Introduction to BH Macro Limited

BH Macro Limited is a renowned close-ended investment company. The company invests the assets in a master fund, namely Brevan Howard Master Fund Limited that is managed by Brevan Howard Group. The money invested in the Master fund can be invested in various instruments such as debt securities, bank loans, currencies, commodities, listed and unlisted equities, options, futures, swaps, warrants and other derivative instruments. The investment objective of the company is to generate consistent long term appreciation by active leveraged trading and global investments. The company is managed by the Brevan Howard Capital Management LP and the master fund is used as a hedge fund (Reuters 2013).

Beta is referred as a measure of the investment’s relative volatility. This means that it measures the risk in relation to the market or in comparison with a benchmark. It is calculated as ratio of covariance of market return and stock return to the variance of market index (Sercu 2009). In the given task, the risk on security of the company BH Macro Ltd. has been determined with the Benchmark FTSE 250 index. The calculated value for beta is 0.119756828, whereas the published value for beta that is obtained from uk.reuters.com is -0.09 (Reuters 2013).

The difference in the value of beta comes due to different types of risks that are classified as systematic and unsystematic risk. Systematic risks occur as an impact of the macro economic changes, and these macroeconomic factors that lead to market risk include growth rate, government policies and expenditures, inflation rate, structure for interest rates, etc. Whereas, the unsystematic risks occur as a result of various company specific factors such as new product development, entry of new competitors, decreasing credit rating of the firm, loss of influential people, and employee turnovers or labour strikes (Sercu 2009).

The difference in the calculated and published value for beta might occur because of various reasons such as different time intervals, different time frame, exclusion and inclusion of dividend, and different index.

Different time intervals

In the task, the beta value has been calculated by using the monthly share prices of last five years, whereas it might be possible that the beta value that has been published on Reuters might have been derived using the daily share prices.

Different Time Frame

The time frame that has been selected for calculating beta is 5 years, i.e. from 1 February 2008 to 31 January 2013, while the published beta might have been calculated using a different time frame.

Exclusion and Inclusion of Dividend

In the task, the beta has been calculated without considering the dividends as they were not available. Whereas, the published beta might have been calculated using the dividends (Sercu 2009).

Different index

Here, the benchmark for calculating beta is FTSE 250, and Reuters might have used some other market index as the benchmark for calculating beta.

Share price refers to the price of a single share in the total number of company’s stocks or derivatives. The share price performance of any company can be analysed using the trend analysis method. The investors can analyse and determine returns on their investments. In the given case, the share price performance of BH Macro Ltd. for last 5 years is compared with the share price performance of FTSE 250. The following graph represents the comparison of share price performance. In the graph, it is indicated that the share price performance of BH Macro Ltd. is better than that of FTSE MID 250, and the share prices have been very consistent over the period of five years. Whereas, for FTSE, the share prices decreased during the recession period of 2009 that later improved and the prices went up the market index. Then again there was a little decrease in the share price performance of FTSE in 2011-12, which improved by 2013. But the company’s share price performance was not much influenced after the recession period of 2009 and they have been consistently improving.

Calculating the Beta Value

The share price performance can also be compared on the basis of some financial theories such as Security market line (SML), single index model (SIM), and time value of money.

Security Market Line

Security Market line is the graphical representation of the Capital Asset Pricing Model. The graph represents the relationship between the systematic and unsystematic risks of the company in terms of expected returns on security and the return of the whole market index at a particular time. It is considered as an effective method to determine whether a particular asset can provide rational returns or not. It also illustrates the total risk free returns and price risks. Risk is calculated through the covariance of the market returns and the variance of return on security (Barucci 2003).

The slope of SML is obtained through the following equation:

Return on security = Risk Free Return + {price per unit of risk * risk}

The risk free rate of return that has been obtained for the BH Macro is 0.005927113.

Single Index Model

Single Index model is another model that can assist in comparing the share price performance of the company. The Single index model was introduced by Sharpe and it measures the risks and returns of a company’s stock. It represents a relationship between the share price performance and the complete portfolio, i.e. according to the model, the share price performance or the security performance is related to the company’s portfolio performance (Strong 2009). Mathematically, the model is represented in the form of the following equation:

R_it = a_i + b_i R_mt + e_it

Where,

R_it = return on security in the given time period,

a_i = constant return or alpha,

b_i = beta,

R_mt = return on market index in given time period,

e_it = error term

0.006733495 = 0.005974289 + (0.119756828 * 0.006232112) + ~0

In this model, an assumption is made, i.e. the value of the error term is taken to be close to zero (~0) as it is the degree of variation in the value of return on security. Also, the value has finite variance and is not correlated with the market index or with any other security.

