Digging into the defensive toolkit

A well-articulated investment philosophy is the cornerstone of prudent financial advice. It defines not only how capital should be deployed, but more importantly, why.

At the heart of any investment philosophy lies portfolio construction – the practical expression of investment beliefs through strategic asset allocation.

For financial advisers, getting this process right is fundamental to meeting client goals across market cycles. This begins with clarity; that is, understanding the distinct roles that growth and defensive assets play in a diversified portfolio.

Growth assets, such as equities and property aim to drive capital appreciation over time but are inherently volatile. Contrastingly, defensive assets are designed to preserve capital, reduce portfolio drawdowns, and provide stable income, especially during periods of market stress. However, in today’s structurally uncertain environment, marked by inflation volatility, policy reversals, and fragile global growth, the conventional definition of “defensive” demands reassessment.

At Atchison, we apply a multi-dimensional lens to defensive asset classes. We believe true defensiveness requires more than just capital stability – it requires reduced correlation to growth assets in downturns, the delivery of consistent real income, and the capacity to respond favourably to macroeconomic shifts. Under this definition, floating-rate and long-duration fixed income strategies form the core of our defensive framework. These instruments are selected not only for their historical performance, but for their complementary roles in managing risk across different stages of the economic cycle.

Other defensive assets worth mentioning include cash and term deposits. While safe, these instruments can be ineffective in real terms. Cash yields rarely keep pace with inflation, particularly after fees and tax, leading to a gradual erosion of purchasing power. Term deposits, meanwhile, may offer marginally higher yields, but typically involve capital lock-up at fixed rates – rendering them inflexible in rapidly changing monetary environments. Additionally, term deposits offer no asymmetric upside in adverse scenarios – unlike long-duration bonds, which can appreciate meaningfully during equity sell-offs or interest rate cuts.

Long-duration bonds offer convexity and capital protection in risk-off regimes, acting like “portfolio insurance” during systemic crises. These are instruments with fixed coupons and extended maturities – typically beyond three years – making them highly sensitive to changes in long-term yields. This sensitivity is a strength in environments marked by economic slowdown, risk-off sentiment, or central bank easing. The Atchison Active Long Duration SMA incorporates global and domestic fixed income exposures across government, inflation-linked, and aggregate bond funds. When yield curves steepen or equity volatility rises, long bonds can rally significantly, offering crucial downside protection. This makes it a valuable diversifier, particularly when clients approach retirement or require capital stability during drawdowns.

Contrastingly, floating-rate strategies form a flexible, responsive, and yield-efficient solution. They move beyond static capital preservation and into dynamic risk management – which is better aligned with the needs of modern liquid portfolios. Instruments such as bank senior debt, floating-rate notes (FRNs) and short-duration credit reset their coupons in line with prevailing short-term interest rates, making them well-suited to rising or uncertain rate environments. Crucially, they offer high liquidity, enabling advisers to reallocate or raise cash quickly without incurring meaningful capital losses.

The case for combining floating-rate and long-duration strategies is not about replacing cash altogether – it’s about enhancing the quality and resilience of a portfolio’s defensive core. Floating-rate bonds offer inflation-aligned income; long-duration bonds provide capital appreciation when risk-off dynamics emerge. Together, they cover the full spectrum of economic scenarios – growth, stagnation, inflation, and recession.

At Atchison, this philosophy is embedded within our SMA design, offering advisers institutional-grade access to active defensive strategies that respond to real-world conditions. More importantly, it helps advisers deliver on their mandate: to preserve wealth, manage risk, and construct portfolios that endure.

Given the cyclical nature of markets, it’s in advisers’ best interests to understand the full suite of defensive tools at their disposal – and deploy them in alignment with market conditions, their investment philosophy, and a disciplined portfolio construction process.

Mishan Dahia is an investment analyst at Atchison.