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.

Finweek English Edition - - MARKET PLACE - Ed­i­to­rial@fin­week.co.za Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

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.

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