The world's largest and best-known defensive companies may look overvalued but that doesn't mean investors should give up on finding quality businesses with predictable earnings and capital preservation potential, according to AllianceBernstein senior portfolio manager Chris Marx.
The global equity specialist's AllianceBernstein Active Low Volatility strategy aims to produce benchmark-like returns with roughly a third less risk and much higher capacity for capital protection.
It is aimed at institutional investors who are happy to tolerate tracking error in order to get a more predictable outcome. The lower volatility characteristic of the portfolio is also intended to provide a greater risk budget for other parts of clients' portfolios.
The investment process centres on finding high-quality business, which have not been bid up by the market in the race for income producing, defensive assets.
"The likes of the utilities, tobacco and telco companies have performed strongly since the onset of the financial crisis but these areas are now overbought," Marx said.
"Our screens for sustainability and stability, as well as value, lead us to asset light businesses with an emphasis on intellectual property. These companies tend to have stickier earnings and recurring revenues. There is also an emphasis on finding shareholder-friendly management with highly cash generative businesses."
While Marx was restricted from talking about specific stocks, he said the portfolio was comprised of around 75 companies in sectors including software manufacturers, pharmaceutical companies and insurers.
While he acknowledged that the strategy is likely to underperform during strongly rising markets, Marx said the approach keeps investors insulated from pricier corners of the market and will protect capital better in falling markets.
Furthermore, Marx said that many of the expensive defensive stocks that investors had flocked to in the midst of the crisis are more vulnerable to a recovery-induced rise in interest rates.
The value approach meant that negative news or changing factors which called into question the sustainability of an industries ability to generate earnings often signalled a buying opportunity.
At this year's PIMCO Secular Forum, the company's global executives set themselves the challenge of taking a three to five year view and anticipate where the market would be against what investors would ... Watch video
What are the key challenges advisers face when building retirement portfolios for clients? Watch Joe Fernandes, Head of Global Investment Solutions at Colonial First State Global Asset Management. Watch video
Around 150 delegates attended Financial Standard's inaugural Best Practice Forum in Managed Accounts held in Sydney in August. Financial Standard also launched a new magazine: FS Managed ... Watch video
Get it Daily
FREE to your inbox, get the Financial Standard Daily Email.