Portfolio Manager Update
Ethna-DEFENSIV
Key points at a glance
- Higher yields on US and German sovereign bonds: inflation concerns, robust economic situation, unease about US national debt.
- Further slowdown in inflation as well as interest rate cuts expected on both sides of the Atlantic.
- Portfolio duration raised to 5.3 by opening a long position in US Treasury futures (15%).
31 October 2024 – Yields on both US and German sovereign bonds rose in October. Higher yields in the US are a reflection of concerns about the possible return of inflation, as evidenced by the level of breakeven inflation – a market-based measure of expected inflation. Indeed the rate of US inflation priced in by the market for the next ten years has risen by around 30 basis points. This partly explains the rise in the yield on 10-year US sovereign bonds from 3.6% to 4.3% since the Fed’s mid-September meeting. In addition, the concerns about the economy as a whole and the labour market have abated, particularly after a slowdown in the summer. If nothing else, speculation about the outcome of the election is a key factor for longer-dated US sovereign bonds. The assumption behind this speculation is that the national debt will continue to climb regardless of the election result, thus impacting the credit rating for the US. As a consequence, the Bloomberg US Treasury index – which measures the performance of fixed-rate nominal debt issued by the US Treasury – lost around 2.4% during the month; this represents the worst monthly loss for bond investors since 2022.
In Germany, the increase in expected inflation in the same period was not quite as large, coming in at 20 basis points. This has to do with the fact that European inflation figures for September were well within the ECB’s target of 2%, surprising many market participants. Yields on 10-year German Bunds were therefore much more stable overall, sparing investors any appreciable losses.
However, when we drill down into the macroeconomic data, a falling trend in US inflation clearly emerges. The rise in the consumer price index slowed in September to 2.4% year on year from 2.5% in August. In addition, PCE inflation – the Fed’s preferred measure – fell to 2.2% from 2.5% in the previous month. In our view, there are good reasons for the Fed to cut interest rates further and therefore for lower yields at the long end of the yield curve. We do not expect the upcoming Fed cuts to result in a rebound in inflation. Despite further interest rate cuts, the US key rate will remain in restrictive territory for a few quarters yet, which should continue to drive inflation down towards 2%.
These considerations led us to increase duration by opening a long position in US Treasury futures. Portfolio duration stood at 5.3 at month-end, with 3.6 in physical bonds and 1.7 in a 15% futures overlay. Performance for the month (T class) was -0.5%.
We expect a certain degree of volatility in the bond markets in the near future due in particular to the US presidential election. We are therefore concentrating on underlying macroeconomic developments. Once the dust has settled on the elections and the incoming president’s first economic decisions, we will have greater clarity and be able to better adapt our positioning.
Fund positioning
Figure 1: Portfolio structure* of the Ethna-DEFENSIV
Figure 2: Portfolio composition of the Ethna-DEFENSIV by currency
Figure 3: Portfolio composition of the Ethna-DEFENSIV by country
Figure 4: Portfolio composition of the Ethna-DEFENSIV by issuer sector
Ethna-AKTIV
Key points at a glance
- Equity markets trod water in October, whereas US fixed income rose sharply. The Ethna-AKTIV (T) fell just 0.01% over the course of the month and remains close to its all-time high.
- In anticipation of falling interest rates, portfolio modified duration was increased from 4.5 to 9.3 via interest rate derivatives.
- Equity portfolio exposure was increased to 35.7%. On the one hand, the basic portfolio – which is exclusively invested in US large caps – was expanded to 30.5. On the other, the allocation was increased by an additional 5% equity future.
- The portfolio has 0% foreign-currency exposure. The remaining 22% US dollar position was hedged during the month.
31 October 2024 – Last month was dominated by the eagerly anticipated earnings season and, of course, the upcoming US election. Fortunately, the expected escalation in the Middle East did not come to pass. While a final assessment cannot yet be made on the earnings season, the increasing likelihood of a Trump win caused a revival of the reflation trade. For the equity markets, this meant a rather mixed picture with negligible change over the month as a whole. Far more significant were the changes in fixed income. The rise in fixed income that began mid-September powered on in October. The yield on ten-year US Treasuries climbed 50 basis points in October, gaining 0.69% in the space of not quite six weeks since the most recent bottoming out of interest rates. The yield on their German counterparts only rose 0.27% in October. This readily explains the current strength of the US dollar.
We consider this fixed income surge totally over the top, given that the growth outlook is only moderate and central banks are expected to cut interest rates further. The fact that, in all likelihood, inflation will remain constant or only rise slightly does not justify this abrupt change of sentiment. In our view, the US Federal Reserve will follow to the letter the plan it has been communicating to date. For this reason, we markedly upped the current portfolio interest rate sensitivity via the duration overlay. This increased the duration reached through bond investments from 4.5 to 9.3. The composition of the bond portfolio itself was not changed significantly. With an average rating of A to A+, 15% is allocated to sovereign bonds, 20% to European and 27% to US investment grade bonds. There are no bonds with a rating or BBB- or lower.
