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

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Latest Updates

Economy

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Superannuation

No, Division 296 does not tax franking credits twice

Claims that Division 296 double-taxes franking credits misunderstand imputation: franking credits are SMSF income, not company tax, and ensure earnings are taxed once at the correct rate.

Investment strategies

Who will get left holding the banks?

For the first time in decades, the Big 4 banks have real competition in home loans. Macquarie is quickly gain market share, which threatens both the earnings and dividends of the major banks in the years ahead.

Investment strategies

AI economic scenarios: revolutionary growth, or recessionary bubble?

Investor focus is turning increasingly to AI-related risks: is it a bubble about to burst, tipping the US into recession? Or is it the onset of a third industrial revolution? And what would either scenario mean for markets?

Investment strategies

The long-term case for compounders

Cyclical stocks surge in upswings but falter in downturns. Compounders - reliable, scalable, resilient businesses - offer smoother, superior returns over the full investment cycle for patient investors.

Property

AREITs are not as passive as you may think

A-REITs are often viewed as passive rental vehicles, but today’s index tells a different story. Development and funds management now dominate earnings, materially increasing volatility and risk for the sector.

Australia’s quiet dairy boom — and the investment opportunity

Dairy farming offers real asset exposure, steady income and long-term growth, yet remains overlooked by investors seeking diversification beyond traditional asset classes.

Sponsors

Alliances

© 2026 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.