Defensive Equities: When Defence is the Best Offence
Defensive Equity: Comparing Listed Infrastructure, Listed Property and Low Valatility
In uncertain times, investors looking for shelter can consider an allocation to defensive equities to shore up their portfolio. Listed infrastructure, listed property and low volatility strategies are all different ways to invest in defensive equities, all of which also provide investors with an income yield.
Investors can use these defensive equities as the low-risk barbell in a barbell approach to equity exposure or, for smaller investors who lack the scale to acquire private market real assets, as a substitute for real assets. For bullish investors, defensive equities can facilitate an exposure above strategic weights with a smaller increase in overall risk. And for investors who are more bearish, defensive equities enable a reduction in overall risk with no change to the strategic asset allocation. Finally, investing in defensive equities can provide investors additional dividend income.
While investing in listed property is common (mostly through listed companies Real Estate Investment Trusts (REITs)), allocations to listed infrastructure and low volatility equities are less common. Yet we find there can be significant return and diversification benefits in widening the lens on defensive equity exposures. Listed property and listed infrastructure provide a liquid proxy for real assets, while low volatility strategies tilt toward stocks based on historical price behaviour, to generate a similar factor exposure.
This article considers the risk and return profile for each of these three defensive equity thematics, including how each held up during the COVID-19 crisis and in 2022. We find that core infrastructure has delivered superior risk-adjusted returns relative to passive listed property and a low volatility index. But given the less than perfect correlation between these different liquid strategies, we believe there can room for all three in a multi-asset class portfolio.
However, there is a wide range of returns across products within each thematic. Within listed infrastructure, investors should narrow their focus on the companies that are ‘core’ infrastructure. Using a broader definition will decrease the defensiveness and therefore the appeal. Further, we consider the same will hold true for listed property, with better risk adjusted returns to be achieved by narrowing in on higher quality and more ‘core’ exposures; a passive approach gives risk adjusted returns significantly inferior to listed infrastructure and low volatility strategies, even with the higher income yield.