Many might not be familiar with the theoretical financial terms beta and alpha, however both are very important in guiding investors. Beta is simply the sensitivity of an asset class or sector to the market as a whole. In simple terms, it is the volatility in comparison to the market as a whole. Note that the market per se has a beta of one, thus an asset that has a beta of more than one is perceived to be more volatile than the market, while an asset having a beta lower than one, theoretically is seen to be less volatile than the market. Thus looking at an asset’s beta will indicate the volatility expected of one’s portfolio when markets are volatile. Usually, defensive and utility stocks hold low betas below one, while consumer discretionary, tech and stocks within the financial sector hold betas higher than one, thus implying higher volatility.

In previous writings, we have also discussed the ‘alpha’ term, which is another critical tool in assessing investors to evaluate their portfolio’s performance. Briefly, alpha is the excess performance a portfolio generates in excess of a reference benchmark. The said metric is seen more frequently within mutual funds, where a Manager is assessed on alpha generation.

Beta and alpha in today’s market context

The recent market volatility might have caught many investors by surprise in terms of portfolio positioning. An important element that investors should take into serious consideration is the fact that markets tend to react prior to events actually occurring. For instance, in the second half of 2017, many market participants believed that the European Central Bank (ECB) will commence tightening its policies and to this extent many had increased their weighting in financials, primarily subordinated debt, which to be fair turned out to be pivotal in generating alpha for 2017.

However, 2018 is a different saga given the volatility triggered by both; let’s say a more accommodative ECB, which stated that interest rates will be intact until the mid-year 2019, considered to be a negative for the financial sector on one end, and Trump’s continuous rational/irrational actions on the other.

Let’s be frank, today’s financial markets have been very conditional on Trump’s actions, tweets and other comments. I would dare say that markets would be in a much better place in terms of performance in 2018, if Trump would act more responsibly. In my view, the recent market volatility has pushed many Managers, including us, in re-positioning their sector allocations, not because fundamentals have deteriorated, but simply a decision to reduce a portfolio’s volatility by decreasing weights from sectors which are more sensitive to the current situation.

Thus despite one might at times consider a portfolio’s performance, in such current market situation capital preservation is also an important element and thus beta might matter more to achieve a better alpha. Simply put, despite portfolio positioning is usually tight to fundamentals; on a day-to-day portfolio valuation is conditioned by the market volatility. In this regard, when markets are volatile, reducing a portfolio’s beta will help in outperforming the market and thus induce positive alpha. 

As we had opined in previous writings, 2018 is not going to be an easy year for investors and the first 6 months of the year have been testament to that. It’s important to be very patient and take rational investment decisions. Undoubtedly, the political noise is a big negative for markets, but this is market risk, which is very difficult to eliminate. That said, the recent market volatility has indeed created selective opportunities and thus investors should be diligent enough to consider the undervalued sectors, while also considering the sector’s beta given the sustained levels of market uncertainty.

Disclaimer: This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.



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