Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 168

Three risk measures provide a fuller LIC picture

Historical returns can be a good guide when evaluating the merits of a Listed Investment Company (LIC). However, investment performance represents only one side of the risk-reward equation. Investors also need to factor in the risk metrics when assessing a LIC, such as the following three:

  • Beta
  • Standard deviation
  • Sharpe Ratio

Beta

Beta measures the magnitude of a LIC’s movement relative to its benchmark. A beta measurement of 1 conveys that the LIC is moving in line with its benchmark. A beta of less than 1 indicates it is less volatile than its benchmark, and a beta of more than 1 suggests that the LIC is more volatile than the benchmark.

For example, if a LIC has a beta of 1.1 in relation to the S&P/ASX All Ordinaries, then the LIC historically has been 10% more volatile than the index. Therefore, if the S&P/ASX All Ordinaries has gained 10%, with everything else being equal, the LIC would be expected to have gained 11% (10% x 1.1). The reverse is true if the index has fallen.

In the graph below, we calculate some LIC’s five-year share price beta. Overall, the graph suggests that the share price movement of the LIC is lower than the market. This also suggests that the inherent active nature of a LIC would be a good addition to an investment portfolio to smooth out long-term volatility.

Five Year Share Price Beta

Other observations from the graph:

  • LICs within the Large Capitalisation and the Large to Medium Capitalisation mandate have a beta largely between 0.6x-0.9x compared with the market. This suggests that, with the right LIC, an investor could achieve the same performance as the market with less risk.
  • All the Wilson Asset Management LICs (ASX: WAM, WAX and WAA) have a beta of less than 0.5x due to their historically high portfolio weighting in cash.
  • Australian Leaders Fund (ASX: ALF) and Cadence Capital (ASX:CDM) have low betas due to their ability to short investments in comparison to their benchmark.

Standard deviation

Standard deviation is a statistical measurement of historical volatility and is the most common definition of risk. It measures a LIC’s dispersion of investment return from its historical average. A larger standard deviation indicates higher volatility.

We use the pre-tax net tangible assets (NTA) as our data point to assess the standard deviation. The pre-tax NTA represents a better measure of a LIC’s investment performance.

The graph below reflects the pre-tax NTA performance of LICs over the past five years. This is reflected by its position along the horizontal, with LICs further to the right achieving higher returns. The graph also highlights the standard deviation of the LIC’s pre-tax NTA performance. This is reflected by each LIC’s positon along the vertical axis, with more volatile LICs positioned higher on the graph.

Pre-Tax NTA Performance Standard Deviation vs Pre-Tax NTA Performance

Other observations from the graph:

  • Century Australia Investments (ASX:CYA) and Australian United Investment (ASX:AUI) have domestic investment mandates but slightly higher risk profiles than the S&P/ASX All Ordinaries Accumulation Index.
  • Diversified United Investments (ASX: DUI) also has a higher risk profile due to its holding international exchange traded funds (ETFs) in its underlying portfolio.
  • The majority of LICs have a lower standard deviation than the S&P/ASX All Ordinaries Accumulation Index, of 12.6%, and nearly half of these LICs outperformed this index.
  • Wilson Asset Management LICs (ASX: WAM, WAX & WAA) attributes its low standard deviation to holding a significant amount of cash.
  • Magellan Flagship Fund (ASX: MFF) has been the best performing International LIC on a risk-adjusted perspective.

Sharpe Ratio

The Sharpe Ratio reflects the ratio of all excess returns over the risk-free rate divided by the standard deviation. The higher the Sharpe Ratio, the better the LIC’s performance in proportion to the risk it’s taken. A LIC with a negative Sharpe Ratio would suggest that a risk-free asset (example, government bond) would be a better investment.

The graph below shows the Sharpe Ratio of some LIC’s investment performance over the past five years.

Five Year Pre-Tax NTA Sharpe Ratio

Key notes from the graph above are:

  • Large market cap LICs and large-to-medium cap LICs have an average Sharpe Ratio of 0.36x, which is also the ratio for the S&P/ASX All Ordinaries Accumulation Index.
  • International-focussed LICs have outperformed risk-free assets over the past five years.

Conclusion

The return is only one side of the investment equation. Investors also must be aware of the risk they are assuming to achieve those returns before they can make an informed judgement when comparing LICs.

These three metrics do not tell the complete story. However, they should be used together with historical return, and qualitative factors such as investment philosophy, management experience and the cost of running the LIC. Together, these factors will make investors far more informed when determining which LICs to add to their portfolios.

 

Nathan Umapathy is Research Analyst at Bell Potter Securities. This document has been prepared without consideration of any specific client’s investment objectives, financial situation or needs and there is no responsibility to inform you of any matter that subsequently may affect any of the information contained in this document.

For the latest Bell Potter Quarterly Report and Weekly NTA updates, click here.

 

  •   11 August 2016
  • 4
  •      
  •   

RELATED ARTICLES

Why LICs may be close to bottoming

The fascinating battle between Nick Bolton and Magellan

Why LICs are closing and more should follow

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.