Selecting the right stocks when constructing a defensive Australian equities portfolio is taking on a new dynamic and investors need to recognise some traditional defensive holdings are no longer fitting the bill, according to a local equities portfolio manager.
Platypus Asset Management portfolio manager Simon Bonovourie pinpointed Cochlear Australia shares as a classic case of a stock that was once considered defensive but now no longer possesses the right characteristics to maintain this classification.
“It was a stock you always bought to achieve a defensive position. Well, they came out with a product recall and the stock fell by 20 per cent on one day and I think it’s making new lows for the move, so it’s certainly not considered defensive,” he said.
In order to select truly defensive shares Bonovourie suggested investors had to think outside the square.
To this end, he highlighted shares in the major Australian banks as a different way to make a defensive play even though these stocks were not traditionally viewed as being defensive.
“Banks here in Australia are in a completely different position to banks over in Europe and the US. Banks in Australia have very healthy capital levels,” Bonouvrie said.
He continued that most of the hits the banks took during the global financial crisis were as a result of corporate collapses but seeing domestic corporate balance sheets had now extinguished significant debt levels an element of vulnerability associated with bank stocks had also been eliminated.
According to Bonovourie the local banks have also experienced an increase in their credit quality and were carrying sufficient provisions in their books to withstand any major economic catastrophe further strengthening the characteristics of their shares being a defensive type stock.
“So you might think initially that bank shares may not be that defensive because of what’s happening around the world but here in Australia traditional defensive stocks aren’t necessarily defensive,” he said.
