Listing does not alter asset risk profiles, Schroders

The idea that the listing of an asset on an exchange can meaningfully alter its risk profile is an “example of behaviour and emotion prevailing over rationality”, according to Schroders’ head of Australian equities Martin Conlon.

Writing in a paper ‘Human behaviour — herd mentality, panic and risk’, Conlon said a “stoush has raged for some time” between the listed and unlisted camps (over their respective risk profiles) in a range of assets.

“This stoush has heightened recently as listed assets have sharply increased in volatility, causing many investors to question their appetite for this ‘risk’,” Conlon said.

He said listing an asset (merely) creates an efficient mechanism for fractional ownership and a low cost method for allowing buyers and sellers to exchange these assets.

“If the same groups of owners with the same ownership shares, the same assets and the same financial leverage, chose to own (these) through an unlisted vehicle, the price would in all likelihood be less volatile.”

This is because the “manager/valuer of the vehicle would choose to publish a per share valuation which showed little movement on a daily basis”, he said. “They would have little justification to do otherwise.”

On the other hand, he said, the listed asset, allows (through its liquidity) the price to move up and down — perhaps sharply - as owners, as either forced or willing sellers, allow the daily price to be set at the point at which a willing buyer is found.

“For those not obligated to sell during any particular time period, (however) the cash flow and fundamental value outcome will be the same.”

“Therein lies the fallacy of market volatility as a measure of risk,’ Conlon said.

“The cure does not lie in delisting assets and convincing our selves we have reduce risk or moving more of our assets into a framework of less regular pricing.”