Defensive equities are usually found in sectors that have withstood market shocks, such as utilities and real estate. But as COVID-19 shakes up investment conventions, companies with intangible assets are being more appreciated for their volatility cushion.

The nature of defensive stocks can be surprising. We saw evidence of this during the COVID-19-fueled sell-off in the first quarter, when equities from traditionally defensive industries like utilities and real estate didn’t protect portfolios as in prior downturns. Meanwhile, historically less-defensive sectors, such as software services and digital media and entertainment, were surprisingly less impacted.

Broadening Conventional Defensive Wisdom

While defensive stocks didn’t meet expectations during the recent sell-off, we don’t believe that their protective potential is lost forever. Still, investors should broaden their sources of volatility mitigation. And in an economy increasingly influenced by service- and technology-heavy industries, we think intangible assets should be top of mind.

By capturing the contributing value of things like brand, platforms and data, intangible assets are more concrete than many investors think. Along with other fundamentals, intangibles can augment quantifiable intelligence on a company’s competitive advantages, sustainability and resiliency—all very tangible predictive signals of long-term defensiveness.

Touching on Intangibles: The Different Paths to Defensiveness

Factoring intangible assets into fundamental analysis isn’t new. Brands and patents, for instance, have always mattered to a company’s bottom line (just ask Coca-Cola and Merck). But the distinct ways intangibles are assessed are rapidly evolving—and turning even obscurities like culture and network effect into measurable, predictive data.

Separating and capitalizing intangible assets can better reveal how businesses are run. Whether it’s a company’s research and development, culture, brand or patents (Display), intangibles like these often can provide surprising insight on a company’s defensive positioning.

A large hexagon is surrounded by six loosely connected smaller hexagons, each labelled for a type of intangible asset.

Intangible assets can add value in different ways. So, a closer look can unlock how variations uniquely contribute to a company’s competitiveness, growth and stability.

Platforms with Network Effect–Platforms are matchmakers. And by growing the number of participant connections, a platform business can reduce friction—which helps grow its total accessible market—and effectively lower transaction costs, which can stabilize revenues.