Portfolio Manager Update
Ethna-DEFENSIV
Key points at a glance
- Yields are near the peak of the current hiking cycle.
- Portfolio duration was increased to 4 by closing short positions and building up long positions in futures on government bonds.
- Further purchases of longer-dated bonds at attractive prices are planned.
31 May 2024 – Yields rose along the entire length of the curve in May, both in the U.S. and Europe. After 10-year government bond yields hit lows of 4.3% in the U.S. and 2.4% in Germany midmonth, inflation concerns were rekindled, driving yields back up. At month end, however, we saw signs of an economic slowdown in the U.S., which put the higher yields into perspective: first-quarter 2024 GDP growth was surprisingly low, at 1.3% compared with 3.4% in the previous quarter, and real consumer spending growth was down in May. In Europe, one of the main reasons for the higher yields was the further signs of improvement in the business climate, not least because the ECB is expected to lower interest rates soon.
As stated in last month’s commentary, we think successively reducing portfolio duration is the correct course of action. Various members of both the Fed and the ECB have hinted that interest rates have peaked and that the next moves will be interest rate cuts. We still take the view that yields are near the peak of the current hiking cycle.
Against this backdrop, over the course of the month we closed all short positions in futures on German and U.S. sovereign bonds and successively built up a long position in futures on longer-dated U.S. sovereigns. At month end, this position amounted to 16.5%, increasing portfolio duration to 4. We are essentially following a barbell strategy at the moment, with bond positions concentrated at the short end of the yield curve and futures positions at the long end. We are thus benefiting from high coupons on bonds with maturities of 2 years or less and looking to net price gains at the long end.
Looking ahead, we are watching the markets very closely and are taking positions that offer our clients an attractive risk-reward ratio. There is huge demand for corporate bonds at the moment, which is driving risk premia down, so attractive valuations are relatively few and far between. However, we continue to endeavour to secure high-quality longer-dated bonds at attractive prices any time there is a market lull.
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
- Portfolio remains geared towards an environment of moderate growth, falling but stubborn inflation and a rising stock market trend.
- The equity component was reduced to 20% for tactical reasons and is exclusively invested in U.S. large caps.
- High quality characterises the bond portfolio, which is currently being shifted into longer maturities. The portfolio modified duration of 3.1 was raised to 5.4 via the duration overlay, having been 2.2 and 1.3 in the previous month.
- The 10% position in the Japanese yen was closed; the portfolio still has USD exposure of 25%.
31 May 2024 – In contrast to April, May was dominated by a risk-on sentiment that, as expected, confirmed the consolidation of the equity markets that occurred in the previous month to be precisely that. Absent major central bank meetings, the market drivers were an earnings season that was finishing up and a wide array of macro data. The macroeconomic numbers painted a mixed picture. While the growth outlook for the U.S. has weakened slightly, the global purchasing managers’ index was positive, up for the sixth time in succession. The soft-landing narrative, which may even involve a growth surprise, thus remains in play. Overall, earnings season was surprisingly positive. Of course, the highlight was NVIDIA’s exceedingly good figures, which once again confirmed the current investment hype surrounding the theme of artificial intelligence. However, market breadth is essentially lacking in the current uptrend in indices. Despite the fact that the S&P500, like many other equity indices, is close to its all-time high, less than 40% of the index constituents are above their respective 50-day averages. This means that only a small number of stocks are driving the market at the moment. While not inherently a deal breaker, this does make for a critical situation that appears to be vulnerable to corrections. So it’s no wonder that investors are more than ever checking every little movement in interest rates for its potential to drive prices. Around mid-month, interest rates trended lower on the back of weaker economic figures, prompting equities to rise. At month end, however, higher interest rates dominated, prompting equities to fall. Meanwhile, central banks are holding back but are dispelling notions of interest rate cuts due to the decent growth projections and inflation rates, which remain outside their comfort zone.
