Portfolio Defense: Value, Growth, or Neither?

It’s a common misconception in the investing world that value is a more defensive investment style than growth. This view has been supported by 20 years of historical data. On average from 1/1/2000 to 12/31/2019 value stocks have exhibited less downside and lower volatility, along with higher returns (Figure 1).

Figure 1 – Over 20 Years, Value Had the Stronger Defensive Profile, 1/1/2000–12/31/2019 Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.

But this is a case where the averages may be misleading. Much of value’s outperformance over this 20-year span actually occurred in the three-year period from 1/1/2000 to 12/31/2002, during the Tech Bubble crash. In those three years alone, growth fell by over 60% due to its overweight in the technology sector, while value dropped by only 30%.

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 Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.

Similarly, if we isolate only the months in which the S&P 500^®7 had negative performance, there is still no clear winner between value and growth. Over the 20-year period, value outperformed in just 54% of down markets, and a significant portion of that occurred during the Tech Bubble drawdown.

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 Source: Morningstar; Natixis Investment Managers Solutions. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.

Similarly, during the five worst market drawdowns since 2000, non-cyclical sectors outperformed their cyclical counterparts, the Russell 1000 Growth and Value indices, as well as the broad equity market 80% of the time (Figure 4).

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.

The underperformance of defensive sectors during the Tech Bubble drawdown was driven by utilities having an uncharacteristic middle-of-the-pack return. Consumer staples and healthcare still outperformed all other sectors.

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.