Global defensive equity: Managing volatility with confidence

For nonprofits facing funding challenges, a global defensive equity strategy can help

For nonprofits, the ability to wring as much growth as possible from each unit of risk has never been more important. Organizations facing reduced funding, higher operating costs from inflation, increased taxes, or all of the above need their portfolios to work harder. At the same time, those relying more heavily on investment assets cannot afford to expose themselves to excessive volatility.

A defensive equity approach such as State Street’s Global Defensive Equity (GDE) portfolio can help address this dilemma. GDE is an actively managed, diversified, low-volatility equity strategy designed to balance strong returns with lower risk. By focusing on relatively stable stocks, the strategy seeks to provide much of the global equity market’s growth potential while significantly reducing volatility and drawdowns.

At its core, State Street's GDE approach is simple: We try to make sure that when we take risks, we get sufficiently compensated for them.

What a GDE strategy looks like

GDE portfolio managers employ a rigorous selection process to identify high-quality companies that exhibit durable growth potential yet trade at reasonable valuations. Assessing quality involves a close evaluation of company management teams and financial fundamentals, such as free cash flow and balance sheet strength. The portfolio tilts toward low-volatility stocks, which typically results in overweight positions in more defensive sectors like utilities and consumer staples, and underweight positions in more volatile areas such as technology and consumer discretionary.

The results speak for themselves. State Street has managed a GDE strategy for 17 years. During that time, it has delivered 90% of the MSCI World Index’s return while taking on only 75% of its risk. In rolling five-year periods, GDE has consistently produced lower volatility than its benchmark, and in all three calendar years when global equity markets posted negative returns since inception, GDE delivered an average of 8.4% improvement in drawdown. Historically, its long-term standard deviation has been about 11%, similar to that of long-term U.S. Treasury bonds but with equity-like growth potential.

A tool for navigating an uncertain future

In addition to the immediate pressures on funding streams, nonprofits are operating against an unstable macroeconomic backdrop. Uncertainty about global trade and economic policies, as well as heightened geopolitical tensions, continue to unsettle markets. Over the longer term, structural forces—including the rapid integration of artificial intelligence, the physical and economic impacts of climate change, demographic shifts, and growing fiscal strain on governments—may all contribute to a more volatile and unpredictable risk environment for decades to come.

At State Street, our sense is that the market risk is going to be higher over the next two decades than the last two decades, indicating the critical importance for nonprofits to be prepared for a changing risk environment.

Against this backdrop, GDE’s orientation toward stability and capital preservation may prove especially valuable.

How not-for-profits can use GDE

Nonprofits can tailor their GDE strategy to meet their particular objectives. Organizations that are looking to increase their equity exposure to pursue greater growth can allocate to GDE as a way to capture equity-like returns without taking on the full measure of equity market volatility. Meanwhile, organizations that already have significant equity exposure but want to reduce risk may choose to replace part of their higher-risk equity allocation with GDE.

Investors should note that incorporating GDE may increase tracking error relative to broad benchmarks like the MSCI World and MSCI ACWI. For this reason, it may be a better fit for nonprofits that focus on total risk and long-term goals rather than those that prioritize minimizing deviations from standard indexes.

For example, an organization might replace a portion of its beta exposure with GDE, freeing up risk budget to pursue higher-return opportunities elsewhere—for example, in concentrated growth strategies or alternative investments like long/short hedge funds. In this way, GDE can serve as an efficient, lower-volatility core that enables institutions to take advantage of higher-risk, higher-reward strategies in other parts of the portfolio.

A timely solution

Not-for-profit organizations face mounting challenges in a world of constrained funding, higher costs, and heightened uncertainty. For those seeking to make more efficient use of their investment assets, GDE provides a way to manage volatility with confidence, helping them sustain their missions through turbulent times while staying focused on long-term objectives.

Start the conversation

Connect with us to learn more about how the not-for-profit investment strategy landscape is shifting, share your perspectives, and discover how our expertise can support your organization. Reach out today to start a conversation.

To learn more, contact us at NotforProfitTeam@StateStreet.com.