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Bram de Haas
Bram de Haas
Articles (319)  | Author's Website |

Murray Stahl Makes the Case for Buying Beta

Why going long beta could be a good value investing strategy

November 27, 2015 | About:

One guru whose writing I follow closely is Murray Stahl (Trades, Portfolio) of Horizon Kinetics. For me, it is all must-read material because it is always thought provoking and levels above the research published by most asset management firms in terms of being actionable.

Take Stahl's latest market commentary, which deals with the beta of ETFs. Beta, or β, is a metric that communicates past volatility. If a stock’s price has moved a lot, it tends to have a high beta; if a stock’s price has been very stable, it has a low beta. This is measured over a period of years against a benchmark like the S&P 500 and results in a value. The benchmark is equal to 1 and stocks that have exhibited a lot of volatility are above 1 (the higher the greater the volatility) and the stocks below it are more stable than the benchmark. What is important to note is that the value is based on historical price volatility data, which isn’t necessarily a great predictor for the future.

Stahl shows how tremendous amount of money is flowing into low beta ETFs and high beta ETFs are basically unmarketable:

The table above from Stahl's market commentary shows the AUM in high beta portfolios. Two have so few funds that they are most likely unprofitable to maintain for Powershares.

The contrast that the table above shows that low beta or low volatility is a very popular trade.

Where have we heard this high beta argument before? Just a few weeks ago, I wrote up three investment ideas by Rupal Bhansali from Ariel Investment. I wrote this:

She made one remark that I thought was extremely interesting in that she recommended volatility over stability. In her mind going long volatility in the current market is actually less risky than going long stability or as she put it succinctly: stability is a crowded trade.

I am more of a bottom-up stock picker myself, and don’t spend much time looking at the macro environment, but these observations by these two guru investors resonate with me. As I look for cheap stocks and load up my portfolio without any macro concern, I have noticed it has become quite volatile of late. If the macro observations of Stahl and Bhansali are correct, that makes sense as I’ve subconsciously gone long volatility.

The way I went about acquiring high beta stocks is definitely not the most efficient, and one of the reasons I love Stahl’s research so much is that it is always actionable. He included three high-beta ETFs: the PowerShares S&P 500 (SPHB), which has four stars at Morningstar; the PowerShares S&P Int’l. Developed High Beta Portfolio (NYSE:IDHB), which has two stars at Morningstar; and the one-star PowerShares S&P Emerging Markets High Beta Port (NYSE:EEHB).

Alternatively, you could invest in high beta stocks directly. You can screen for them, but one issue I encountered during that process is the highest scoring ones are very junky. Lots of OTC issues that are nearly bankrupt and that shows crazy volatility. It takes a lot of work to go through all of these and find investable ideas. This is even more so if you have high standards, which I don’t. Instead you can also take a look at what is inside the ETFs I have just described. To be put into an ETF, issues need to have some sort of liquidity and that means the contents are somewhat pre-screened if that is one of your concerns. I’ve listed the top five companies for each ETF and the characteristics of the portfolios to give you an idea of where to find high beta currently.

PowerShares S&P 500

The top five stocks in this ETF are: Freeport-McMoran Inc. (FCX), Cameron International Corp. (CAM), Marathon Oil Corp. (MRO), Newfield Exploration Corp. (NFX) and Avago Technologies (AVGO). It is immediately apparent that the bear market in energy had its effect on the content of this ETF, which consists of 96% U.S. stocks. It is diversified across sectors with the top three being energy at 27%, technology at 20% and financial services at 19%.

PowerShares S&P Int’l. Developed High Beta Portfolio

The other two ETFs are focused on foreign markets. This one consists of 98% non-U.S. companies, with 23% being in the financial industry and 21% in energy. During a crisis financials tend to get hit very hard. Emerging markets from China to Brazil and back to Russia are going through something of a crisis, and it makes sense that financials have been showing tremendous volatility and thus make up a large part of this high beta ETF. The top five stocks are: Penn West Petroleum (PWE), Alibaba Health Information Technology (HKSE:00241), Canadian Oil Sands (COSWF), MEG Energy Corp. (TSX:MEG) and Det Norske Oljeselskap ASA (OSL:DETNOR).

PowerShares S&P Emerging Markets High Beta Port

The third high beta ETF contains 100% foreign issues. It has a similar make-up as the developed high beta portfolio, with 20% of its portfolio in the financial services industry and 15% in industrial. The top five positions are Sberbank of Russia PJSC (SBRCY), JSFC Sistema GDR (JSFCF), China Galaxy Securities (HKSE:06881), Kingsoft (HKSE:03888) and Sinopec (SHI).

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website

Rating: 5.0/5 (1 vote)



Idaustin - 3 years ago    Report SPAM

The wisdom of retail bubbles to the surface again. Too bad beta is unrelated to liquidity, which retail confuses and substitutes for risk.

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