Economy

The Beta answer to questions about the market

What a year it’s been so far. After the FTSE/JSE All Share Index ended 2019 with more than 12% positive growth, and the MSCI All Country World Index with a whopping 27% growth in US dollar-terms, general consensus forecasts for 2020 were definitely optimistic in nature. Sobering were the events that followed when our local market had already declined by 33% by mid-March (19 March 2020) due to the COVID-19 pandemic, which now has the whole world in a state of disarray. Suddenly optimism had turned to utter panic.

The two main emotions in the financial world, greed and fear, are constantly and increasingly battling one another. This poses an important question. How do I get these two emotions to live together in peace?

The good news is that I actually do have the answer to this question: just own investments that offer the lowest risk and the highest returns.  The bad news is that no-one really has the appropriate method, or knows how to apply this solution practically.

Most investors who are currently invested in shares are one of two kinds of people: long-term investors who are content with short term price fluctuations, or short-term speculators who feel that the probability for share price increases, are very good. For the latter, taking a closer look at the beta value of their investments right now, wouldn’t be a bad idea.

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 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% market 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 should be lower.

I worked through the FTSE/JSE Top40 Index and identified the five shares with the highest and lowest five-year average betas (in alphabetical order):

Top five: five-year average lowest betas

  1. AngloGold Ashanti
  2. Clicks
  3. Shoprite
  4. Spar
  5. Vodacom

Top five: five-year average highest betas

  1. Anglo American
  2. Amplats
  3. Implats
  4. Northam
  5. Sasol

What makes these two lists so remarkable, is that shares from the FTSE/JSE Top40 Index that had the highest five-year average betas, were mostly platinum mines, but more importantly, also some of the best performers on the JSE over the last five years. The top five lowest beta shares were companies that could mainly be described as ‘consumer-driven companies.’

I took things one step further by building two separate portfolios from each of the list of top five highest betas, and the top five lowest betas, and then compared these two portfolios’ performance to that of the FTSE/JSE Top 40 Index, and the results were quite staggering.

As I mentioned earlier, three of the top five high beta shares consisted of platinum mines, which had a good run in 2019, so it makes sense that the high beta shares outperformed the Top40 Index over the past 12 months (until 17 April 2020). What made this so interesting, however, is the fact that “low risk” didn’t necessarily mean “low returns” over this period. Not only are the top five low beta share prices still (up to 17 April 2020) trading 25% higher compared to 12 months ago, but in the graph above, you can clearly see that they were much less volatile than the high beta shares and the Top40 Index.

I’m not recommending that investors run wild in search of only low beta shares right now. Doing your homework remains key to your portfolio’s success. This is simply another tool you can use when compiling your personal share portfolio. Always invest with your mind and keep your emotions out of the management process.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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