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Volatility Equities Blog

Defense in Motion

Three Strategies to Protect Your Equities

16 January 2018

3 min read

Kent Hargis, PhD| Chief Investment Officer—Strategic Core Equities; Portfolio Manager—Global Low Carbon Strategy

Christopher W. Marx| Global Head—Equity Business Development

Sammy Suzuki, CFA| Head—Emerging Markets Equities

Changing market conditions over the last five years have taught us a few things about managing risk. The most important lesson? Delivering downside protection constantly requires refining and adjustment.

Equity markets are never static. In recent years, equity investors have enjoyed handsome returns amid subdued volatility, yet market conditions have been far from simple. Interest rates have been stuck at historically low levels. The search for income has driven a flood of money into stocks with high dividend yields. Valuations have risen, particularly in the US. And political risk is a growing source of instability.

Always Think About Downside Protection

When markets are consistently rising, it’s easy to take risk management for granted. But in fact, we believe that the best time to think about risk is when volatility isn’t there so that your portfolio is properly prepared—waiting until turbulence strikes is often too late. In our experience, three broad lessons about risk management can help underpin a portfolio strategy for downside protection.

Define risk more broadly—Traditionally, many investors have used tracking error to gauge portfolio risk. But tracking error, which measures the deviation of performance of a portfolio or stock from the benchmark, is an unsophisticated, one-dimensional measure. In a volatile or down market, closely tracking the benchmark offers little solace.

Similarly, investors often think of low beta, or market sensitivity, as a sign that a stock or portfolio is less risky than the market. This, too, is relative, and under some conditions beta can prove to be a poor predictor of returns. For example, if you’re paying a lot for a low-beta stock that’s highly sensitive to interest rates, it may be riskier than you think.

Standard deviation does a better job of measuring absolute risk, but doesn’t really help deliver a desired investment outcome that’s enough to meet investors’ needs. So it’s important to broaden a definition of risk by thinking about upside and downside capture, or how much your portfolio will capture market moves on the way up and down, as a fundamental component of investing strategy. After all, for many investors, risk is all about reducing losses when the market is falling. And investors are prone to emotional biases that can lead to poor decisions, like selling after a big loss. Focusing on delivering a smoother pattern of returns can yield more wealth and a more satisfying outcome.
Defense is dynamic—In investing as in sports, defensive formations must change along with circumstances. A defensive strategy that worked well yesterday may not work tomorrow in a different market under different conditions.

Utilities and telecom stocks have been considered defensive plays for a long time. But that could change if interest rates (finally) rise. Are all consumer-staples stocks as safe as they seem? Not necessarily, if an Amazon-induced earthquake rattles the retail sector and small upstarts build viable new brands through non-traditional media. Combined with their relatively high valuations, these traditional defensive hideouts may not prove so safe.

On the flip side, 20 years ago, many investors thought energy stocks were safe havens. And large-cap tech names, especially in enterprise software, have become some of the most stable cash-flow generators. How times have changed.

The lesson is simple. When devising a defense, don’t rely on an old playbook. Look carefully at current market behaviors, sensitivities and new forces of change that could redefine the essence of safety.
Stable companies come in many forms—Don’t be locked into preconceived notions of how to source stability. It’s not just about investing in certain sectors (like utilities and staples) or certain equity factors (like low beta).

Finding stability requires a more sophisticated approach. Look for high quality businesses with less market or economic sensitivity. These exist across the market, but require hard work to find. Some are companies that are positioned to benefit from long-term secular changes in their industries. Proven cost benefits or other competitive advantages are another source of stability. Still others might operate in markets with structural advantages or favorable regulatory conditions. We’ve found companies that offer degrees of stability in industries ranging from technology to industrials to financials, which aren’t typically places that investors search for safety.

Following these three principles can help form the backbone of an equity strategy that loses less in market downturns and can recover more quickly in a rebound. Whether markets are volatile or not, we believe that investors should always be prepared to change direction in deploying downside protection—because market risks never stand still.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

About the Authors

Kent Hargis, PhD

Kent Hargis is the Chief Investment Officer of Strategic Core Equities. He created the Strategic Core platform and has been managing the Global, International and US Strategic Core portfolios since their inception in 2011. Hargis has also been Portfolio Manager for the Global Low Carbon Strategy Portfolio since 2022. Previously, he managed the Emerging Portfolio from 2015 through 2023. Hargis was global head of quantitative research for Equities from 2009 through 2014, with responsibility for directing research and the application of risk and return models across the firm’s equity portfolios. He joined AB in 2003 as a senior quantitative strategist. Prior to that, Hargis was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. Hargis holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets. Location: New York

Christopher W. Marx

Christopher W. Marx is Senior Vice President and Global Head of Equity Business Development. He is responsible for overseeing the firm's team of equity investment strategists and product managers, setting strategic priorities and goals for the global Equities business, developing new products, and engaging with clients to represent market views and investment strategies of the firm. Previously, Marx was a senior investment strategist and a portfolio manager of Equities, and in 2011 he cofounded the Global, International and US Strategic Core Equity portfolios with Kent Hargis. He joined the firm in 1997 as a research analyst covering a variety of industries both domestically and internationally, including chemicals, metals, retail and consumer staples. Marx became part of the portfolio-management team in 2004. Prior to joining the firm, he spent six years as a consultant for Deloitte & Touche and Boston Consulting Group. Marx holds a BA in economics from Harvard University and an MBA from the Stanford Graduate School of Business. Location: New York

Sammy Suzuki, CFA

Sammy Suzuki is Head of Emerging Markets Equities, responsible for overseeing AB’s emerging-markets equity business and instrumental in the formation and shaping of AB’s Emerging Markets Equity platform. He was also a key architect of the Strategic Core platform and has managed the Emerging Markets Portfolio since its inception in 2012, and the Global, International and US portfolios from 2015 to 2023. Suzuki has managed portfolios since 2004. From 2010 to 2012, he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate, first covering the capital equipment industry, followed by the technology and global automotive industries. Before joining the firm, Suzuki was a consultant at Bain & Company. He holds both a BSE (magna cum laude) in materials engineering from the School of Engineering and Applied Science, and a BS (magna cum laude) in finance from the Wharton School at the University of Pennsylvania. Suzuki is a CFA charterholder and was previously a member of the Board of the CFA Society New York. He currently serves on the Board of the Association of Asian American Investment Managers. Location: New York

This is a marketing communication. This information is provided by AllianceBernstein (Luxembourg) S.à r.l. Société à responsabilité limitée, R.C.S. Luxembourg B 34 305, 2-4, rue Eugène Ruppert, L-2453 Luxembourg. Authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results.

This information is directed at Professional Clients only and is not intended for public use.

Defense in Motion

Three Strategies to Protect Your Equities

Always Think About Downside Protection

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