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In defence of 'defensives'



2017 saw markets continuing to ‘whistle past the graveyard’, consistently ignoring geopolitical and macro risks while taking volatility to record lows. But in 2018 we have been starkly reminded of the risks of market complacency, with significant volatility returning to markets during the first major equity sell-off since early 2016. Initially, it was the threat of rising interest rates, measured in mere basis points, that served as the initial trigger – followed by various geopolitical threats, including the prospect of a damaging trade war.

The derating was largely indiscriminate: companies in these sectors were sold regardless of the nature of their debt, business models, or growth prospects. Companies with fixed-rate debt should be less vulnerable to rate rises, whereas companies with business models that benefit from the growth and inflation that tend to accompany higher rates should actually benefit over the long term.

As such, we began to capitalise on some compelling opportunities in these segments of the listed infrastructure market during the first two months of 2018. Being selective in these sectors is always crucial because there are myriad ‘bond proxy’ traps. To avoid them, investors must focus on companies that are growing. We use dividend growth as a key differentiator, and by way of example have found that investing in utilities that grow their dividends above the average market rate has been a successful strategy for avoiding bond-proxy behaviour over the long term.

Our scaling was rewarded in March when we started to see a re-rating in interest-rate-sensitive stocks – particularly those that had been sold most indiscriminately. Utilities and real estate were the only two global sectors to rise during the month, and in our portfolio, we observed that the structurally-growing companies in these sectors were those whose shares re-rated most significantly.

This was not just a matter of rerating, though. The relative performance of defensive stocks in March was also supported by heightened market volatility, as geopolitical threats – such as the prospect of a trade war between the US and China – spooked the market. 

As volatility becomes part of the market landscape again, listed infrastructure’s defensive characteristics could become increasingly appealing for investors looking to reduce the risk profile of their investments. However, for the reasons detailed above, the importance of investing in listed infrastructure businesses that are growing cannot be emphasised enough.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

The M&G Global Listed Infrastructure Fund invests mainly in company shares and is therefore more likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

Cyveillance Protected

The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
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