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).
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).
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).
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).
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.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
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.
Diversification does not guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Asset allocation does not ensure a profit or protect against loss.
Indexes are not investments, do not incur fees and expenses and are not professionally managed. It is not possible to invest directly in an index.
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.
Figure 1 – Over 20 Years, Value Had the Stronger Defensive Profile, 1/1/2000–12/31/2019
Name
Return (%)1
Std Dev2
Average Drawdown3
Max
Drawdown4
Drawdown4
Russell 1000 Growth TR USD5
5.18
16.50
-12.44
-61.86
Russell 1000 Value TR USD6
7.03
14.59
-10.71
-55.56
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
Name
Return (%)
Std Dev
Average Drawdown
Max
Drawdown
Drawdown
Russell 1000 Growth TR USD
11.29
13.86
-8.94
-47.99
Russell 1000 Value TR USD
9.34
14.03
-9.67
-55.56
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
Name
Return (%)
Std Dev
Average Drawdown
Max
Drawdown
Drawdown
Defensive
Utilities
8.05
14.31
-10.25
-43.39
Healthcare
7.72
13.85
-9.60
-35.56
Consumer Staples
7.64
11.47
-7.99
-32.67
Sensitive
Technology
3.92
22.59
-16.03
-80.35
Energy
6.31
21.23
-15.55
-53.15
Industrial
7.17
18.07
-12.76
-56.84
Cyclical
Financial
4.41
21.08
-15.39
-78.72
Materials
6.77
20.09
-14.56
-55.50
Consumer Discretionary
8.59
17.76
-12.26
-54.85
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.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
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.
Diversification does not guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Asset allocation does not ensure a profit or protect against loss.
Indexes are not investments, do not incur fees and expenses and are not professionally managed. It is not possible to invest directly in an index.
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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