As far as the bond side of the portfolio is concerned, the obvious conclusion is that interest rates have peaked or are at least close to peaking. Now is the time to lock in yields that bond investors have not seen for more than 15 years. Accordingly, we continue to rotate out of short-dated and into longer-dated bonds. Because we cannot do this overnight, we have raised the portfolio modified duration to just over 5 using derivatives. Owing to our underweight in the market-driving technology stocks at the beginning of the month, the equity portfolio contribution fell short of expectations in May. Having quite rightly increased the equity allocation to 35% in April, we reduced it to 20% over the course of the month on the basis of our tactically motivated critical stance. We divested ourselves of the yen position. Despite the intervention of the Bank of Japan, the yen tends to remain weak contrary to our original theory. Since it has a not insubstantial negative carry, we systematically closed this loss-making position.
Looking ahead, we consider the Ethna-AKTIV to be well equipped to take the opportunities that exist at the moment, even if the highly uncertain macroeconomic situation means that traffic won’t be all one way.
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
- The broad market took a breather in the second half of the month.
- We remain constructive, holding on to a net equity allocation of around 75%.
- We made an array of adjustments within the equity portfolio.
31 May 2024 – April’s volatility continued in May. While the heavyweights tended to prop up the common indices, the fall in small caps was steeper. We regard this setback as a pause in the rally that has been ongoing since the end of October. On the whole, we remain constructive. The economic leading indicators are improving, company fundamentals are positive, valuations are fine and sentiment is not showing signs of overheating. Given this assessment of the market, we are leaving the Ethna-DYNAMISCH’s net equity allocation unchanged at around 75%. On the selection front, on the other hand, there were a number of changes.
Our focus in relation to selection is on quality companies exhibiting structural growth. Given how vast the equity universe is, we maintain a curated watchlist in order to keep track. It currently contains around 200 companies that meet certain quality criteria and whose performance we follow closely. Every now and then discrepancies between the fundamental picture and price performance come to light, which cause us to take a closer look. Recently, a familiar face – Reckitt Benckiser – came to our attention in this context. After it performed well as a beneficiary of the Covid-19 pandemic, we sold the U.K. manufacturer of cleaning and household products in 2020. It really has been impossible to make any headway with the share since then. The downward trend intensified at the beginning of 2024 in the wake of a U.S. lawsuit related to Reckitt’s baby formula and the uncertainty surrounding any financial consequences. We believe the effects on the share price were over the top and consider the risk-reward ratio to be very attractive given the low valuation. We took up a position again back at the end of April.
We entered what was a rather unconventional position for the Ethna-DYNAMISCH at the beginning of May in the form of Volkswagen. It is unconventional because the car maker doesn’t qualify as the sort of quality security we normally go for. At any rate, Volkswagen is not on our watchlist. However, given the current downbeat mood, as reflected in the record-low valuation, the risk-reward ratio is so attractive that only marginal improvements could bring about a revaluation. In any case, all the signs point in this direction. A large number of model launches this year as well as the latest calibration of its China strategy could coincide with an economic upturn in Europe and China. Earnings have already been upgraded recently. This, coupled with a dividend yield of around 8% on the purchase price, led us to expand the Volkswagen preference share to a tactical top-five position at the beginning of May. Once the upside potential we expect has been reached, we will close the position.
It’s a different story with our new position in U.S. cybersecurity company Fortinet. In this case, our investment horizon is longer term, provided our investment rationale doesn’t change significantly. A constant stream of new threats have provided the sector with a massive tailwind for years. As a major platform provider, Fortinet is also benefiting from the consolidation of the fragmented market. We have been watching the sector for a long time now. A number of securities are on our watchlist. However, we have balked at the valuations so far. Fortunately, the market is very short-sighted at times and is very sensitive to the slightest dissatisfaction. This plays into our hands and we took advantage of the fall in price after the quarterly figures to take up a position at the beginning of May.
In addition, we decided from a top-down perspective to build up an exposure of around 3% to the oil sector in order to diversify the portfolio further. At the selection level, we added two new positions to the portfolio in mid-May: SLB and TotalEnergies. The U.S. company SLB, formerly Schlumberger, is the biggest oilfield services company in the world and an innovation leader in many end markets. The high-margin digital business of SLB is particularly attractive. It includes a drilling project management platform and should increase the overall profitability of the company in the next few years as it drives growth. TotalEnergies, on the other hand, being an integrated oil and gas company, is directly dependent on the trend in fossil fuel prices. However, TotalEnergies, with its substantial capacities in renewable energy projects, has already diversified strongly and is one of the industry leaders in ESG terms.
