Your questions, our portfolio managers' answers

How are current macro trends affecting financial markets? A key focus at the moment is the upcoming US elections. The deep political divide has the potential to significantly impact future key issues such as trade, taxes and regulation. Meanwhile, inflation in the US and Europe remains above central bank targets, limiting the scope for interest rate cuts. In an environment of uncertain growth, weakening economies and mixed earnings forecasts, flexible and active strategies are essential to manage these risks and seize opportunities.

Ethna-AKTIV

• Early November marks the next US election, and the political divide is deeper than ever. What impact do you expect the US elections to have on global financial markets, and how are you preparing the fund for it, or how do you plan to respond?
• In times of crisis, as we have recently seen in the capital markets (e.g. the panic sell-off in early August), the Ethna-AKTIV has been able to successfully navigate around major setbacks and still participate well in the subsequent upswing. What factors or management measures were decisive?

Ethna-DEFENSIV

• You have recently gradually increased the duration of the Ethna-DEFENSIV. Given the current interest rate situation, how will you proceed? Will you increase the duration even further?
• It can sometimes be difficult for clients to categorise the Ethna-DEFENSIV. What advice would you (as portfolio manager) give to the client?

Ethna-DYNAMISCH

• The equity quota of the Ethna-DYNAMISCH was around 75% for most of the year. Recently it was reduced to 50%. Why was that?
• What needs to happen to see higher rates above 75%?
• Smaller capitalised stocks and value stocks have been in a countermovement recently. Is this the beginning of a larger rotation?

Ethna-AKTIV

Early November marks the next US election, and the political divide is deeper than ever. What impact do you expect the US elections to have on global financial markets, and how are you preparing the fund for it, or how do you plan to respond?

The US presidential election and the distribution of power in both the House of Representatives and the Senate carry a number of implications for future developments. Uncertainty about the outcome of the election is often accompanied by corresponding volatility in the capital markets, and this year is no exception. However, it’s important to remember that the risks that are often highlighted are also accompanied by opportunities.

In fact, the positions of the two parties differ on many issues. In areas such as immigration, trade, foreign policy, taxation, and regulation, there are different plans. However, real and relatively rapid implementation generally requires not only the presidency but also a majority in both the House of Representatives and the Senate. The likelihood of this is currently relatively low. Accordingly, early implementation within the portfolio is not advisable for many of the possible programme items. For this reason, there will be no election-induced changes to the portfolio of the Ethna-AKTIV in advance. We rely on our portfolio construction, the associated diversification and the careful selection of the individual stocks in which we invest.

However, there is one thing that the two future presidents and their programmes have in common: their projects will be financed on credit. Both candidates will try to stimulate growth with relatively high budget deficits. Whether this will be successful remains to be seen. What is clear, however, is that absolute debt growth will continue unabated. If growth cannot be stimulated, relative debt to GDP will rise to levels exceeding 100%, which is an unfavourable position even for the USA. This is one of the key implications of the election for us, and something we can already prepare for. This supply overhang tends to argue for rising interest rates at the long end.

Compared to President Trump's first election in 2016, the potential for post-election surprises is not only limited but rather negative. At that time, he was able to positively influence the capital markets with a comprehensive tax reduction package. This time, the potential for a similar agenda is very limited. Furthermore, there is a not insignificant chance that the Democrat Harris will win the race. She is known to be in favour of raising taxes.

Overall, however, we believe that it is not the election result itself, but the certainty of the outcome of the election that will end the period of volatility. At this stage, however, it is too early to speculate on the viability of individual programmes and their implications.

In times of crisis, as we have recently seen in the capital markets (e.g. the panic sell-off in early August), the Ethna-AKTIV has been able to successfully navigate around major setbacks and still participate well in the subsequent upswing. What factors or management measures were decisive?

As is often the case, success is not the result of a single factor. Rather, it's the combination of a number of measures that have enabled the Ethna-AKTIV to reach new all-time highs in a short period of time. It is interesting to note that these are mostly management decisions that were taken either years ago or at least before, but only to a small extent during the stress event at the beginning of August.

Looking at the long-term decisions, two points should be highlighted: Focus and better post-crisis engagement. This means that years ago we optimised our approach to ensure that our small team concentrates on fewer but more important topics. In addition, we have enhanced our risk management measures to ensure that participation in the upswings that follow increasingly rapid crises is not restricted for too long. It is this management approach that forms the foundation on which the appropriate measures for the moment in question are built.

For this summer, and especially for the volatile period in early August, our recipe was simple and focused, exactly as we had planned. Rather than reduce our equity exposure in response to market losses, we relied on the strong diversification of our bond portfolio. Notably, as a timely management measure, taken before the stress scenario occurred, we increased the duration of the portfolio from 4 to over 9 using derivatives. Our analysis at the time, that the phase of economic weakness would be accompanied by lower interest rates, proved to be true sooner than expected and helped to stabilise the portfolio sustainably due to the massive fall in interest rates.

