The phrase ‘horses for courses’ is admittedly not always applied to investments, but when managing a portfolio (especially one for retirement), it could be worth bearing in mind.
Indeed, growth stocks are undoubtedly worth holding in a diversified portfolio. However, a portfolio made up solely of growth stocks may not always offer the greatest potential gains — especially when the economy is going through a recession and earnings at many cyclical companies are disappointing.
Therefore, it seems sensible for a portfolio to contain a mixture of companies — some cyclicals, some defensives — so as to increase diversification and reduce risk, in terms of volatility.
Indeed, one of the defensive shares that could be worth considering is Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US). It currently has a beta of just 0.57, which highlights just how defensive it could be were markets to experience a slip-up in 2014.
Its beta means that for every 1% fall in the wider index, Centrica’s share price should (in theory) fall by 0.57%. Similarly, for every 1% gain in the wider index, Centrica’s share price should (in theory) increase by 0.57%.
This highlights the downside protection that Centrica could offer, although the theoretically reduced upside may need addressing over the long run via a cyclical, too.
In addition, if interest rates remain low and the stock market does experience a disappointing period, Centrica has a yield that is considerably above the average yield offered by the wider stock market.
Indeed, the FTSE 100 currently has a yield of 3.4%, while Centrica’s yield is 5.3%. That’s over 50% higher than the FTSE 100 yield and is due in some part to the political risk that continues to hang over the company, with Labour leader Ed Miliband promising price freezes and a tougher regulator if his party wins the election in 2015. This has pegged back the share price of Centrica in recent months.
Of course, no company is without risk and, despite the political risk, Centrica seems to offer downside protection in times of crisis and also a high yield to maintain a respectable level of income during such a period.
While it may not be your next 10-bagger, it does provide diversity and could lower the overall risk of a portfolio. Furthermore, a mixture of stocks could help to increase returns and decrease volatility over the long run, making retirement come that bit quicker.
> Peter owns shares in Centrica.