If you are a shareholder in Kingston Financial Group Limited’s (SEHK:1031), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 1031 is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
See our latest analysis for Kingston Financial Group
What does 1031’s beta value mean?
Kingston Financial Group’s five-year beta of 1.19 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, 1031 can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could 1031’s size and industry cause it to be more volatile?
With a market capitalisation of HK$86.13B, 1031 is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. But, 1031’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors can expect a low beta associated with the size of 1031, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from 1031’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How 1031’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test 1031’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 1031 seems to have a smaller dependency on fixed costs to generate revenue. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. This outcome contradicts 1031’s current beta value which indicates an above-average volatility.