Member question: “Is anyone using Barra to calculate WACC (weighted average cost of capital) or do you use another service provider?
- “To calculate cost of equity, we use our beta available from Bloomberg. Over the last year, our beta has decreased. The lower beta results in a lower calculated cost of equity and then WACC.
- “We think this could be a short-term impact and need to be very thoughtful about how to apply it in various analysis. In recent conversations, we have learned about Barra beta. My question: Is anyone using Barra beta and if so, how do you calculate it, or do you use a service provider to obtain this data?”
Peer answer 1: “We use Barra beta. My understanding is that they use a black box model to create a ‘predictive’ beta. We subscribe to the service to have access to the data.”
Peer answer 2: “We use Barra beta but we’re evaluating switching from Barra to Bloomberg in the future. Here are several considerations for comparing Barra beta and Bloomberg’s beta:
- “Barra ‘predictive’ lacks transparency. When we use the Barra betas of peers [in one country] as another data point to guide our own cost of equities estimation, they have very low Barra betas.
- “I suspect the Barra method is probably running these companies’ correlation with a MSCI global index instead of [the country’s] domestic equity index.
- “The Bloomberg beta method is transparent and allows customizing the index to correct such noise. Barra beta, I was told, also has an issue with new companies lacking trading history.
- “We have introduced a moving-average tweak to our beta estimation to smooth out the noise.
- “You may want to consider asking one of your bankers to provide a one-time look of several Barra betas and their history before signing up for the service.”
Peer answer 3: “We use Bloomberg’s five-year weekly adjusted beta. We look at Barra, but don’t like the lack of transparency.”