In the opposite column to these five new positions are five divestments: Morningstar, Middleby, Dynatrace, Planet Fitness and Coloplast. We still regard these companies as quality names exhibiting structural growth but have found more attractive opportunities elsewhere. So they have been put back on our watchlist. They may return – as with Reckitt Benckiser – as soon as the risk-reward ratio improves.
We remain focussed on quality at a reasonable price (Reckitt Benckiser, Fortinet), flexible (Volkswagen) and broad-based (SLB, TotalEnergies) so as to continue to offer our investors risk-controlled access to the equity markets.
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
In a soft landing scenario, inflation proves stubborn everywhere.
- Global yields are firming up once again as the Fed has confirmed that interest rates will remain higher for longer and Eurozone inflation has proven to be stickier than expected.
- US stocks withstood higher yields as earnings supported valuations.
- Asian stocks interrupted their rebound, as investors remained unconvinced by Chinese property policies.
- Despite the Bank of Japan (BoJ) signalling that there is room for further rate hikes, the yen continued to weaken.
- The HESPER FUND – Global Solutions posted a 0.59% return in May.
- The HESPER FUND – Global Solutions refined its portfolio allocation. The net equity exposure was increased to 37% and the overall duration was maintained in slightly negative territory (-0.8). In FX, the fund kept its long exposure to the Norwegian krone up to 20%, reduced its US dollar exposure to around 33%, cut its GBP short exposure to -30% and opened a small position in MXN of 2%.
31.05.24 - The Fed is maintaining a wait-and-see-approach. Further evidence is required to confirm that inflation is cooling.
In May, the probability of a further rate cut by the Fed declined further. The market has been grappling with uncertainty over the path of the Fed’s policy all month long. Economic data is mixed and sometimes conflicting, suggesting a loss of momentum. The Fed’s recent statements also have given mixed signals, but there is currently no indication that a rate cut may be coming this summer. Some Fed officials have indicated that further rate hikes cannot be entirely ruled out. It appears that market participants are becoming increasingly concerned about the growing supply of US Treasuries, as the last two actions only saw limited demand.
Despite the European Central Bank (ECB) being prepared to cut rates in June, inflation is edging up again in the Eurozone. A surprising rebound of the European economy combined with persistently high wage pressures and upside risks to an uncertain inflation outlook are fuelling the debate over subsequent steps. The disinflationary path is still ongoing, albeit at a much slower and more uncertain pace than expected. The easing cycle will start soon, but it will be shorter and shallower. Rates are likely to remain higher than in previous cycles.
Bond investors remained biased, betting on lower yields, in the mistaken belief that a meaningful rate-cutting cycle is approaching (albeit the timing keeps shifting). Recent events forced the market to reprice this scenario. May was another tough month for bondholders.
Lingering uncertainty about interest rates weighed on Wall Street at the end of the month.
US equities hit record highs despite soaring yields, but lost steam over the last few days of the month. US stocks were supported by a good earnings season. However, some big tech companies bloated up the indices. In the US, most indices rose. The S&P 500 soared 4.8% and the DJIA increased by 2.3%. The tech-heavy NASDAQ jumped 6.9% thanks to the stellar performance of Nvidia, which continues to fuel AI hopes. The small cap index Russel 2000 rose 4.9%.
In Europe, the Euro Stoxx Index rose 1.3%% (+2.9% in USD) and the FTSE 100 1.6% (+3.4% in USD) underpinned by miners and banks. The Swiss Market Index rebounded 6.6% (+8.3% in USD).
