Why we favour defensive large caps

ON UK INCOME

2011 was a year of polarisation. Large companies performed better than medium-sized and smaller companies, defensives better than cyclicals, and high yielders better than other classic value styles such as low price to book.

The temptation is to be contrarian and look for a cyclical rally led by smaller, more depressed stocks on lower valuations. We are starting to find opportunities to buy medium sized businesses with strong franchises and reasonable growth prospects trading at attractive valuations.  However, we prefer to maintain a bias towards defensive, large cap, high-yielding stocks for any medium to long term horizon. There are several reasons for this. Firstly, despite a stronger performance in 2011, the top 100 companies are still cheaper than the rest of the market with lower P/E ratios and hig...