Keeping Cool in Volatile Markets—The Upside of Defensive Equity Strategies

It’s a deeply ingrained investing maxim that risk and return go hand in hand: to get more return, you must accept more risk. So some investors may find it counterintuitive that the opposite is also true: you can take less risk and still beat the market over time. It’s a different way of defining investment success that leans on downside defenses in the pursuit of long-term goals.

Meeting investment objectives today requires a fresh mindset. Investors are facing an uncertain future, as US tariff policies shake up global trade, add risks to the global economy and stir market volatility.

This follows several turbulent market episodes in recent years, from the COVID-19 economic shutdown in 2020 to the post-pandemic inflation spike in 2022. Meanwhile, equity market risks have been augmented by extreme US market concentration caused by the dominance of the US mega-cap stocks. Uncertainty often spurs unstable market conditions, which may deter investors from taking more risk to capture return potential.

That creates a conundrum for many investors. Whether an individual saving for retirement, a pension plan facing funding gaps or an insurance company dealing with stiffer capital requirements and asset/liability–matching challenges, investors can’t tolerate wild market swings, let alone the prospect of losing money. They need their investments to go the distance.

Generating a Gentler Pattern of Returns

Strategies that expressly target downside-risk reduction can address many of these needs. These solutions get their performance power from the simple mathematics of lower risk drag and compounding. Stocks that lose less in market downturns have less ground to regain when the market recovers, so they’re better positioned to compound off those higher returns in subsequent rallies. Over time, this gentler return pattern can end up ahead of the market.

A measure known as upside/downside capture helps explain how preserving capital in the near term can actually drive outperformance over the long term. Imagine a hypothetical global stock portfolio that captured 90% of every market rally and fell only 70% as much as the market during every sell-off. What would the long-term returns of this portfolio look like?

You might think it would underperform; it wouldn’t. As Display 1 illustrates, $100 invested in this portfolio in 1986 would have built up $7,368 in capital through June 2025 with reduced volatility. That’s almost three times more capital than that generated by the MSCI World Index.

It’s not easy to build a portfolio that can capture more upside during market rallies than it loses during downturns over time. In our experience, the secret to delivering on the 90%/70% potential lies in finding high-quality stocks with stable trading patterns and attractive prices (what we call “QSP,” which stands for quality, stability and price). It also requires the ability to nimbly adjust exposures as insights into fundamental attractiveness and risks change.

1 QSP returns are for the quintile of stocks with the highest Strategic Core Edge. Strategic Core Edge is the expected return from a proprietary model combining a number of quality, stability and price factors, with a ratio of approximately one-third for each quality, stability and price component.