Our view is that the interest rate differential between USD and EUR will not widen any further for now. We therefore consider the strength of the US dollar to be rather transient and, for the time being, we have fully hedged the foreign-currency allocation.
This year we did not get the typical election year seasonality that normally manifests in a more volatile October. For that reason, we simply increased the equity exposure over the course of the month rather than consolidating it as planned. The basic portfolio was expanded to just over 30% and is exclusively invested in US large caps. A 5% position in the S&P 500 future was also purchased. In addition to the seasonal tailwind, which should mainly feed off the share buybacks scheduled for the remaining two months of the year, there could yet be a surge in liquidity. This will arise if, on the one hand, the Fed brings quantitative easing to a premature end and, on the other hand, if, in the upcoming budget negotiations, the Treasury Department maxes out its account with the Fed instead of going to the capital markets for funding.
Without putting too much emphasis on the impact of the US election, we regard precisely this portfolio positioning – high duration, no FX risks and an approximately 35% equity portfolio – as ideal to get us through a possibly more volatile period after the election. Let us not forget that both political camps in the US pursue a growth-oriented, capital-market-friendly policy based on debt. A recession is not (yet) just around the corner.
Fund positioning
Figure 5: Portfolio structure* of the Ethna-AKTIV
Figure 6: Portfolio composition of the Ethna-AKTIV by currency
Figure 7: Portfolio composition of the Ethna-AKTIV by country
Figure 8: Portfolio composition of the Ethna-AKTIV by issuer sector
Ethna-DYNAMISCH
Key points at a glance
- Global equity markets have been mixed of late.
- We took advantage of the volatility in individual stocks to make further adjustments, including three total divestments and one new addition.
- With an equity allocation of 75% we are continuing our controlled offensive.
- Long-dated US sovereign bonds are back in the bond portfolio for the first time this year.
31 October 2024 – Equity markets were very mixed in October and showed no clear direction. The two main factors were the Q3 earnings season, which is gathering momentum, and early November’s US presidential election. Outside the US, there was a tendency to profit-taking as the chances of a Donald Trump win crept up; equity markets in the US, meanwhile, held their ground. Against the backdrop of higher inflation expectations and better US economic data, the yield on 10-year US Treasuries rose by over 50 basis points in the space of a month: a significant rise for the measure regarded as the global risk-free rate of return, which in its wake also provided the US dollar with a considerable tailwind. In the Ethna-DYNAMISCH we used the generally more attractive yield levels to take up a small position of around 4% in long-dated US sovereign bonds in the portfolio once again.
Although too soon to draw conclusions on the earnings season, at least there have not yet been any significant market-wide anomalies that would cause us to adjust our market outlook. The majority of companies within the portfolio reported good results in October. As in previous months, we exploited the relative volatility of individual stocks to make ongoing adjustments to the weightings of individual equities in the portfolio. We sold three stocks outright and added one.
Among those we sold was US medical device company ResMed, one of our most popular positions in the past 12 months. We had added the market leader in respiratory equipment for patients with obstructive sleep apnoea in September/October 2023, after the success of GLP1 weight-loss drugs sparked fears of a sharp decline in ResMed’s target markets. We did not share these fears and, for a long time, RedMed was one of the top positions in the Ethna-DYNAMISCH. Following a gain of around 80% since we took up the position a year ago, we exploited the sharp increase in the price as a result of the Q3 figures and sold the position in its entirety. Looking ahead, there are now more attractive equities that, in our view, are in a similar situation today to that of ResMed a year ago. Here we would include software company NICE – a new position we only took up in August and which we profiled in our latest Aktienexpress on LinkedIn.
We also sold US brokerage firm Charles Schwab and German chemicals company BASF. While there is nothing much wrong with either of them, in an overall portfolio context we classify them as two of the weaker candidates in terms of risk versus reward. In addition, both are cyclical to some degree and to some extent quite heavily dependent on external factors; consequently, the bar is set slightly higher for them. In relation to BASF, we can also add that better is the enemy of good.
The better in this case is UK chemicals company Croda, which has a market capitalisation of around EUR 6 billion and was a new addition to the portfolio in October. Unlike BASF, Croda focuses on specialty chemicals with a higher pricing power in attractive, less cyclical end-markets such as the pharmaceuticals industry as well as the personal care market. Croda was in the spotlight quite a bit during the pandemic because it manufactured the excipients for the Pfizer-BioNTech COVID-19 vaccine. Once COVID-19 vaccinations declined, the company became a victim of its own success and revenue fell. At the same time, the personal care end-market came under pressure due to the rise in inflation and the combination of these factors led the stock to correct sharply compared with its highs in 2021. We believe the market is failing to see the structural growth in store for the company and took advantage of the lows in October to take up a position.
