inc., Berkeley, Calif.
Mr. Cauldwell, who is heading the project, said the group hopes to release the model between September and December, making it available to investors.
The group will look at the factors that appear to drive the South African stock market. Factors it will examine include those special to South Africa, such as a stock's performance sensitivity to gold, because the country is one of the largest gold producers in the world, Mr. Cauldwell said.
In addition, the group will examine standard factors that usually have some influence on the stock prices in every market. These include market-capitalization level, such as large, medium and small, and price-earnings ratios. Among other standard factors, the group will look at leverage, dividend yields and earnings and revenue growth.
The model will enable investors to create South African index funds, because investors often have to sample to replicate an index because of the difficulty of buying shares in all the stocks of any index, Mr. Cauldwell said.
"In many countries it's impractical to buy every stock in an index," he added.
"So if you are going to sample, and not buy every stock within index, the recognized means is optimization, so you need an optimizer or risk model," such as the one the BARRA-led group is developing, he said.
The model will provide insights on the market, helping investors to determine the style, performance benchmarks and sources of risk to evaluate actively managed South African portfolios.
The model will enable investors to identify why a portfolio performed well or poorly, and determine how much of the performance was due to luck or skill, Mr. Cauldwell said.
The South African organizations working with BARRA are: Alexander, Paterson Faure Inc.; Coronation Asset Management (Pty.) Ltd.; Eskom Pension and Provident Fund; Genbel Investments Ltd.; Iscor Pension Fund; Martin & Co. Inc.; Old Mutual Investments; Prudential Portfolio Managers (South Africa) Pty. Ltd.; RMB Asset Management (Pty.) Ltd.; South African National Life Assurance Co., known as Sanlam; Standard Merchant Bank Ltd.; Syfrets Managed Assets Ltd.; and Time Life Insurance.
