Report reveals top defensive equity strategies

Yasmine Raso

Senior Journalist, Financial Newswire

6 September 2022

A new report from independent investment consulting firm, bfinance, has revealed the top defensive equity strategies that have a proven track record of strong performance during market downturns.

The report titled Defensive Equity Strategies and Market Downturns also included a new classification framework that seeks to assist investors in understanding the exposures and performances of different equity strategies.

The five categories, Low Volatility, Income, Classic Quality, Quality Value and – the least defensive – Quality Growth, provide investors with a bird’s-eye view of the multiple variations of equities to consider when it comes to building portfolios.

This comes after the report found defensive and diversifying strategies have come under scrutiny in 2022, with the MSCI’s “flagship” global equities index losing 20 per cent of its value in the first half of the year due to geopolitical tension and rising inflation.

“The median strategies in Classic Growth and Quality Growth are delivering a reduction of more than 80% versus the market index when it comes to Weighted Average Carbon Intensity, a trend we are seeing globally and within the Australian market as well,” Sebastian Mays, Business Development Director at bfinance, said.

“Our latest findings also point to the strength of the healthcare sector across all categories of defensive equity, a trend we are seeing in Australia with a surge of interest in the industry broadly.”

The classification framework’s spectrum ranges from most defensive to more focused on quality and growth, with ‘Low Volatility’ seeking “explicit risk reduction”, ‘Income’ targeting “companies with high dividend yields”, ‘Quality’ favouring “companies with characteristics such as a clear competitive advantage and a strong balance sheet”, ‘Quality Growth’ targeting “undervalued Quality stocks on an opportunistic basis”, and ‘Quality Growth’ looking at “Growth characteristics alongside Quality”.

The report also noted that a high number of fund launches have specifically targeted the ‘Quality’ and ‘Quality Growth’ strategies, despite recent market downturns delivering mixed results to managers across the entire spectrum.

“These exceptions… serve as an important reminder that every crash has its own unique drivers. Several of these strategies are sacrificing considerable upside in exchange for their downside resilience,” the report said.

“The question of whether to sacrifice upside potential to gain downside resilience is a perpetual and controversial one. Investors should be sceptical of any strategy claiming to offer strong downside capture without an upside sacrifice.

“Defensive strategies of various forms are expected to hold up relatively well under inflationary conditions. However, the outcomes will depend on whether central banks are able to engineer a ‘soft landing’ (higher interest rates without economic decline).”