XTR – Stock Picking Using Beta

The Beta coefficient, in terms of finance and investing, is a measure of volatility of a stock or portfolio in relation to the rest of the financial market. An asset with a beta of 0 means that its price is not at all correlated with the market and that the asset is independent. A positive beta means that the asset generally follows the market. A negative beta on the other hand shows that the asset inversely follows the market and generally decreases in value if the market goes up. It might look like a coincidence but XTR 21 has two highest beta stocks viz. Petrom and Broker and two negative beta stocks viz. Turbomecanica and Alro. No wonder last week’s negativity saw XTR as the best performer. The negative beta stocks balancing the high beta stocks. Negative correlation helped reduce losses. We expect a similar performance in the coming future.
Beta correlations are not only evident between companies within the same sector, but also within the same asset class like equities. This is why a majority of the stock components fall or rise together. However, when you talk about emerging markets, this correlated risk, measured by beta can also assist in numeric rankings between sectors and stocks and assist in stock picking.
Emerging markets continue to be a driver for global investment and it’s presumptuous to assume that the degree of a bear market can become large enough to drive out liquidity from the Romanian capital market. Though markets are more integrated today than they were in 1980’s when Japan went into a depression, the very fact that global economy thrived for more than thirty years despite the Japanese slow down clearly highlights that the economic engine growth might come from a different asset class or a different region, but no global depression can stop it completely.
The intermarket factors will continue to play just like they do between large cap and small cap, commodities and equities, developed and emerging markets. High betas of emerging markets will continue to attract investments from both local and international investment pools. And even if things become chaotic, the degree of chaos in emerging markets cannot be compared to one in developed markets.
It’s keeping these comparisons in mind we present this issue of XTR dedicated to betas. Indices are a good measure of judging a fund manager’s performance, as they beat the index. Today we have funds in Romania, which have moved to risk-adjusted performance combining returns with volatility. This is alpha, a measure of a fund manager’s skill, defined as the ability to produce superior risk-adjusted returns. However, most stock market indices just like in Romania are dominated by larger companies.
This means that active manager’s chance of outperforming lies in buying the shares of smaller businesses or outperforming through the value approach i.e. buying the shares of companies that look cheap on valuation measures, such as low price earnings multiples etc.. Hence the fund managers edge of delivering real alpha continues to diminish as market sophistication increases and what fund managers might deliver may be more beta rather than alpha. According to recent research, the correlation between fund returns and the S&P 500 index is already high and getting higher.
And Bill Fung and Narayan Naik of the London Business School suggest that it seems possible that in time ahead the gap between alpha and beta will continue to reduce. And though there will be fund managers outperforming all the time, identifying them early will remain a challenge. Hence a conservative strategy might be to just concentrate on beta and invest in indices and ETFs that allow the relevant exposure. XTR 21 allows small capitalization and value exposure on a appropriate sample of the market universe , classic stock picking using beta.
To read the latest XTR issue write to us for a free trial today or download the report from REUTERS KNOWLEDGE, YAHOO FINANCE, THOMPSON ONE or THOMPSON RESEARCH.