Page 104 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 6 Investment risk

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.
Although market risk almost “supersedes” many other risk factors, it is difficult to see market risk
in isolation. In other words, the way that market risk relates to a particular fund depends on the extent
to which that fund is representative of “the market”.
The JSE All Share index, for example, contains around 140 shares. The S&P500, a major US
index, contains 500 shares. Even these benchmarks are not, of course, fully representative of
“the market”, but they are sufficiently broad-based to be regarded as good proxies. By contrast,
some funds only hold 30 or 40 shares, making them much less diversified than a market index.
Furthermore, the fund may have overweight positions in a small number of shares.
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, has
said that if you really know businesses you should probably only invest in about six of them.
But most investors do not know businesses that well and investing in only a few increases the
risk of being wrong about their future prospects. Diversification reduces both the risk of not knowing
which business or manager to back and the risk of being wrong about the prospects of a business.
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

102 Profile’s Unit Trusts & Collective Investments March 2026