Emerald Yau
- Defensive strength: Cash-rich companies provide a cushion during market downturns due to lower debt reliance and financial flexibility.
- Growth potential: High free cash flow allows reinvestment, fueling innovation, expansion, and stock appreciation during upswings.
- Dividend resilience: Strong free cash flow supports sustainable dividend payments, even in challenging economic climates.
In today’s market, where frequent policy shifts strike like unexpected villains, equity investors are often forced to adopt protective gear in a hurry. Strategies anchored in value stocks, dividend plays and other traditionally defensive equity sectors have been some of the obvious ways to protect against market turbulence.
But there is another strategy in the background, often overlooked but ready to save the day: quality companies with high free cash flow. These companies may be less well-known, but in times of uncertainty they may have the financial firepower to hold the line.
Why companies generating high free cash flow deserve a bigger role in portfolios
Free cash flow (FCF) is viewed as one of the most revealing indicators of a company’s financial health. In essence, free cash flow is the true cash a company generates (after accounting for the capital expenditures it needs to maintain its core operations).
Free Cash Flow = Operating Cash Flow − Capital Expenditures
This represents the money that a company can deploy freely — to pay dividends, buy back shares, reduce debt, invest in growth and innovation and more — all key attributes for investors.
Companies with strong and consistent free cash flows are typically associated with better financial health and they can respond more quickly to competitive pressures. Their financial strength and flexibility may be an advantage in times of turbulence.
FTSE Cash Flow Focus Index Series: an all-weather investment strategy
To fight off the unexpected villains in today’s market, equity investors need more than just hope. They need a resilient, all-weather strategy.
The FTSE Cash Flow Focus Index Series, launched in 2024, offers a transparent, index methodology centred on capturing high-quality, financially resilient companies with strong free cash flow profiles.
These companies can offer a triple benefit: a defensive stance during downturns, capital appreciation potential during upswings, and more reliable dividends. This combination makes them well-rounded partners for long-term investors through fast-changing market conditions.
In this article, we’ll delve into the characteristics that could make the FTSE Cash Flow Focus indices a prudent choice for equity strategies in uncertain times.
Defensive shield: protecting against market turbulence
Companies with high free cash flow are typically less reliant on external financing to fund their operations. Their lower debt burden means there’s a higher probability that they can march forward even in times of economic stress, providing an overall defensive shield to the FTSE Cash Flow Focus indices.
The above-average cash position also positions these companies to combat unexpected challenges, such as policy changes or supply chain disruptions. The ability to quickly pivot, invest in solutions, or expand into new markets without requiring external capital therefore gives these companies an advantage in maintaining competitive positioning.
For example, as shown in Exhibit 1 (based on a back-test of the index), the Russell 1000 Cash Flow Focus index, which was launched in 2025 and contains 100 cash-rich US large caps, would have demonstrated remarkable power of resilience during periods of market stress – from the global financial crisis and the Covid-19 shock, to the 2022 correction and recent policy-driven volatility. Since 2006, the index gave a total return of 251% higher than the base universe, the Russell 1000 — thanks in part to the cash-rich constituents’ ability to shield and defend.
Exhibit 1: Relative performance of the Russell 1000 Cash Flow Focus Index
Source: FTSE Russell, as of 31 May 2025. Rebased to 100 as of 31 Mar 2006. Past performance is no guarantee of future results. The returns shown include back-tested performance. Please see the end for important legal disclosures.
Speed burst: keeping pace with market rallies
The power of the FTSE Cash Flow Focus indices is not limited to their defensiveness. Capturing upside potential has been another effective advantage.
Too good to be true? Not really. Here’s why.
Cash-rich companies have great flexibility to reinvest in their business, fund strategic initiatives, acquire competitors or explore new markets. These moves can boost competitiveness by fueling the power of innovation. In doing so, they may also drive higher revenue growth and, potentially, stock price appreciation.
In Exhibit 2, we show how the Russell 1000 Cash Flow Focus index would have kept pace with its parent universe during three market recovery (rally) periods.
Exhibit 2: Relative performance of the Russell 1000 Cash Flow Focus Index during market recovery or rally periods
| Market Period | Date Range | Russell 1000 Cash Flow Focus | Russell 1000 |
|---|---|---|---|
| Post Global Financial Crisis recovery | 9 March 2009 - 19 Feb 2020 | 548% | 536% |
| After Financial Crisis to Covid market shock | |||
| Post Covid recovery | 23 Mar 2020 - 12 Jan 2022 | 109% | 119% |
| After Covid market shock to 2022 market shock | |||
| 2023 to early 2025 recover & AI-driven bull market | 12 Oct 2022 - 19 Feb 2025 | 88% | 77% |
| After 2022 market shock to 2025 trade policy uncertainties |
Source: FTSE Russell, as of 31 May 2025. Performance figures represent cumulative total return. Past performance is no guarantee of future results. The returns shown include back-tested performance. Please see the end for important legal disclosures.
Dividend armour: strengthening security measures
Cash-rich companies also have the ability to provide added security to dividends.
Companies that generate significant cash flows are typically better positioned to weather economic downturns and market shocks, raising the likelihood they can continue paying dividends even when other companies might be forced to cut or suspend payouts.
For income-focused investors, sustainable dividend payments – even in challenging times – can be particularly valuable. By representing a combination of cash-rich companies, the FTSE Cash Flow Focus indices are thus equipped with the potential to bring an appealing, alternative option to investors seeking dividend income.
Exhibit 3: Dividend return of FTSE Asia Pacific ex Japan Cash Flow Focus Index vs. base universe
Source: FTSE Russell, as of 31 May 2025. Past performance is no guarantee of future results. The returns shown include back-tested performance. Please see the end for important legal disclosures.
The trifecta of defence, growth, and income: powering up your portfolio
By assembling a league of high-quality, less volatile companies that have strong free cash flows, the FTSE Cash Flow Focus indices can unleash a trio of forces to defend and empower your investment portfolio.
The indices’ defensive shield could help protect your portfolio from heavy hits when markets stumble; the speed burst should keep pace with momentum when markets rally; while the dividend armour may strengthen the resilience of your portfolio with more reliable dividend income.
Together, these three forces form a dynamic blend of defence, growth, and income that could help amplify your portfolio’s resilience and performance. FTSE Cash Flow Focus indices may just be the index solution your portfolio needs, in good times and bad.
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