One Thing To Consider Before Buying Man Group plc (LSE:EMG)
If you are looking to invest in Man Group plc’s (LSE:EMG), 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 EMG’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
See our latest analysis for EMG
An interpretation of EMG's beta
Man Group’s beta of 0.94 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. EMG's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Does EMG's size and industry impact the expected beta?
EMG has a market capitalization of GBP £2.79B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. But, EMG’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 low beta for the large-cap nature of EMG but a higher beta for the capital markets industry. It seems as though there is an inconsistency in risks from EMG’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is EMG'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 examine EMG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since EMG’s fixed assets are only 1.43% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect EMG 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. Similarly, EMG’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You could benefit from lower risk during times of economic decline by holding onto EMG. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. Consider the stock in terms of your other portfolio holdings, and whether it is worth investing more into EMG.
Are you a potential investor? Before you buy EMG, you should look at the stock in conjunction with their current portfolio holdings. EMG may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Man Group for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Man Group anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
