In 2011 the conservative (or smart) investors who held defensive property and utility stocks significantly outperformed the wider market. While most investors generally prefer an exciting growth stock, it is often more rewarding to hold the more boring defensives companies and trusts, particularly during challenging environments. The accompanying table shows the 2011 and 10 year returns of selected indexes and defensive stocks.
Periods of slow global growth and falling interest rates create a positive environment for quality defensive companies. As utility and property stocks generally have large amounts of debt, the lower interest rates reduce their interest expense and boost their earnings. Lower interest rates also shrink the return investors get from fixed income investments and raise the attractiveness of high dividend paying defensives. This can cause some defensive stocks to generate positive returns even when markets fall.
Last year was a perfect example of this environment where both New Zealand and Australian utility and defensive stocks outperformed their respective markets. NZ property and ASX utilities have also outperformed the market over the last 10 years. In contrast ASX property stocks performed poorly over 10 years as they were over geared going in to the global financial crisis (GFC). The near collapse of many large Australian property stocks during the GFC is a reminder that investors must still ensure defensives have staggered debt maturities and are not over geared.
While periods of low growth may make equities seem unattractive, do not forget that there could be great opportunities amongst the turtles of the market. Returns in excess of 25% achieved by some defensive stocks are sure to keep most investors very happy.
|2001 to 2011 Return|
|NZX50 Gross Index||-1.00%||50.60%|
|NZX Property Index||10.60%||78.40%|
|Ports of Tauranga||33.30%||129%|
|Argosy Property Trust||15.80%||N/A|
|ASX200 Property Stocks||-1.50%||7.70%|
|Spark Infrastructure (ASX)||27.30%||N/A|