In Asia, stocks were mostly weak. On the one hand, China has unveiled a broad rescue package with the objective of stabilising the property market and the IMF has revised its forecast for Chinese economic growth upwards to 5%, citing an encouraging start for 2024. On the other hand, the Biden administration has introduced a historic and significant increase in tariffs on a “strategic” range of Chinese imports, while the EU is ready to impose its own tariffs on electric vehicles. The Hang Seng Index rose by 1.8% while the CSI 300 Index decreased by 0.7% (-0.7% in USD). The Korean stock market fell 2.1% (-2% in USD) and the Indian Sensex lost 0.7% (-0.7% in USD) in the midst of the long election process. The Japanese Nikkei saw a marginal increase of 0.2% (+0.4% in USD).
The prolonged and excessive weakness of the Japanese yen is becoming a significant concern for the BoJ.
The BoJ has emphasised the importance of maintaining an accommodative financial environment, given the continued lack of confidence in the bank’s ability to achieve its 2% price target.
The BoJ is facing a new dilemma as the persistently weak yen is threatening to fuel inflationary pressure at a time when the bank is seeking to proceed cautiously with policy normalisation after ending the negative rate policy in March with its first hike since 2007.
There is growing speculation that the BoJ may raise interest rates in July following the failure of two government currency intervention strategies to shift the tide in the market.
Against the backdrop of rising global yields and the BoJ’s intention to cut bond purchases in order to improve market functioning, a monetary response to quell excessive yen weakness represents a risk for currency traders and bondholders alike.
HESPER FUND – Macro Scenario: sticky inflation will force central banks to an easy and shallow easing cycle.
Central banks are navigating a challenging scenario characterised by uncertain disinflation, tepid economic activity amid political elections and rising geopolitical tensions. Central banks need to carefully assess the risks of remaining hawkish for too long, with the risk of cutting rates too soon and missing their target. Central banks must consider two key questions: whether current policy is sufficiently restrictive, andhow long it will take this policy to bring inflation back to target levels.
The combination of a strong fiscal support, a healthy labour market, and geopolitical tensions could result in a further delay or even spoil the disinflationary path.
As long as the economy remains stable and prospects of future rate cuts remain in sight, equity markets could withstand higher yields up to a certain point. However, should a sustained rise in government bond yields materialise, risk markets could suffer a serious setback. The challenge of stubborn inflation within a soft-landing scenario is likely to be a source of difficulty for bonds, while offering support to risk assets such as equities and commodities. It seems unlikely that a meaningful rate-cutting cycle will be implemented. Policy easing is coming, but the cuts will be slow and not as deep as expected given the strength of the economy.
Positioning and monthly performance
The HESPER FUND – Global Solutions (T-6 EUR) gained 0.68% in May, supported by equities and a negative duration stance. YTD, the fund is up 3.08%.
In order to balance the portfolio in this challenging environment of a soft landing and persistent inflation, the HESPER FUND built up a position in gold and continued to keep its equity exposure rather subdued. Duration exposure was kept slightly negative (-0.8 years) with a long position in short-dated bonds to profit from the inverted yield curve and a short position in longer dated bonds. The fund continued to trade actively in the FX space, reducing the dollar exposure to 33%. The GBP short exposure was also reduced to -30% as the pound remained strong. The NOK long was maintained at 20%. The fund built up a 2% exposure to MXN.
The breakdown of MTD performance (+0.59%) was +0.37% fixed income (+0.18% long positions, +0.19% short futures positions), +0.75% equities, -0.03% commodities, -0.35% currencies and -0.12% fees and expenses. Decorrelation with traditional assets such as equities and bonds remained high.
Total assets fell to EUR 56.4 million at the end of the month. The T-6 EUR unit class was 7.4% below its all-time high on 29 September 2022.
Volatility over the past 250 days has increased to 6.2%, maintaining an attractive risk/return profile. The annualised return since inception has risen to 3.39%.
Looking ahead to next month, the fund has continued to stay far away from its reference currency and to trade actively in the FX space. Currently, the currency exposure of the HESPER FUND – Global Solutions is as follows: USD 33%, NOK 20%, MXN 2%, CHF -8% and GBP -30%.
As in the past, we will continue to monitor and calibrate the fund’s exposure to the various and different asset classes in line with market sentiment and changes in the macroeconomic baseline scenario.
*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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