The role of equities in a defensive portfolio

This article is part of
Guide to defensive multi-asset investing

Healthcare and technology companies

He cited healthcare and technology companies as examples of this.

Suhail Shaikh, chief investment officer at Fulcrum Asset Management says: “At a time like this, when there is so much uncertainty about the future, I would look at companies that are benefitting from societal change, I would look at Microsoft who are capitalising on the change to cloud computing, and Amazon, who are capitalising on the growth of online shopping.

"An investor might look at those stocks right now and think they are trading at expensive valuations, but the trends they are benefiting from will be around for a long time.”

John Husselbee, head of multi-asset investing at Liontrust, says he prefers not to take a strong view on which investment style will come into favour at any one time, and instead tries to blend the various styles. 

Defensive stocks

Andrew Keegan, head of wealth portfolio solutions at BlackRock says in the market turmoil of March, those stocks that are traditionally defensive and less reliant on sourcing materials from China performed best. 

Mike Coop, fund manager at Morningstar,acknowledges that the traditional defensive stocks, in areas such as consumer goods have performed well during the turbulent period.

But he says the defensive qualities of those shares is already reflected in the valuations  of those companies.

He says this is an example of what he considers to be a significant risk investors face when compiling a portfolio: diversification risk.

Mr Coop says:  “The tendency of the market is to be pretty efficient at pricing assets based on what is going to happen in the short-term, but to be pretty bad at pricing assets for the longer term.

"That’s because investors prioritise what just happened.

"But those traditional quality defensive equities are already reflecting what could happen in the short-term.

"Owning those means you are exposed to those circumstances, but the risk is that something different happens, and so you are not protected from it.”

He says one example of such a risk would be if inflation rose sharply and economic growth was stronger than expected.

In such an environment, it is likely that those defensive consumer stocks would perform less well than the more cyclical stocks.

This is because the more defensive companies generally sell products for which there is constant demand, and demand does not rise when the economy does.  

Erik Weisman, chief economist at MFS, an investment management firm, says he expects the recovery in company earnings that eventually happens, to be at a much lower level than is typical of such recoveries from recession.