Amy Xie Patrick: How to build defensiveness that protects and performs

True defensiveness isn’t about sitting still, it’s about staying ready, argues Pendal’s head of income strategies, AMY XIE PATRICK

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“DEFENSIVE” is one of the most overused — and misunderstood — words in investing.

Too often, it’s mistaken for caution, safety, or simply holding more cash.

But being defensive shouldn’t mean being idle.

At Pendal, we see defensiveness as both a means and an end: it should protect capital in times of stress and keeps investors positioned to benefit when conditions improve.

It’s a waste to steer through a downturn successfully, only to sit out the recovery. If your portfolio never participates when markets rebound, you may as well have stayed in cash.

True defensiveness brings together capital preservation, liquidity and income — so investors can stay invested with conviction through periods of fear and recovery.

At Pendal we think about defensiveness through these three key facets, each integral to how we manage our income funds:

Capital preservation

Capital preservation is the first and most visible line of defence.

It isn’t about prediction — it’s about process. Markets will always deliver surprises, like this year’s “Liberation Day” tariff shock.

These events can’t be forecast, but portfolios can be prepared.

Our process is built on a continuous assessment of risk versus reward. When that balance turns unfavourable, we don’t wait for the headline — we step aside.

Earlier this year, as US equity markets stretched far ahead of economic fundamentals, we steadily reduced exposure to higher-risk assets such as equities, high yield and emerging markets.

Our process is designed to make the tough calls before conditions force your hand. Good decisions are made in advance, not in the heat of the moment.

By early May, the situation reversed. Valuations had adjusted, risk premiums had rebuilt, and our assessment of fundamentals hadn’t materially worsened.

That shift — not a change in macro view — gave us the conviction to re-enter markets and participate in the recovery.

Another important source of defensiveness comes from how we use duration.

We don’t treat bonds as inherently “defensive,” or assume they will automatically offset equity weakness.

Bonds are not slave assets to equities, and there’s nothing in duration that guarantees it performs when equities fall.

Our active duration process is grounded in understanding what fundamentally drives bond returns: growth and inflation.

That means we can harness the power of duration when it helps and sidestep it when it harms, ensuring duration contributes to defensiveness rather than detracts from it.

Avoiding the drawdown and capturing the rebound isn’t about luck or market timing. It’s the result of a disciplined, repeatable process grounded in risk-reward.

Income

For many investors — especially in retirement — income is synonymous with defensiveness.

A consistent stream of payments provides stability and confidence even when markets are unsettled.

But income is a return like any other — and higher yield usually means higher risk.

If an income fund is to behave defensively, its income engine must be built on high-quality foundations: lending to businesses with robust balance sheets and dependable cash flows that can service and refinance debt in all conditions.

Reaching lower in credit quality can boost yield temporarily but often erodes capital stability when volatility strikes. In prolonged stress, even the income itself can come under threat.

That’s why Pendal’s income portfolios are anchored in investment-grade credit with a strong preference for senior-ranking bonds — securities that should keep paying through volatility and make income a genuine source of defensiveness.

Liquidity

Liquidity — the ability to turn assets into cash quickly and with minimal penalty — is another vital, often overlooked facet of defensiveness.

Having liquidity when others don’t provides options. It lets us move from defence to offence the moment value re-emerges.

Lower-quality bonds tend to be less liquid and compensate investors with a liquidity premium. We deliberately leave some of that premium on the table because flexibility is worth more. A liquid portfolio can act in volatility; an illiquid one can only endure it.

We also ensure our portfolios’ liquidity matches that of our funds: daily-liquid products backed by publicly traded, transparently priced securities.

Defensiveness, clarified

If 2025 has shown anything, it’s that markets continue to swing between caution and optimism.

Headlines have been plentiful; genuine opportunities rarer.

Our high-conviction process has delivered by:

• Stepping aside when the risk–reward balance deteriorates
• Using duration actively — harnessing it when it helps, reducing it when it harms — so it becomes a source of defensiveness rather than a drag
• Re-engaging swiftly when value reappears and fundamentals support it
• Maintaining liquidity and income stability throughout

That’s what we mean by defensiveness: portfolios that preserve capital, sustain income, and stay flexible enough to adapt — turning resilience into readiness, and caution into opportunity.

True defensiveness isn’t about sitting still — it’s about staying ready.

If your definition of “defensive” feels due for an upgrade, Pendal’s Income & Fixed Interest team would welcome an opportunity to talk about how we build portfolios that protect and participate.

You can contact us through the client account team here.