An appraisal of the popularity of fundamental and technical analysis as decision making tools for investing in the equity markets by portfolio managers working for large institutional investors in South Africa

Abstract

The literature reveals that, behavioural finance lends some support to the methodologies of both fundamental and technical analysis. Behavioural Finance supports the concept of investment behaviour being grounded in two dimensions, viz., the dimensions of emotion and rationality. The evidence, presented in the literature suggests that fundamental analysis is grounded in the rational investor, while technical analysis is an attempt to model the behavioural side of investing through trend following, charting and the use of indicators (e.g., momentum, stochastic, etc.). Typically large investment houses tend to use both technical and fundamental analysis; technical analysis appears to be used primarily for timing, while fundamental analysis is used to establish intrinsic or fair value of the share under focus – thus making it easy to establish whether the share is cheap or expensive. The null Hypothesis was based on the premise that both technical and fundamental analysis was popular with a significant proportion of portfolio managers, while the alternative hypothesised that there was a significant preference for one or the other. The response rate of the questionnaire resulted in a sample size of 12. The sample size was sufficient for a statically valid inference. Approximately 50 questionnaires were sent out. Of these 13 responses were received, and 12 selected (from four large institutions) for inclusion – translating into a response rate of 26%. The low response rate did retain sufficient power and provided evidence to support the null hypothesis - almost all portfolio managers showed a preference for fundamental analysis. However, there was also evidence, at the 95% confidence level, that between 40% and 90% of portfolio managers used technical analysis as well. A possible explanation for this is covered in section 6.