The optimal portfolio construction and portfolio performance comparisons between LQ 45 and Non-LQ 45 equities at Jakarta Stock Exchange

Written by: M.T. Ferdy Reza

This research is motivated by a tendency from investors’ observable fact that they incline to invest their funds on stocks classified as index of LQ 45 rather than on stocks classified as non LQ 45 index, reflected from the high volume of market capitalization and their liquidity. Therefore, this research is conducted in order to construct an optimal portfolio and compare the stock portfolio performance between LQ 45 and non LQ 45 index for companies enlisted at Jakarta Stock Exchange.

The numbers of samples in the research are consisted of 22 LQ 45 stocks and 24 non LQ 45 stocks taken using purposive sampling technique, having criteria of being actively traded at Jakarta Stock Exchange starting from the period of 2002 up to the period of 2006 and having monthly mean return more than 1%. The method used to analyze is Markowitz Diversification in order to form an optimal portfolio of LQ 45 as well as non LQ 45 stocks. Furthermore, the result is plotted in efficient frontier and the result is evaluated for the most optimal portfolio combination.

The optimal portfolio formed from LQ 45 index gives 65.39% of return, 25.13% of standard deviation, 0.68 of beta, 2.22 of Sharpe index, 80.50 of Treynor index and 60.19 of Jensen index. There are 10 chosen stocks from 22 stocks qualified, that is: PT. Multifarious Tambang, Tbk. accounted for 4.97%, PT. Astra Agro Lestari, Tbk accounted for 22.77%, PT. Bakrie Sumatera Plantations, Tbk with weight of 9.07%, PT. Bank Danamon, Tbk accounted for 0.12%, PT. Ciputra Development, Tbk accounted for 0.43%, PT. Global Mediacom, Tbk accounted for 14.98%, PT. International Nickel Indonesia, Tbk accounted for 15.51%, PT. Sumalindo Lestari Jaya, Tbk accounted for 8.68%, PT. Telecommunications Indonesia, Tbk accounted for 17.30%, and PT. United Tractor, Tbk accounted for 6.16%.

Whereas optimal portfolio formed from non LQ 45 stocks gives 61.07% of return, 27,18% of standard deviation, 0.81 of beta, 1.89 of Sharpe index, 63.61 of Treynor index and 56.79 of Jensen index. For optimal portfolio combination of non LQ 45, there are 12 chosen stocks, that is: PT. Indocement Tunggal, Tbk accounted for 6.52%, PT. Semen Gresik, Tbk accounted for 6.43%, PT. Ambasador Anggada, Tbk accounted for 7.41%, (4) PT. Glorious Real Property, Tbk accounted for 2.90%, PT. Summarecon Agung, Tbk accounted for 10.45%, PT. Light Kalbar, Tbk accounted for 3.44%, PT. Unilever Indonesia, Tbk accounted for 0.78%, PT. Lippo Bank, Tbk with weight of 9.97%, PT. Bank NISP, Tbk accounted for 25.70%, PT. Nature Finance, Tbk accounted for 15.48%, PT. Petrosea, Tbk accounted for 10.76% and PT. Hexindo Adiperkasa, Tbk accounted for 0.42%.

The research result also indicates that LQ 45 portfolio has a better performance in comparison with non LQ 45 portfolio that is based on the return indicator, standard deviation, beta, Sharpe index, Treynor index, and Jensen index. That is also supported by the calculation result of optimal portfolio using annual data from which they indicate that primarily LQ 45 portfolio has a better performance in comparison with non LQ 45 portfolio, especially if seen from return, Sharpe index, Treynor index and Jensen index.

By referring at this research result, and while doing investment on stocks, investors should prioritize stocks that classified in LQ 45 index. In addition to that, whenever choosing stocks to form a portfolio, an investor should not only rely his/her decision based only on historical return and systematic risk, but also does he/she need to analyze the market condition and business life cycle as well as business prospect of each and every industrial type.