Should You Be Concerned About Standard Life Aberdeen plc's (LON:SLA) Risks?

For Standard Life Aberdeen plc’s (LSE:SLA) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as SLA. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as SLA, because it is rare that an entire industry collapses at once. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

An interpretation of SLA's beta

Standard Life Aberdeen's beta of 0.96 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, SLA appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could SLA's size and industry cause it to be more volatile?

A market capitalisation of £12.85B puts SLA in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. However, SLA operates in the diversified financial industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of SLA, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from SLA’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How SLA's assets could affect its beta

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine SLA’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, SLA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, SLA’s beta value conveys the same message.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto SLA. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Standard Life Aberdeen’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

• 1. Future Outlook: What are well-informed industry analysts predicting for SLA’s future growth? Take a look at our free research report of analyst consensus for SLA’s outlook.
• 2. Past Track Record: Has SLA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SLA's historicals for more clarity.
• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.