Your questions, our answers

Ethna-DEFENSIV

• Are you considering a further increase in duration in view of the imminent end of the interest rate hike cycle? What opportunities and risks do you see in increasing duration?
• What are the advantages of Ethna-DEFENSIV compared to investing in call money?

Ethna-AKTIV

• First the pandemic, then the war in Ukraine, and now the escalation in the Middle East. No one knows if this conflict will spill over into Iran and what might happen in Taiwan. How is Ethna-AKTIV prepared for all these crises? Do you have a specific strategy to protect yourself against such events?
• The "classic 40/60" approach no longer seems to be very popular. The continuing outflows in the sector (around $35 billion in the third quarter alone and more than $96 billion in 2023) speak for themselves. What does this mean for the management of Ethna-AKTIV?

Ethna-DYNAMISCH

• Are small/mid-caps about to make a comeback and is the Ethna-DYNAMISCH increasing its allocation in this segment?
• Government bonds offer adequate yields again. How is the Ethna-DYNAMISCH dealing with this?

Ethna-DEFENSIV

Are you considering a further increase in duration in view of the imminent end of the interest rate hike cycle? What opportunities and risks do you see in increasing duration?

The duration of our portfolio is currently 3.5 and the market currently seems to agree that yields will fall rapidly: The pace of purchases of long-term government bonds is the highest in decades. Although long-term yields are likely to approach their long-term peak as the Fed's rate hikes come to an end, there are many risks lurking in the short term. A key headwind is the surprisingly robust US consumption.  Despite the Fed's tightening of financing conditions, strong consumption and robust employment have driven GDP growth to an annual rate of 4.9% in the third quarter of 2023. Exuberant spending and tight labour markets are usually a bad sign that inflation will fall to 2% and the Fed will soon start cutting interest rates. Another source of risk is US debt. The current rate of US government spending and borrowing is unprecedented and there are no signs of a future slowdown. If anything, all of this points to a plateau in yields. As we do not expect any further rate hikes, it makes sense to build positions at the longer end of the curve and thus increase duration. At the same time, we respect the upward momentum and remain cautious for the time being. Given our goal of good performance in both the short and long term, we believe that the current risks still outweigh the prospects for returns. In the medium term, however, interest rates will fall and bond investors will benefit. We will not miss this opportunity and will increase duration at the next opportunity.

What are the advantages of Ethna-DEFENSIV compared to investing in call money?

1. A bond fund such as Ethna-DEFENSIV invests in bonds with maturities of more than one year and thus secures the current yield level over a longer period of time than a fixed-term deposit. Short-term interest rates around the world are unlikely to remain at the current levels for long. The US Federal Reserve, for example, expects an average key interest rate of 2.5%, i.e. well below the current range of 5.25 - 5.5%. The Ethna-DEFENSIV therefore represents an attractive investment with the potential for a long-term return.
   
2. Additional income when yields fall: Falling bond yields will lead to price gains in our portfolio and generate a very attractive performance. At some point, the central banks will have to lower their key interest rates (due to falling inflation or recession). The prices of the bonds in the fund will then also rise, generating significant price gains. Fixed-term deposits can only be reinvested at lower rates after the central bank has cut interest rates.
   
   
3. A fund can be sold easily at any time (e.g. in the event of an unexpected liquidity need), which is not the case with a fixed-term deposit. In this case, the client has to contact their bank and request a termination. This is then usually only possible by paying a penalty or by reducing the interest rate originally agreed.

Ethna-AKTIV

First the pandemic, then the war in Ukraine, and now the escalation in the Middle East. No one knows if this conflict will spill over into Iran and what might happen in Taiwan. How is Ethna-AKTIV prepared for all these crises? Do you have a specific strategy to protect yourself against such events?

