The investor’s solution
In a volatile and unpredictable market it might be a smart move for investors to take a look at the beta value of the shares in their portfolios.
with terms like “Brexit”, “Trump” and “junk status” popping up regularly over the past year, I think we all have come to the conclusion that uncertainty is the only definite we can count on for now. But at the same time, according to Bloomberg consensus forecasts, analysts still believe that our local market has a growth potential of 11.5% for 2017 (from current levels), which means that we have to be very careful not to move out of the market completely. Despite the fact that analysts and economists expect improved growth for 2017, however, they also agree on the fact that it will by no means be an easy task.
The two main financial emotions, greed and fear, are in a constant battle that intensifies daily. This leaves us with one important question: How do I get these two emotions to exist harmoniously?
The good news is that I have the answer to this question: own investments with the lowest risk and the best returns. The bad news is that no one really knows how to apply this solution practically.
Most people who are invested in shares today fit one of two personas: long-term investors who do not mind short-term volatility; or short-term speculators who still believe the probability of share price increases is high. It certainly won’t be a bad idea for the latter to take a closer look at the beta value of their investments right now. The beta defines the potential volatility of your share’s return or decline, compared to the volatility of the overall market or index. In simple terms, if a share has a beta of 1, it means that for every percentage point that the market moves up or down, your share price will move up or down by the exact same percentage.
A beta of 0.8 will mean that your share price will only rise by 0.8% for every 1% rise in the market, but it will only decline by 0.8% for every 1% decline. As the saying goes – half a loaf is better than none. It might not be a bad idea to shift your focus towards low-beta shares for the time being. That way, if analysts’ predictions are correct in that the market will rise, you will still benefit. If their predictions are wrong, your losses in a market decline will be lower.
With the last great correction, the market declined by 46% between May 2008 and November 2008. Interestingly, the five shares (companies) out of the 60 largest companies on the JSE that traded at the highest betas declined by a larger percentage and ended this period with a total decline of 57%. The five shares in this group that traded at the lowest betas didn’t even decline by a quarter of the market’s total decline over the same period.
Let’s take a look at the top 100 largest shares on the JSE. If we focus on companies that have good expected growth forecasts according to analysts’ forecasts (as polled by Bloomberg), and which currently has the lowest betas, the following 10 shares (in alphabetical order) stand out: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. AB InBev AECI AngloGold Ashanti British American Tobacco Curro Distell HCI KAP Oceana RCL Foods
After applying this process, I found it very interesting to see that these 10 lower-beta shares, with a combined average growth percentage of 9%, have managed to deliver twice the growth of the FTSE/JSE All Share Index (4.5%).
I’m well aware of the fact that historical performance bears no guarantees for future performance. The data, however, does give us a good example of the fact that you don’t have to take higher risks to enjoy higher returns. Invest with your mind and keep your emotions out of the management process completely.