The Australian Foundation Investment Co. Ltd (ASX: AFI) share price booked gains this morning while the major benchmarks swam in a sea of red.
The tide turned slightly on the ASIC share price around lunch, slipping below the opening price this afternoon alongside the S&P/ASX 200 index (ASX: XJO), which is down 1.1% into the red today. At the time of writing, however, AFIC shares are trading steady at around $8.36.
What’s up with the AFIC share price today?
Firstly, there is no market-sensitive information for the company today that is likely to impact the AFIC share price. So we can rule that out.
However, in view of the broader market selloff today, it’s important to realise some of the mechanics behind the market’s psychology, in order to explain why AFIC hasn’t slumped with the broader market today.
In times where risk, volatility and market uncertainty are high, investors tend to display a herd-like behaviour where they shift capital from risker investments into ‘safer’, more conservative ones.
This is called a ‘flight to quality’, and may occur within the same type of investment, or across different asset classes in times of financial market turbulence.
When talking about the share market in these instances, investors generally define risk as high volatility or fluctuations in price.
On this basis, the flight to quality involves shares that have low historical volatility, when looking in the rearview mirror.
The historical volatility of a share is measured using a fancy term called standard deviation – but there is a much easier way for Foolish investors to see this for themselves.
One easy way to examine this is to simply check a company’s share price chart, and see the style of the price line.
If it looks like a hyperactive 2-year-old drew it – with high peaks and low troughs – this is what high volatility looks like.
Conversely, a stable, gradually increasing line indicates the opposite scenario.
Looking at AFIC’s chart, it doesn’t take a rocket scientist to see that its volatility has been low this past 12 months.
Compare this to Afterpay Ltd (ASX: APT)’s share price over this same time, and one clearly see’s the difference.
How AFIC share price volatility compares to Afterpay
Data: Google Finance. Google and the Google logo are registered trademarks of Google LLC, used with permission
Hence, investors who want to take some risk off the table as market uncertainty grows, are likely to seek out shares such as AFIC, in a flight to quality, to help preserve capital.
What else could be at play?
Another factor to consider is that AFIC is a diversified investment company.
And one way that investors tend to reduce their investment risk is to diversify their portfolio – not keep all their eggs in one basket.
Given that AFIC has a high number of investments in the local share market, it offers investors a diversified way of staying invested in ASX shares.
Except they can achieve this benefit by owning one share – AFIC – instead of purchasing a bunch of individual shares at who knows what prices.
This increases the popularity of shares like AFIC in times of market uncertainty, as it offers investors a way to hedge their bets, and diversify their investment portfolio.
That way investors aren’t left catching the falling knife if a basket of shares begins to crash – as in today’s example – they can simply sell their AFIC shares instead, no dramas.
In a nutshell, AFIC shareholders gain access to the returns offered by a whole range of ASX shares but get to reduce their risk at the same time, because they aren’t holding the shares individually.
There’s a bit of a cap on the total return (as one trades some reward in exchange for lower risk), but that’s still a pretty attractive scenario for large institutions and investors with millions/billions of dollars at stake.
AFIC share price snapshot
It hasn’t been a terrible year for the AFIC share price, which posted a gain of 14.5% since January 1.
This extends its climb over the past 12 months to almost 33%. Both of these results are well ahead of the broad index’s return of around 25% in the last year.
The post The AFIC (ASX:AFI) share price is steady today as the ASX 200 falls appeared first on The Motley Fool Australia.
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More reading
- How does the AFIC (ASX:AFI) share price compare to its net tangible assets?
- Own AFIC (ASX:AFI) shares? Here’s what you’re invested in
- Own AFIC (ASX:AFI) shares? Then you also own these US tech stocks
The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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