Paying for Defense

T. Rowe Price

A deeper dive into defensive equity.

Key Insights

  • Following the 2008–2009 global financial crisis, defensive equities—such as “low beta” and “high quality” stocks—became popular investments for many investors.
  • Low‑beta equities were not as defensive when valuations were high leading into sell‑offs. Expensive high‑quality equities showed more dispersion in sell‑offs.
  • We believe investors should not rely too heavily on defensive equity as a portfolio hedge, given how widely historical performance has varied based on valuations.

Traditionally, investors have expected defensive assets, including defensive equity, to provide some improvement in portfolio performance during market drawdowns. These equity styles have increased in popularity since the 2008–2009 global financial crisis, prompting us to take a closer look at the question: Are there underappreciated risks lurking in these investment approaches that investors tend to believe are relatively less volatile?

In this paper, we analyze defensive equities as an investment by focusing on two main types: low‑beta equities and high‑quality equities.

  • In section one, we show how the universe of equity assets considered to be defensive has become more crowded over time.
  • In section two, we analyze the relationship between relative valuations and performance during market drawdowns.
  • Section three applies our framework to a recent case study (the COVID‑19 pandemic).
  • Finally, the fourth section offers our thoughts on the implications of our findings for investors.

For the full report and methodology, download Paying for Defense.


Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

EEA ex-UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

202007‑1237148

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