You can prepare for crises and, if necessary, react when they occur. However, a distinction must be made between the so-called "unknown unknowns", which come more or less out of nowhere, and the "known unknowns". Both types of events can, of course, be responded to on a case-by-case basis. But unlike the former, which by definition cannot be anticipated, the latter can only be prepared for to a certain extent. The question is how much effort you put into it and what premium you are willing to pay for it. As a general rule, we only use options to hedge in the short term and in specific exceptional cases, because otherwise the costs would eat up the entire risk premium in the long term. They are therefore not the right instrument for long-term geopolitical confrontations. That is why, when faced with such risk management challenges, we focus first on appropriate asset allocation, including appropriate diversification, and second on reactive exposure management, taking into account the current risk budget. It is important to remember that every crisis brings not only risks, but also opportunities that need to be identified. That is why it is so important to protect the risk budget on the one hand and to actively exploit it on the other.

The "classic 40/60" approach no longer seems to be very popular. The continuing outflows in the sector (around $35 billion in the third quarter alone and more than $96 billion in 2023) speak for themselves. What does this mean for the management of Ethna-AKTIV?

In principle, the reaction of customers is relatively easy to understand given the results for the broad range of products. However, it should also be borne in mind that, as is often the case, the relevant period for comparison with a fixed-rate alternative is far too short. Any static product with some interest rate sensitivity - and this includes both bonds and equities - has not performed well over the past two years compared with, for example, fixed-term deposits, given the strongest cycle of interest rate increases in recent decades. If the maturity were extended, the pendulum would swing the other way very quickly. However, customer perceptions are generally not so objective. Looking ahead, however, we remain convinced that providing capital to attractively growing and adapting companies in a ratio that matches the customer's risk profile (be it 60/40 or 70/30) is superior to any other investment in the long term. However, we believe that developments in recent years have highlighted the dilemma of passive investment styles. It is precisely such significant changes in the investment environment that have provided, and continue to provide, the perfect opportunity for active managers to demonstrate their added value. In this environment, Ethna-AKTIV, for example, was able to react to these interest rate movements in good time. This enabled the fund to preserve capital and reinvest it profitably. Last but not least, it should be noted that with the return of interest rates, active managers once again have the full range of traditional investment options at their disposal.

Ethna-DYNAMISCH

Are small/mid-caps about to make a comeback and is the Ethna-DYNAMISCH increasing its allocation in this segment?

The performance gap between small/mid-caps and large caps has reached historic proportions over the past two years. This applies both to the US (e.g. Russell 2000 vs. S&P 500) and to various European indices (e.g. MDAX vs. DAX). The small-cap indices have barely moved forward and are trading close to their three-year lows, while the large-cap indices have performed much better. It is therefore understandable that the second-tier equity markets are increasingly coming into focus and that expectations of a countermovement are growing.

We have also been increasing our exposure to this segment for some time. However, we have so far refrained from increasing our allocation as we tend to underestimate the headwinds for smaller companies. While the price losses in 2022 were still largely due to valuation issues, the combination of an economic slowdown and higher interest rates led to a significant drop in profits in 2023. The price divergence is therefore driven by fundamental weakness. Once this weakness has bottomed out or is sufficiently priced in, we are also prepared to further increase the allocation to second-line stocks in the Ethna-DYNAMISCH. This can be done both through stock selecting and by taking tactical positions in liquid derivatives of relevant indices such as the Russell 2000 or the MDAX.

Government bonds offer adequate yields again. How is the Ethna-DYNAMISCH dealing with this?

For the first time since July 2021, we built up a position in long-dated US government bonds in October. We are less interested in the interest rate (which is higher at the short end due to the inverted yield curve) than in a hedging component in the portfolio context.

If interest rates/yields fall on recession fears, those bonds (prices) with the highest (prices of) bonds with the highest interest rate sensitivity (or modified duration) will rise. This mechanism has led us to focus on US government bonds with maturities of around 30 years and a modified duration of around 20. With our position totalling 5% of the fund, we have already benefited from the easing of the higher yield levels in recent weeks. Should the yield level rise again, we intend to increase the position counter-cyclically to around 10-15% and reinstate this important component of risk management.