For portfolio managers seeking high-potential ideas with defensive traits.
This alpha generation strategy unearths stocks with solid forecast incremental value creation promise but a guarded risk profile. These stocks may appeal to portfolio managers who seek exceptional returns but with a risk profile moderated by “sensible” management policies. It adopts a more conservative risk profile than the Spirited-Alpha Growth Strategy.
The Defensive-Alpha Resilient Ideas Strategy
Our defensive list may raise an eyebrow. Certain stocks on our defensive stock list may pique investor curiosity, especially when they include those from industries not traditionally considered defensive.
The methodology underpinning our defensive strategies differs radically from the conventional approach. Defensive stocks are traditionally associated with non-cyclical industries such as utilities and healthcare, where products or services are expected to demonstrate high demand inelasticity during economic downturns. However, this industry-based approach from the top down might not offer sufficient protection as it overlooks bottom-up fundamental factors driving valuations.
While the conventional approach to identifying defensive stocks emphasizes industries, financial stability, and predictable cash flow, our objective is to identify companies that provide opportunities for substantial shareholder value growth while mitigating company-specific risks. Our choices are industry-neutral, focusing on individual companies that exhibit strong value creation growth potential while minimizing risks specific to the company. This approach aims to go beyond industry categorizations and focus on the intrinsic characteristics of individual companies to provide a more nuanced understanding of their defensive attributes.
Central to this is the I-EVA test, which focuses on the visibility of value creation potential. Additionally, we offer investors a platform to assess risk mitigation based on three objective and forward-looking risk criteria. For instance, defensive investors might find companies that adopt contractionary capital allocation policies, low-duration risks (short I-CAP), and low embedded expectations more attractive.
Defensive companies prioritize both the preservation of internal resources and the creation of shareholder value, employing a strategy focused on avoiding losses. Management’s prudence and a balanced approach to risk are evident in their careful deployment of invested capital and restrained reinvestment rates. The chosen capital deployment strategy can have ramifications for the company and investors may wish to take this on board during their investment evaluation. However, in a swiftly expanding market, a company that embraces a defensive approach to capital allocation may face the risk of losing market share in the long term to a competitor that aggressively allocates capital. As a consequence, the overly defensive firm may experience potential under-performance in the value-creation tables, reflected in comparatively slower I-EVA acceleration and persistently shorter I-CAP values in the longer term.
By focusing on the visibility of value creation potential and the assessment of risks, we aim to identify companies with solid defensive qualities that may not be immediately apparent when relying solely on traditional measures.
The Defensive-Alpha Resilient Ideas Strategy stock selection criteria:
- Strong Forecast Incremental Value Creation (I-EVA): The strategy identifies companies with significant potential for accelerating economic profits and earnings
- Lengthy Implied Competitive Advantage (I-CAP): Companies enjoy a lengthy competitive advantage, indicating confidence in future profitability and tolerance for duration risk
- Contractionary Capital Allocation Strategy: Contractionary capital allocation policies suggest minimal management execution risk
- Moderate Embedded Expectations: Stocks with moderate or low embedded expectations, indicating the absence of exuberance in share prices
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