Markets in Motion Series | Winning with Defense

MVPs for Tough Markets

High-scoring returns during bull runs get the most cheers. We believe winning over the long haul, however, requires a well-rounded portfolio with a mix of positions that react differently when market conditions change. At times, your most valuable players (MVPs) could be those that seek to provide some defense when the going gets rough.

2018 Replay

The stock market stumbled in opening months, then found its footing in the second and third quarters to make some remarkable gains. But the tide turned once again as signs of slowing global growth, uncertainty on the direction of U.S. interest rates and trade disputes led to losses at the end of the year.

Stock market represented by the Russell 1000 Index. Data from 1/1/2018 to 12/31/2018. Source: Morningstar. The index does not reflect fees, brokerage commissions, taxes or other expenses of investment. Investors cannot invest directly in an index. Past performance is no guarantee of future results.

The fourth quarter was rough for investors. With volatility increasingly putting assets at risk, it’s important to consider strategies that may help mitigate the impact of declines.

High Quality Players Stand Out

When the going got rough, high-quality players stepped up. As shown in the chart below, the higher its quality, the better a stock held its ground.

Data from 9/30/2018 - 12/31/2018. Quality is based on S&P Quality Ranking System1. Returns reflect an equal-weighted average of the return of stocks in the Russell 1000 Index by quality categorization. Source: FactSet, Merrill Lynch, U.S. Bureau of Economic Research.

Characteristics of Quality Companies

High and sustainable returns on the capital invested

High levels of free cash flow

Low amounts of debt

Leading market shares

Strong management teams

High standards for environmental, social impact and corporate governance issues

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1The Quality Rankings System is managed by S&P Global Market Intelligence. It attempts to capture the growth and stability of earnings and the dividends record with a single rank. The rankings are generated by a computerized system and are based on per-share earnings and dividends records of the most recent 10 years. Basic scores are computed for earnings and dividends and, then, adjusted by a set of predetermined modifiers for changes in the rate of growth, stability within long-term trends and cyclicality. Adjusted scores for earnings and dividends are then combined to yield a final ranking.

The Quality Rankings are based on the following scale:

Quality Ranking Description
A+ Highest
A High
A- Above Average
Quality Ranking Description
B+ Average
B Below Average
B- Lower
Quality Ranking Description
C Lowest
D In Reorganization
LIQ Liquidation

A strategy or emphasis on environmental, social and governance factors (“ESG”) may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus. A portfolio’s ESG investment focus may also result in the portfolio investing in securities or industry sectors that perform differently or maintain a different risk profile than the market generally or compared to underlying holdings that are not screened for ESG standards.

Diversification does not assure a profit nor does it protect against loss of principal.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.