The global credit crunch and current downturn in equity markets should result in all investors revising their definition of defensive assets, according to the head of equities at a large financial services house.
Three popular defensive asset classes were cited as examples that highlighted this requirement.
“As we look at the market over the last 12 months, three sectors which had previously been deemed to be quite defensive – financials, mostly banks, property and infrastructure – are all down as much or more than any other sector basically,” Goldman Sachs JBWere Asset Management head of equities Dion Hershan said.
Hershan said he believed the reason for this was an overemphasis by the industry on evaluating the operating volatility of a company and not the volatility generated through financial leveraging.
In addition, investors should now be more focused on the quality of dividends a company issued and in particular how those dividend payments were being funded, he said.
“A lot of people have been focused on yield without trying to figure out the substance of yield,” he said.
“It’s critically important to distinguish what is coming from operating cash flow versus what is coming from the debt markets and merely a capital return.”
Furthermore, he said he believed the current market conditions meant investors had to be mindful that company earnings were not infinite and were themselves governed by cycles.
“Companies can have profit warnings and it really does show the risk in taking a period’s performance and extrapolating it in perpetuity,” he said.
