For portfolio managers seeking high-potential ideas with extensive risk mitigation. 
This strategy identifies companies poised for a turnaround in value creation while maintaining a conservative risk profile. Such stocks may appeal to portfolio managers aiming for exceptional returns while keeping overall risk levels highly guarded. This approach carries a more conservative risk profile than the Spirited-Alpha Value Strategy.

The Defensive-Alpha Quality 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 Quality Ideas Strategy stock selection criteria:

• High Current Value Creation (I-EVA rate):
  High forecast value creation rates
• Strong Forecast Incremental Value Creation (I-EVA):
  The analysis identifies companies with significant potential for accelerating economic profits and earnings.
• Short Implied Competitive Advantage (I-CAP):
  The strategy seeks businesses with short I-CAP metrics indicating a low tolerance for duration risk.
• Contractionary Capital Allocation Strategy
  Contractionary capital allocation policies suggest minimal management execution risk
• Low Embedded Expectations:
  Companies with low embedded expectations are favored, as they indicate the absence of exuberance in share prices

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