Although the FTSE 100 has vast potential to make further gains, so-called ‘black swans’ can appear. These are essentially unforeseen events that can have a negative impact on share prices and, as such, it’s common sense for portfolios to have exposure to companies that are unlikely to be hit quite as hard as the wider index in the event of a severe market fall.
With that in mind, here are three super-defensive shares that I’d buy with £10,000.
United Utilities
It’s been a fantastic year for investors in United Utilities (LSE: UU) with the north-west based water company seeing its share price rise by 34% over the course of 2014, while the FTSE 100 is up just 1% over the same time period. As a provider of water services, United Utilities has a product that is about as defensive as you can get and it can be stated that demand for water is likely to remain steady and stable over the long run. This means that earnings should be far more predictable than many of its peers, and the 4.2% yield should remain consistent over the longer term, too. Furthermore, with it having a beta of just 0.4, a fall of 1% in the wider market should mean (in theory) that shares in United Utilities suffer only a 0.4% drop.
Unilever
Although many of its products are described as being ‘discretionary’, purchasers of Unilever’s (LSE: ULVR) (NYSE: UL.US) products may argue that in recent years they have become necessities. For instance, various luxury personal care and food products enjoy a staggering amount of customer loyalty and many purchasers would rather forego or trade down on other products than on their favourite brand of shampoo or skin care cream. This means that Unilever’s earnings profile is far more predictable and stable than many of its index peers.
In addition, Unilever has a huge geographical spread and a large portfolio of products, which means that changes in tastes or challenges in one part of the globe are unlikely to hit it too hard. Furthermore, with a beta of 0.8 Unilever could outperform a falling index.
AstraZeneca
AstraZeneca’s (LSE: AZN) (NYSE: AZN.US) earnings profile is currently highly volatile. That’s because it is experiencing a patent cliff, where many of its blockbuster drugs are coming under attack from generic competition. However, the company is making progress in replacing these key drugs and could have a bright future. In addition, it could prove to be a great defensive play because it has a beta of 0.8 and also because demand for its products is unlikely to change significantly – even during a recession. Indeed, the products that AstraZeneca sells and is hoping to sell are likely to see constantly rising demand over the years as illnesses such as diabetes become more prevalent. This means better revenue and earnings visibility for shareholders and makes the stock a prudent defensive play.