Defensive investment strategies come at cost
Standard defensive responses to current market volatility may cause investors to miss attractive opportunities among certain cyclical stocks, according to Principal Global Investors.
Investors may be tempted to pay too much for the more defensive cyclical stocks, thereby ending up with excessive defensive positioning which could then leave them poorly placed to make up losses, let alone reap gains once the market does turn.
Commenting further, Mustafa Sagun, chief investment officer of Principal Global Investors Equities, said that while it was understandable that investors were falling back on conventional risk management tactics to counter volatility in the market, doing so limited one's ability to capitalise on the inevitable opportunities that such markets presented.
"The nub of the issue is that most investors probably can't achieve their goals solely from so-called 'safe assets' and some degree of equity exposure is warranted," he said.
"You simply can't achieve the better return potential of equities without taking risk.
"And the flipside of locking out risk in super defensive portfolios will eventually also be locking out returns," Sagun continued.
"Combine that with the herd effect of many investors rushing into defensive positions, and the consequent demand-driven price rises, and you get investors paying over-the-odds and likely to be disappointed in the long run."
Sagun said that the fact that the market was so concerned and was therefore paying too much for defensive stocks meant that there was an even greater differential between the expensive "defensives" and the cheap "cyclicals".
"That provides a significant safety net because buying growth stocks cheaply protects capital - and positions you to participate more fully in the upside when the bull market returns."
Recommended for you
Data and technology provider Novigi has acquired Iress’ superannuation consulting and managed services business from Apex Group.
AMP is to launch a digital advice service to provide retirement advice to members of its AMP Super Fund, in partnership with Bravura Solutions.
Unveiling its performance for the calendar year 2024, AMP has noted a “careful” investment in bitcoin futures proved beneficial for its superannuation members.
SuperRatings has shared the median estimated return for balanced superannuation funds for the calendar year 2024, finding the year achieved “strong and consistent positive” returns.
