Stock Market

Think high-beta stocks give high returns? Think again

Ritesh Presswala | Nazim Khan

Whenever stock markets are expected to see an upswing, experts are often seen advising investors put in money in high-beta stock.

Beta is a measure of risk that explains why volatile a security has been versus a particular benchmark index. 

A beta of 1 indicates that the stock price will move about as much as the market or index. A beta of less than 1 indicates that the stock price will be less volatile than the market while a beta of greater than 1 indicates that the stock price will be more volatile.

So a stock with a beta of 1.2 will be expected to (basis its past performance) rise 20 percent more than the index when the latter goes up and fall more on the way down.

The general perception amongst investors is they should seek exposure to high-beta stocks in a bull market and low-beta stocks when markets are expected to correct.

We decided to test that assumption and pulled data from the past five years to see how how high-beta shares have fared compared to low-beta ones.

Our search universe comprised the stocks in BSE 200. We compared their beta with respect to the benchmark a five-year period and looked up their performance.

Surprisingly, barring one, not a single stock having a beta higher than 1 turned up on the list of top performers.

The below table shows that of the top 15 stocks by performance — they clocked absolute returns between 600 percent and 4,800 percent — all but one had low beta.

Intuitively, the data makes sense from the standpoint that low-beta shares generally belong to defensive- or consumption-oriented sectors that typically have low debt or strong cash flows or both.

Over the past five years, with the investment cycle gone for a toss and the world economy in doldrums, leveraged or export-focused companies have witnessed a downswing in their fortunes. Such shares are typically considered more volatile and it’s no surprise that, on average, they do not figure majorly in the list of top performers.