Responsible Investment

Financial Implications of South Africa Divestment

January 30, 2008
 Image ‘Apartheid - A Crime Against Humanity’ by United Nations Photo (CC BY-NC-ND 2.0)

After adjusting for all other factors, doing business in South Africa appeared to be associated with positive returns of 0.77%, although the difference was significant only for the 1960-1975 time period, when the disparity reached 2.05%. The factor turned negative for 1975-83, and although not significant, the authors observe “[it] is nonetheless sufficient magnitude to reject the hypothesis that [South Africa] stocks have substantially outperformed [South Africa-free] stocks with similar characteristics in the recent past.”

After adjusting for all other factors, doing business in South Africa appeared to be associated with positive returns of 0.77%, although the difference was significant only for the 1960-1975 time period, when the disparity reached 2.05%. The factor turned negative for 1975-83, and although not significant, the authors observe “[it] is nonetheless sufficient magnitude to reject the hypothesis that [South Africa] stocks have substantially outperformed [South Africa-free] stocks with similar characteristics in the recent past.”

The study also includes a useful commentary on the transaction costs of a divestment strategy. “Analysis of a representative divestment strategy based on buying and holding a value-weighted portfolio of all the SAF stocks in the NYSE suggests that all the traditional transaction costs for a 1 US$ billion portfolio can be as low as 0.41 per cent of the overall portfolio value (assuming trades are not liquidity or information-motivated). Reinvestment of dividends and investment of additional funds after divestment should not substantially exceed those associated with an undivested portfolio.”

References

  1. Grossman, Blake R., and William F. Sharpe. “Financial Implications of South African Divestment.” Financial Analysts Journal 42, no. 4 (July 1986): 15–29. doi:10.2469/faj.v42.n4.15
  2. This article was previously published on stristudies.org, January 30, 2008.

    This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “Ethical mutual funds catch up with conventional funds”, Lloyd Kurtz, and Ingrid Ramaan, www.tias.edu, January 30, 2008.

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Research Paper

Author(s)

Ingrid Ramaan
Administrative Editor FSinsight

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