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Russell research explores "defensive equity" and whether the market is mispricing risk


Report challenges the presumption that less risky stocks deliver lower returns

Seattle, WA — — Recent research from Russell Investments observes that the market doesn’t seem to offer a premium to adequately compensate investors who choose to invest in riskier stocks as opposed to more stable (“defensive”) stocks. The report outlines a substantial body of evidence suggesting that a return premium for riskier stocks does not exist.

“The standard theory of how markets work says that investors should only take extra risk if they think they are going to be compensated for doing so,” said Bob Collie, chief research strategist, Americas Institutional, and one of the research authors. “But there’s scant evidence that riskier stocks systematically outperform their defensive counterparts.”

As for the explanation, several possible causes have been put forward. “There’s good reason to believe that the widespread use of market-relative benchmarking by mutual funds and institutional investors is one contributing factor,” adds Collie. “That’s too entrenched and useful a practice for us to believe that it’s going to go away any time soon. So we may continue to see the defensive effect persist in the future.”

Based on these findings, the authors argue for a re-think of how investors run their investment programs, including the mandates and benchmarks that are given to investment managers and how they approach equity portfolio construction.

“If the market is indeed mispricing risk, then that offers investors the prospect of creating a better asset allocation that can target the same expected return level with less risk,” said John Osborn, director of consulting and research co-author. “Additionally, there are a number of approaches that a concerned institution can take when implementing a defensive strategy, including giving a money manager a defensive index as the performance benchmark, which effectively shifts the total portfolio toward a more defensive position. Overall, investors should pay more attention to risk when monitoring portfolio performance, and they should consider de-emphasizing tracking error as a risk measure and focusing instead on absolute risk.”

According to analysis of the recently launched Russell Stability Index series – which divides the broad market into dynamic and defensive sectors – the defensive index has delivered higher returns and lower volatility over the past twenty years and has also been largely successful to date in mitigating the impact of falling markets.

Access the Russell Research “Defensive Equity: Is the Market Mispricing Risk?” (

About Russell Investments

Russell Investments is an independent, global financial services firm that provides strategic advice, investment solutions, implementation services and global performance benchmarks that are customized to meet the unique needs of institutional investors, financial advisors and individuals.

Celebrating its 75th anniversary in 2011, Russell has pioneered innovations that have come to define many of the practices that are standard in the investment world today, and has four decades of experience researching and selecting money managers globally.

Russell has about $163 billion in assets under management (as of 6/30/11) and works with 2,300 institutional clients, 530 independent distribution partners and millions of individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2 trillion in assets under advisement (as of 12/31/2010) and traded $1.5 trillion last year through its implementation services business. The Russell Global Indexes calculate over 50,000 benchmarks daily covering 85 countries and more than 10,000 securities.

Founded in 1936, Russell is headquartered in Seattle, Washington, USA and has offices in Amsterdam, Auckland, Chicago, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit


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