Through the transactions mentioned, we also reduced the equity allocation by approximately four percentage points compared with the previous month to the current 75%. We regard this level as the ideal starting point to give the currently 32 individual stocks in our concentrated equity portfolio the necessary scope to effectively deliver as the performance driver of the Ethna-DYNAMISCH. At the same time, this level allows for rapid, efficient tactical adjustments by employing additional derivatives. We can thus pinpoint and take further opportunities as well as hedge potential risks if need be. All of which gives us a positioning that can best be summed up as a controlled offensive.
Fund positioning
Figure 9: Portfolio structure* of the Ethna-DYNAMISCH
Figure 10: Portfolio composition of the Ethna-DYNAMISCH by currency
Figure 11: Portfolio composition of the Ethna-DYNAMISCH by country
Figure 12: Portfolio composition of the Ethna-DYNAMISCH by issuer sector
* “Cash” comprises term deposits, call money and current accounts/other accounts. “Equities net” comprises direct investments and exposure resulting from equity derivatives.
HESPER FUND – Global Solutions (*)
Key points at a glance
- The US economy remains remarkably resilient, even in the face of what Fed officials call “restrictive” policy.
- The confidence in China’s stimulus package to revive the economy is losing steam as certain measures lack detail and the prospect of further trade conflicts is blurring the outlook.
- The HESPER FUND – Global Solutions fell by 0.53% in October, as US equities and gold were not enough to offset the impact of much higher yields and weak European stocks.
- The HESPER FUND refined its portfolio allocation. Net equity exposure increased to 46% and the overall duration stance was reduced to 3.8 years. In FX space, the fund maintained its long exposure to the Norwegian krone at 21%, raised its US dollar exposure to 30%, erased a short bet against the Swiss franc and opened a 10% short exposure to the British pound against the US-Dollar. Gold exposure was increased to 9% as prices continued to rise.
31.10.24 - One week to go: are the candidates locked in a dead heat?
HESPER FUND – Macro Scenario: the US economy is more than resilient
The US economy has softened, but it has not yet landed, and there has certainly been no hard landing. In the face of this evidence, markets were forced to reassess the path of the Fed’s interest rate cuts, hitting bond yields and boosting the dollar. The level of the neutral rate remains uncertain and central banks remain data dependent. Both US presidential candidates are promising further spending or tax cuts, which would prolong the period of fiscal profligacy despite an unsustainable deficit trends and swelling interest expenses.
China’s stimulus package as a game changer is still uncertain as we await further details on the fiscal stimulus. Prospects of trade conflicts are darkening the horizon.
The global economy is bound to a soft landing amid worrying geopolitical developments, uncertain US elections and escalating wars in Ukraine and the Middle East.
Monthly performance and current positioning
The HESPER FUND – Global Solutions (T-6 EUR) fell 0.53% in October despite the extended rise on large US stocks and the gold rally, bringing YTD performance to +4.62%. Duration, European equities and the NOK exposure weighted on the fund’s value in October. Total assets fell to EUR 55.7 million. Volatility over the past 250 days ticked down to 6.5%. The annualised return since inception slowed to 3.36%.
During the month, the fund shortened the duration to 3.8 years and slightly increased the exposure to the stock market to 46.5% due to higher valuations. The fund continued to trade actively in the FX. As we anticipated, we set in motion an arbitrage in the forward market as the HKD was trading against the greenback at the highest level allowed by the currency board system. This transaction artificially elevates the overall exposure to the US dollar to 120% when it would otherwise be 30%.
The breakdown of October performance (-0.53%) was -1.28% fixed income instruments, -0.03% equity futures, +0.58% commodities, +0.34% currencies and -0.14% fees and expenses.
Outlook: Is there a need to stimulate a US economy that does not need stimulus?
The world is bracing for US election risks. The economy, trade and foreign policy will be affected by the outcome. Recently, the markets have tilted in favour of “Trump trades”, i.e. assets, currencies, sectors and regions that will allegedly be impacted from his policies.
The Fed’s fears of a rapidly weakening labour market waned early this month as a string of data confirmed the solid underlying conditions of the US economy. In fact, the US economy continued to expand at a robust pace as household spending accelerated ahead of the election and the federal government ramped up defence spending. Thus, not only has the recession scenario been misplaced, but the need for further rate cuts might soon be called in question.
We foresee difficult times for the Fed to do its job, especially if Trump is elected. The outlook for equities remains constructive in the short term, given that financial conditions are not as tight as we thought at current rates. For bonds, the outlook is highly uncertain.
*HESPER FUND - Global Solutions is currently only authorised for distribution in Germany, Luxembourg, Belgium, Italy, France, Austria and Switzerland.
Fund positioning
Figure 13: Equity exposure by region of the HESPER FUND − Global Solutions
Figure 14: Currency allocation of the HESPER FUND − Global Solutions
Figure 15: Bond rating structure of the HESPER FUND − Global Solutions
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