The theory of the time value of money is the most central financial theory and it states that presently, a certain amount of money has certain value in terms of buying power and the same amount of money will have a completely different buying power in the coming future. This means that the value of money decreases with time and measures the value of a certain amount of money considering the interest earned or inflation rates over a given time period (Drake and Fabozzi 2009). In the given task, the comparison of company’s share price performance with the market index can be conducted by using this theory. For this, the value of 1 Euro has been calculated at the end of every month from 1 February 2008 to 31 January 2013, for the company and FTSE 250 market index. The values were calculated with the help of the following formula:

Factors contributing to the difference in Beta Values

Value at the end of month = Value at the beginning of the month*(1 + return)

The following graph will represent the changes in the time value of money for the BH Macro and FTSE 250:

On the basis of graph, it is seen that the value of Euro 1 has shown a notable change for both FTSE 250 and BH Macro, but the performance of company is better than that of FTSE 250.

The share price performance of the company from 1 February 2008 to 31 January 2013 was compared with the last three month’s performance of the company, i.e. from 1 February 2013 to 20 April 2013. In the five year time period, the share price of the company has increased continuously but due to the recession and other economic factors price of the company fell by 20 % in year 2008. In this period, the share price of the company had crossed € 19.50 which reflects 42 % increase in price from year 2008. For the comparison, the average of share prices of last 5 years has been taken to compare with the average share prices of last three months. The average share price of last 5 years is calculated as 17.17 Euros, and the average price for last three months was calculated as 19.94 Euros. In these last three months, the price of the share has reached to 21 euros, which shows 8 % increase in share price from 31^st January, 2013 (BH MACRO LTD (BHMDF), 2013).

The Following Graphs shows price change in 5 year time period and in last three months:

The principal factors that affect the price change over the given time period can be identified as:

Share Buy-Back

If the company goes for the share buy back option, then the number of shares will reduce in the market. Thus, according to the law of supply and demand, if the availability of shares will decline, then this will decrease the supply that will eventually increase the share prices. Therefore, share buy-back is used as an important tool for increasing the share prices of the company and to deliver value to investors (The 10 Factors That Affect and Predict Stock Prices 2008).

Earning results

The basic objective of a company is profit making and the share prices of any company mainly depend on its earning results. If a company has good earnings, then it can expect its share prices to rise and if it does not have good earnings, then the share prices are expected to fall. Also, if the company’s earnings are good, then the increased share prices will attract investors to invest in the company’s stock (The 10 Factors That Affect and Predict Stock Prices 2008).

Take-over or Merger

Usually, when a company has been taken-over by some other company, then its share prices are expected to increase and if the company takes over another company, then the share prices are expected to fall. This also causes a sudden change in the management that leads to various changes in the operations of the company and thus, the performance of the company is affected greatly (The 10 Factors That Affect and Predict Stock Prices 2008).

Other Economic Factors

 There are various other economic actors that also affect changes in the share prices. These factors include inflation, unemployment and interest rate changes. The increasing unemployment leads to a decline in the interest rates, which is the main profitable venture in the stock market. The rising rate of inflation decreases the returns on investments and thus, share prices fall.

The comparison can also be explained on the basis of Miller and Modigilani (M&M) theory. According to the M & M theory, the market value of a company is mainly determined through its earning power and the risks attached with the underlying assets. The theory also assumes that there is perfect capital market, realistic investors, and freely available information, and there is no transaction or floatation costs related to investments. Besides this, the model assumes that investments and dividend decisions are irrespective of each other. The M& M model is given by the following equation:

P₀ = (1 / (1+p))*(D₁+P₁)

Where, P₀ is the market price per share at time 0,

P₁ is the market price per share at time 1,

D₁ is the dividends per share at time 1, and

p is the discount rate for risk and is constant (Sercu 2009).

Conclusion

From the above discussion, it can be elucidated that the share price performance of the BH Macro Limited has been better and consistent when compared with FTSE 250 market index. The calculated beta for the company came out to be 0.119756828, whereas the published beta was -0.09. The reasons could be calculation in different time intervals, different time frame, dividend inclusion and comparison through some other market index. When the share price performance for last 5 years from 1 February 2008 to 31 January 2013, was compared with that of FTSE 250, then the company’s performance was found to be more consistent than the market index. The theories those were used to conduct the comparisons are SML, SIM and time value of money. Also, the comparison of the company’s last five years’ performance with that of last three month’s performance, it was seen that the company had a consistent performance and the same consistency was maintained in the last three months also.

References

Barucci, E. 2003. Financial Markets Theory: Equilibrium, Efficiency, and Information. London: Springer.

BH Macro Ltd (BHME.L). 2013. Basic chart.

BH Macro Ltd. 2013. Historical Prices

Drake, P. P. and Fabozzi, F. J. 2009. Foundations and Applications of the Time Value of Money. John Wiley & Sons.

FTSE MID 250. 2013. Historical Prices.

Sercu, P. 2009. International Finance: Theory Into Practice. New Jersey: Princeton University Press.

Strong, R. A. 2009. Portfolio Construction, Management, and Protection. USA: South-Western Cengage Learning.

The 10 Factors That Affect and Predict Stock Prices. 2008.

BH MACRO LTD (BHMDF), (2013). Historical Prices