Are your defensive shares doing their job?

Businessmen in a Defence Wall

Many of us dedicate a healthy percentage of our portfolios to defensive shares. These shares ideally provide a buffer against economic downturns. Defensive shares typically represent products and services we might regard as “life’s necessities”, such as food and electricity.

Given the events on the ASX this week I thought it was a good time to test the theory and see if the “buffer” has come into play by looking at 2 ASX defensive shares over the past few days.  

Coles and Woolies

Coles Group Limited (ASX: COL) and Woolworths Group Limited (ASX: WOW) shares are regularly touted as “must-have” defensive shares for a balanced portfolio. They can be categorized as “defensive” because even during economic uncertainty they can still rely on a consistent supply of customers. Both companies belong to the S&P/ASX 200 Consumer Staples index (ASX: XSJ) which dropped a total of 3.82% in value on Monday and Tuesday. By comparison, the Coles share value dropped 3.42% and Woolworths shares slid by 2.96%.

Both companies outperformed the average losses of their industry stablemates, but what if we raise the bar and compare their performance against the S&P/ASX 50 (ASX: XFL) which lowered by 4.14% over the same time period. Once again both Coles and Woolworths did better than the index average. We can put Woolworths under one final examination against the S&P/ASX 20 (ASX: XTL) which lost 4% of its value. Again, Woolworths’ 2.96% outshone the average.

No-one likes to see a drop in the value of a carefully put-together portfolio. If you own Coles or Woolworths shares you might not be smiling but you did get your “buffer”. They performed exactly the way defensive shares should work by avoiding the worst of a downturn. It may seem like these are relatively small differences in percentage points, but just 1% can represent millions in overall company value.

The better news is, both Coles and Woolworths rallied on Wednesday with the Coles share price up 1.33% on the day’s trade and Woolworths up 2.28%.

Foolish takeaway

If you’re feeling motivated to load up your portfolio with more defensive shares, then either Coles or Woolworths might be a good place to start. Coles shares closed this afternoon at $13.61 per share, 16% higher year-to-date, while Woolworths closed near its 52-week high at $35.50 with the bonus of a fully franked gross dividend of $1.36 per share.

No-one can say with absolute certainty what will happen to the Australian economy in the short term. You can, however, reduce your portfolio exposure to risk with a sound defensive strategy.

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Motley Fool contributor JWoodward has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.