This stability, together with the prompt realisation of interest profits, allowed us to refrain from taking further risk management measures and to take advantage of opportunities as they arose. As a result, we were able to reduce the previously predominant underweight in technology stocks in the equity portfolio at relatively attractive prices on the stress days. The remainder of the month not only validated our analysis but also demonstrated once again that active and focused management can be successful without immediately resorting to hyperactivity during periods of stress.

Ethna-DEFENSIV

How do you plan to position your portfolio, and what opportunities and risks do you see in increasing duration?

In our previous webinar, we outlined the decision to increase the duration in the Ethna-DEFENSIV to 4. During the summer period, we raised the duration to 6 and were able to benefit significantly from the decline in yields. At the end of August, we reduced the duration back to 3 and realised the profits. By the end of the first half of the year, yields on 10-year German government bonds remained at 2.5%, while yields on 10-year Treasuries were trading at 4.4%. In the meantime (as of 11 September), yields have decreased significantly to 2.1% and 3.6%, respectively.

We consider the chances for further price gains or a further decline in yields as very low, as central banks will cut their key interest rates, but not at the pace currently priced in by market participants. Core inflation remains stubbornly above the central bank targets in both the US and the Eurozone. Central banks will therefore only slowly lower interest rates. Only a recession in the US with significant job losses would force the Fed to reconsider its current stance and result in rapid rate cuts. However, we do not expect this to happen

It can sometimes be difficult for clients to categorise the Ethna-DEFENSIV. What advice would you (as portfolio manager) give to the client?

The Ethna-DEFENSIV is a safe haven, a fund focused on capital preservation and value stability. This is achieved primarily through active management (benchmark-independent), risk diversification and a conservative investment approach. Within its investment policy, the fund management focuses on bonds denominated in EUR, which currently account for 99% of all bonds in the portfolio. Investors should assume that, in general, 70% of all bonds are denominated in EUR (even though this is not explicitly stated in the sales prospectus).

In this context, the fund flexibly shifts between high-quality government and corporate bonds. Regarding duration, there are no specific guidelines, but the Ethna-DEFENSIV is aimed at conservative investors. The portfolio management accounts for this by always monitoring duration and credit risks. Recently, the duration was increased to just over 6 to benefit from falling yields during the summer. A higher duration should only be considered in exceptional circumstances, and even then, only opportunistically. Conversely, there have been instances where we have adopted a negative duration in response to a significant increase in interest rates, as observed in 2022.

Of course, we will also invest in foreign currency bonds should the yields on EUR-denominated bonds fall below the costs of the fund or if profitable trends emerge in global bond markets. However, this will only be done responsibly and to a limited extent. High-yield bonds will only be added to a moderate extent and should generally not account for more than 10% of the fund’s volume. Investments in bonds with a rating of BBB- are avoided. In its approach to futures positions, the Ethna-DEFENSIV is flexible and will continue to utilise futures on Italian and French government bonds in addition to Treasury and Bund futures.

Positions other than those previously outlined are only used rarely and to a limited degree. Investments in particularly risky bonds, such as asset-backed securities (ABS) and distressed securities, are excluded from consideration. By way of illustration, the Ethna-DEFENSIV will never invest in US mortgage bonds, which were at the root of the global financial crisis. Similarly, investments in so-called AT1 bank bonds, such as the Credit Suisse bond recently devalued by the Swiss banking supervisory authority, are also not permitted.

Ethna-DYNAMISCH

The equity quota of the Ethna-DYNAMISCH was around 75% for most of the year. Recently it was reduced to 50%. Why was that?

The previously constructive capital market environment is beginning to show small cracks. Whether it's the shaky economic development, the continuous slowdown of the labour market, downward revisions in earnings expectations or the challenging September seasonality—none of these signs are particularly worrying on their own. However, taken together, they led us to adopt a more cautious tactical stance at the end of August, particularly given the market's apparent lack of concern. We have already implemented comparable temporary quota reductions twice this year.

What needs to happen to see higher rates above 75%?

In the medium term, we remain optimistic. Moderation and normalisation of many relevant framework conditions remain at the heart of our overarching considerations: inflation moderately above central bank targets, an incipient normalisation of the interest rate environment and restrained but adequate growth combined with fairly valued equity markets. Overall, this presents an attractive and not to be underestimated starting position. Once the aforementioned risks have been priced in or have dissipated, it is not only conceivable that the current hedges will be unwound, but also that the equity quota will be increased towards 80 to 90%. The current heightened volatility in equity markets could quickly bring such opportunities to light.

Smaller capitalised stocks and value stocks have been in a countermovement recently. Is this the beginning of a larger rotation?

The previously exclusive market focus on the Magnificent 7 and similar stocks has diminished, allowing less favoured market sectors to benefit from this rotation. It’s important to note that this shift in favourites could be observed primarily in the U.S., less so in the rest of the world. In our view, the balance between different investment styles—growth vs. value, small vs. large cap—is now somewhat more balanced again. The key term here is: regression to the centre. However, fundamental tailwinds are necessary for a further relative outperformance of smaller capitalised and value stocks. As this is currently not the case, we don't expect any significant rotation.

In the Ethna-DYNAMISCH fund, our selection focus remains on quality companies with structural growth. The specific investment style the stocks fall under is not decisive for us.