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 the fact that on average over the past 20 years value stocks have exhibited less downside and lower volatility, along with higher returns (Figure 1).

Figure 1 – Over 20 Years, Value Has the Stronger Defensive Profile, 1/1/2000–12/31/2019
Name Return (%)1 Std Dev2 Average Drawdown3 Max 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 Portfolio Clarity®. 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 the most recent 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 Has Been More Defensive, 1/1/2003–12/31/2019
Name Return (%) Std Dev Average Drawdown Max 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 Portfolio Clarity®. 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
Name Return (%) Std Dev Average Drawdown Max 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 Portfolio Clarity®. 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
WEBART178 0420 Final Chart 4
Source: Morningstar; Natixis Portfolio Clarity®. 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. Since 2000 these sectors have 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.

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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