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Methods for quantifying expectations and results of any active manager can be far from straightforward. But evaluating defensive equity strategies requires a statistical toolbox that may vary further still from their more traditional, strictly alpha-seeking counterparts. Given their potential benefits in the current climate of uncertainty, we put forth some helpful measurements below – from the staples to the more exotic.

The Limits of Experience

Given the frequently asymmetric nature of these strategies by design, a sample size of results over a full market cycle is necessary for setting expectations across all market environments. Reducing these statistics to a single annualized figure for the entire period may work as a shorthand to summarize their long-term outcomes, but rolling periods (e.g., one, three, or even five years) can help illuminate variations over time within those different environments.

Unfortunately, despite the substantial growth in defensive equity strategies over the last decade or so, live track records available for many defensive equity strategies are still relatively short. Even the longer records exist primarily during the recent historically long bull market. You may want to supplement live track records with back-tested results for performance in more than a single correction. Low volatility indexes also suffer from this problem.

Below are metrics you might expect to find in any fact sheet, along with some interesting, less-common but still-insightful measurements.


Risk Return Efficiency Table


What About the Benchmark?

Using a low volatility index as a benchmark for defensive equity strategies seems like it would make sense, but it’s less than straightforward under closer scrutiny. For one thing, which index approach is valid? It’s arbitrary to endorse one index over another given the wide range of construction methodologies. These so-called indexes are actually active strategies – they all have distinct stock selection processes, often have wide return dispersion and some even lack transparency.

Instead, many defensive equity investors simply use cap-weighted benchmarks and Sharpe ratio or Jensen’s (beta-adjusted) alpha to evaluate performance. Investors prefer Sharpe ratio if total volatility – both systematic and idiosyncratic risks – is most relevant. If only systematic risk is relevant, then Jensen’s alpha may be more appropriate. This practical approach recognizes that defensive equity investing isn’t about beating a defensive equity index; rather, it seeks a superior risk-return profile to cap-weighted benchmarks.

Ask the Right Questions

While we’ve covered various methodologies for evaluating defensive equity strategy results, the approaches managers use to achieve those results vary further still. And strategy names aren’t a reliable descriptor. Find out which key characteristics you should be asking about in our eBook, How to Evaluate Defensive Equity Strategies.”

How to Evaluate Defensive Equity Strategies  A practical guide to parsing the category. Download eBook


The information expressed herein is subject to change based on market and other conditions. The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other reasons. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value.