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If you are looking to invest in Monash Absolute Investment Company Limited’s (ASX:MA1), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures MA1’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
View our latest analysis for Monash Absolute Investment
An interpretation of MA1’s beta
With a five-year beta of 0.33, Monash Absolute Investment appears to be a less volatile company compared to the rest of the market. This means that the change in MA1’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, MA1 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does MA1’s size and industry impact the expected beta?
A market capitalisation of AU$40.44M puts MA1 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, MA1’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap MA1 but a low beta for the capital markets industry. It seems as though there is an inconsistency in risks portrayed by MA1’s size and industry relative to its actual beta value.
Is MA1’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test MA1’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 is virtually non-existent in MA1’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect MA1 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
MA1 may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as MA1 is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Monash Absolute Investment’s financial health and performance track record. I urge you to complete your research by taking a look at the following: