Low-Beta Defensive Stocks Shield Portfolios Amid Market Drawdowns
A cohort of low-beta defensive stocks, including General Mills and Procter & Gamble, is outperforming the S&P 500, offering investors a critical buffer against broad market volatility.
Investors seeking shelter from market turbulence are finding relative safety in a group of defensive equities exhibiting minimal correlation to the S&P 500. These stocks, all carrying betas of 0.50 or lower alongside robust fundamentals, posted positive returns in 2022. This performance stood in stark contrast to the broader benchmark, which lost more than 16 percent as inflation and Federal Reserve rate hikes roiled valuations.
This low-correlation approach targets companies that move less violently than the broader market, minimizing the peak-to-trough losses that severely drag on long-term compounding. The selected equities boast positive return on equity, return on assets, return on investment, and healthy margins across gross, operating, and net levels. By dampening standard deviation without sacrificing historical earnings and revenue growth, adding these assets can improve a portfolio's risk-adjusted returns.
General Mills exemplifies this dynamic. The packaged foods supplier carries a five-year monthly beta of 0.32, making it roughly a third as volatile as the overall market. Since 1993, the company's compound annual growth rate of 9.81% has marginally beaten the SPDR S&P 500 ETF’s 9.72%, achieved with drastically lower drawdown risk.
Consumer staples peer Procter & Gamble, valued at a $330 billion market capitalization, relies on its vast distribution network to maintain steady revenue across beauty, grooming, healthcare, and family care segments. McDonald's provides a similar buffer, offering portfolio resilience to business cycles through its global franchise model.
The healthcare sector anchors another portion of this defensive basket. Merck generates revenue through human pharmaceuticals and animal care, collaborating globally on vital treatments. Bristol-Myers Squibb complements this with its oncology focus, directly marketing cancer therapies to hospitals, clinics, and government agencies.
American Tower is the notable exception to the group's 2022 resilience. The real estate investment trust, which leases space on roughly 219,000 communications sites to major carriers like AT&T and T-Mobile, saw its stock decline. While the company previously rallied on the 5G boom, its recent drop illustrates that sector-specific headwinds can occasionally override the protective qualities of a low beta.
Even with that exception, the underlying thesis for low-correlation investing remains intact for risk-averse allocators. During the 2020 COVID-19 crash, these defensive names plunged less than the broader market. For investors aiming to protect prior returns and ensure a more consistent sequence of gains, minimizing unavoidable market risk through low-beta staples and healthcare names offers a proven structural hedge.
