A bedrock of stability
But some investors weather these things better than others. And I don’t mean those who flee to cash or bonds at the first sight of trouble. Making calls like that is very, very difficult – and even the professionals have only patchy records of success.

The investors I’m talking about are those investors whose portfolios – while they might drop – fall in value nothing like the fall experienced by the broader market as a whole.

Investors whose dividend income streams continue more or less unabated, experiencing only minor turbulence, if any.

Investors who sleep easily at night, and who don’t experience that ‘sick to the stomach’ reaction every time they switch on the news, or – worse – take a look at their investment portfolios.

And who are these investors, precisely?

Investors with a solid exposure to defensive shares, in short. They might not be ‘all in’ on defensive shares – everyone likes growth, after all – but they’ve got defensive shares at the heart of their portfolios, creating a bedrock of stability and resilience.

Steady as you go
So, what exactly are defensive shares? It’s not difficult.

Simply put, a defensive share is a business for which revenues – and profits – hold up pretty consistently, whatever the economic weather. Bad times, good times, and everything in between.

Clearly, that’s good news in bad times. Sales and profits continue to chug along, quite happily. Customers might be a little more price-sensitive, and perhaps not buy quite as much, but whatever the product or service that the business provides, they continue to rock up and buy it.

In short, whatever that product or service is, when it comes to customers’ budgets, it comes from non-discretionary spending.

Equally, though, there’s often less welcome news in good times. Those same customers don’t necessarily buy more of whatever it is. They might be a little less price-sensitive, and maybe buy a little bit more, but overall, demand remains fairly steady.

The charm of non-discretionary expenditure
So what sort of companies, exactly, comprise defensive shares?

The key here is to think of companies that sell products or services that come from their customers’ non-discretionary expenditure. People have to eat, for instance, so a supermarket such as Tesco is a good example of a defensive share.

Food manufacturing is also in the frame, especially where there’s a decent ‘moat’ involved: Tate & Lyle would be an example, too. Unilever fits the bill, too – although the recent sale of its various food businesses (think Knorr, Marmite, Colman’s and so on) takes some of the shine off. Nevertheless, the remaining personal care portfolio is still largely defensive.

Ditto companies in the pharmaceutical and personal care sectors generally. Global giant GSK was a superb example, and is still strongly defensive, but the various consumer toothpaste and over-the-counter brands that were hived off into Haleon were a distinct loss from the standpoint of its defensive qualities. AstraZeneca and Reckitt Benckiser are also superb examples of defensive businesses.

More generally, well-chosen Real Estate Investment Trusts can possess excellent defensive qualities. Primary Health Properties, for instance, owns and leases out doctors’ surgeries – over 1,100 of them at the last count. Tritax Big Box, too, is worth a look, owning and leasing out the vast distribution centres that power the supply chains of clients such as Tesco, Amazon, Sainsbury’s, Morrisons, and Marks & Spencer.

But enough: you get the idea, I’m sure.

Boring but dependable
So there we have it. In uncertain times, boring but predictable businesses that sell products or services that people dependably buy, whatever the economic climate, are a sensible underpinning for just about any portfolio – especially for older or more risk-averse investors looking for a decent income stream.

Until next time,

Malcolm Wheatley
Investing Columnist,
The Motley Fool UK