Portfolio Defense: Value, Growth, or Neither?
Figure 1 – Over 20 Years, Value Had the Stronger Defensive Profile, 1/1/2000–12/31/2019
Drawdown4
Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
However, if we examine the 17-year period following the Tech Bubble drawdown, growth appears to be the more defensive style (Figure 2).
Figure 2 – But in the 17 Years Since the Tech Bubble, Growth Had Been More Defensive, 1/1/2003–12/31/2019
Drawdown
Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
Sectors More Defensive than Styles
What has remained consistent, however, is the role that sector allocations play in driving index behavior, including downside protection. Over this 20-year timeframe, non-cyclical sectors such as utilities, consumer staples and healthcare all exhibited more defensive characteristics than their cyclical counterparts in consumer discretionary, financials and basic materials (Figure 3).
Figure 3 – Sector Characteristics, 1/1/2000 to 12/31/2019
Drawdown
Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
Figure 4 – Non-cyclicals Outperformed in Market Drawdowns
Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
Conclusion
Rather than allocating to growth or value to increase or decrease a portfolio’s defensive stance, investors may want to consider non-cyclical sectors, like utilities, consumer staples, and healthcare. From 1/1/2000 to 12/31/2019 these sectors exhibited less volatility and smaller losses during severe market drawdowns.
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The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
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Index information contained herein is derived from third parties and is provided on an “as is” basis. The user of this information assumes the entire risk of use of this information. Each of the third party entities involved in compiling, computing or creating index information disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to such information.
1 Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
2 Standard Deviation: a statistical measure that sheds light on historical volatility.
3 Average Drawdown: the average drawdown is the time average of drawdowns that have occurred up to time. A drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund. A drawdown is usually quoted as the percentage between the peak and the subsequent trough.
4 Maximum Drawdown: the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period.
5 Russell 1000® Growth Index is an unmanaged index that measures the performance of the large-cap growth segment of the US equity universe. It includes those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.
6 Russell 1000® Value Index is an unmanaged index that measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values.
7 S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.
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