Page 107 - Profile's Unit Trusts & Collective Investments - September 2025

Investment risk Chapter 6

Beta analysis
Beta analysis is a method of volatility or risk analysis which calculates the elasticity or
volatility of a share price or portfolio in relation to the rest of the stock market. The beta
coefficient measures a stock’s relative volatility. Shares with a high propensity to change
price relative to the overall market (ie, volatile shares) have a high beta, or risk. A beta coefficient
greater than 1 indicates the particular share or portfolio being analysed is more volatile than its sector
index, and a coefficient less than 1 indicates a share or portfolio whose overall price movement is less
volatile than the sector index (or the overall market index).
A negative coefficient means that the stock moves in the opposite direction to the market. The FTSE/
JSE All Share index has a beta coefficient of 0.73. A conservative equity investor whose main concern is
preservation of capital should focus on shares or portfolios with low betas. A person who is willing to
take high risks in an effort to earn high rewards should look for high beta shares or portfolios.
Take a look at the top 10 holdings of different funds in the fact sheet section of this book, for
example, and the percentage of the portfolio total that the 10 holdings represent. In some cases, the
top 10 holdings constitute over 60% of the fund, while in others the top 10 holdings are 30% or less.
Obviously, heavier weightings in fewer stocks makes for a riskier fund, with a greater chance of either
under or over performance relative to the market. Warren Buffet, the famous American investor,
believes that investors should hold no more than 10 shares, which must be watched like a hawk!
But such a portfolio is then more subject to “stock picking risk” than market risk. So investors who
want to “back the market” would be better served in a diversified fund.
Market timing risk
If you make a very long term investment in a fund which is very well diversified across, say, South
African equities, you eliminate some risks (like sector risk) and increase your exposure to benchmark
risk (ie, the risk of the South African equity market itself). Over the long term, market risk reduces, so a
well-diversified long term equity portfolio is relatively low risk.
It is a characteristic of nearly all markets that they rise and fall. The “wave” formations of different
sectors go up and down at different times. Gold might be rising while financials fall, or bonds might
be rising while the retail sector falls.
Some managers strive to add value to the performance of their funds by actively shifting market
exposure to take account of market movements in different sectors. Multi asset funds, especially
flexible and high equity funds, allow fund managers to take full advantage of market timing by shifting
funds from one asset allocation class to another according to which assets they think are going
to perform. Managers of multi asset funds have the freedom to invest in different sectors, different
assets and sometimes different countries.
In some years all the top performing unit trusts are from theme or sector funds (such as resources
or industrials), and in other years investors find that the top performing funds are predominantly, say,
interest bearing funds. No one category, however, has dominated over the decades.
Fund managers of theme or sector funds are mandated to stay invested in that sector, but
managers of multi asset funds can pick the sectors in which they wish to be overweight. Market
timing risk is really the danger that someone trying to exploit market cycles and “hot” sectors will
make matters worse by getting it wrong. For example, fund managers who sold heavily during the
Covid-related market crash of March 2020 and failed to get back in lost out on a massive bull run.
Measured from the mid-February 2020 high point before the crash, the Nasdaq index gained more
than 40% to mid-February 2021.

Currency risk
This is the risk that otherwise good investment returns will be eroded by a weak currency.
There have been several periods in the JSE’s history where a rising local market has been
accompanied by a weakening rand. If the local equity market rises 25% over a particular period, for
example, and the rand depreciates against the dollar by 25% over the same period, then measured
in dollar terms JSE returns would be zero (ignoring dividends).

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