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  1. #1

    Question on 'Defensive' Funds

    I see a lot on here about Fundsmith and LT Global being 'defensive' as if they will somehow magically be shielded from a downturn. Why is this thought constantly repeated? I own LT Global and will for a long term,yet I am confused about the almost devout allegiance to these funds on here.

    Looking at the last week for example. Neither LT Global or Fundsmith have performed any better than other Global funds. In fact just for an example, Shin Nippon went down less yesterday than both LT Global and Fundsmith despite the fact that the Nikkei was down 4.5%, yet under no circumstance would Shin Nippon be called 'defensive'.

    Another issue I see is LT Global being almost 8% weighted towards Unilever which again is described as a 'defensive' stock but how is a 36% increase in a strong bull market good performance? Why if it only increases 36% in a five year bull market do people think it will perform any better in a bear market? It may well be a strong company with so called 'moats' but at the end of the day if it is being significantly outperformed by other companies then what is the justification for holding it?

    This post isn't supposed to be an attack on the proponents of these funds, I own one of them, I just feel like I'm missing something with the 'defensive' description.

  2. #2
    If you look at the Fundsmith website and go to "TV" then you watch the recent 2018 investors meeting, Terry Smith explains exactly the question you ask. His response is very interesting indeed.

  3. #3
    Well LT Global and Fundsmith have held up a lot better than most through this year's volatility .. LT's done particularly well .. But don't expect that always to be the case.

    Stock price movements are chaotic – which is how they throw up buying opportunities .. What makes these kinds of stocks defensive is how they generate earnings, and how unlikely they are to go bankrupt.

    So in a recession, many businesses take a hit, and stock prices follow .. When we go into a global downturn, we might stop building so many new cities, so miners and industrials might suffer .. We might put off buying a new car, or taking a foreign holiday – bad for auto makers and airlines .. At worst, some of them can't pay back debt, and go bankrupt .. This is why stocks go down in a bear market.

    But Consumer Staples and Healthcare's earnings don't tend to fluctuate much – we keep buying Marmite, cigarettes, artificial hips, regardless of the economic environment .. Which means there's no problem with these stocks continuing to pay dividends, or reinvest in expansion.

    Now whether share prices go down is another matter .. They can be all over the place .. People sell the market, and they're part of the market .. Others might want to take advantage of more aggressive bottom-buying opportunities, and sell defensive stocks .. But underneath the randomness of share prices, these businesses tend to be like armoured tanks .. Warren Buffett's often lost 50% in the market to crazy share price moves, but his businesses have tended to be solid, and those are kinds of businesses you can always buy more of

  4. #4
    Shin Nippon is at a 10.5 premium with a 12 month average of 6.5. I'm guessing that's where some of the Nikkei drop is hiding in the IT.

  5. #5
    Yeah, IT single-day-movements are even more random .. It's like those physics experiments when there's a pendulum on a pendulum – and you get pure chaos.

    I often trade price trends, but when I've tried it with ITs, I've been absolutely destroyed.

    Unilever and Diageo have been in downtrends for a while, but they've virtually ignored the recent volatility .. When I started buying more stocks like Unilever, Diageo, Johnson & Johnson, etc. I could suddenly increase my allocation to stocks without really raising risk .. I've sold lots of bonds and defensive funds recently, and I'm holding an aggressive stock allocation now – but the recent volatility's only taken me down about 2% (and that's despite buying Facebook with comedically bad timing)


 

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