Portfolio Manager Update

To the latest Market Commentary

Ethna-DEFENSIV

Key points at a glance

• The Federal Reserve slashes its key rates by a full 50 basis points.
• The global wave of interest rate cuts has only just begun.
• The inverted yield curves have disappeared.
• The Ethna-DEFENSIV's monthly performance is well into positive territory again at 0.9%.

30 September 2024 – The Fed joins in

In September, the US Federal Reserve joined in with the round of interest rate cuts by slashing the federal funds rate – its key interest rate – by 50 basis points overnight. Its justification for this was the further progress made in combating inflation as well as the rise in unemployment. At practically the same time, the inverted curve for US government bonds also disappeared. Yields on two-year government bonds are again lower than those on their 10-year counterparts. But it is not just in the US that inverted yield curves are a thing of the past; this phenomenon is now nowhere to be seen in almost all developed economies. The ECB followed up its first interest rate hike in June with another in September. Bond yields have continued to fall across the board, but the sharpest decline can be seen in yields on shorter-dated bonds.

Last month, we reported on market participants' fears of a slowdown in the US economy. These concerns quickly faded. The US economy is proving resilient, and the key interest rate cut could provide additional momentum. In Europe, growth is significantly weaker. However, it would be a mistake to draw conclusions about the entire eurozone based on Germany alone – especially given its dependence on the weak automotive industry. Driven by stable growth in Italy and France and significant growth in Spain, there are no signs of a recession looming for the eurozone. In addition, inflation fell below 2% in September.

Both the ECB and the Fed will follow up with further interest rate cuts. We expect the ECB’s deposit rate to be back up to 2% and key rates in the US to be close to or below 3.5% by next summer. The decisive factor when it comes to how long-term interest rates will develop, however, will be how strongly this stimulates the economy and whether it triggers a second wave of inflation. We remain cautious for the time being and expect only minor price changes for long-dated bonds. The upcoming US election is another factor that is creating uncertainty.

In September, the Ethna-DEFENSIV again delivered a very strong performance of around
0.9% (T class), with coupon payments and gains on the bonds in our portfolio primarily responsible for this favourable development. The duration of the portfolio remains conservative at 3.4, while the quality of the portfolio is high. We are currently on the lookout for opportunities regarding new bond issues.

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

• The Ethna-AKTIV (T) continued its impressive participation in rising markets and posted a new all-time high annual performance of 7.33%.
• After successful duration extensions in previous months, we benefited this month from an interim hedging of interest rate sensitivity. The modified duration of the high-quality bond portfolio is now 4.1.
• The equity portfolio’s exposure was reduced to 27% through the taking of profits on the 5% equity future and it continues to be invested exclusively in US large caps.
• Portfolio exposure to the US dollar is 22%.

30 September 2024 – Contrary to its reputation, September was anything but a bad month for the stock market. The fact that economic data did not deteriorate further and that interest rates tended to fall, particularly at the short end, helped many stock indices to new annual – if not all-time – highs. Our flagship fund, the Ethna-AKTIV (T), gained a further 1.17% and ended the month with a YTD performance of 7.33% – close to its new all-time high.

Speaking of interest rates, the elephant in the imaginary interest rate universe was clearly the US Federal Reserve's mid-month interest rate decision. After a freeze of 420 days, the Fed has now made an about-turn regarding interest rates and followed the obvious “demands” of the interest rate market in cutting rates by 50 basis points. Inflation no longer seems to be considered an issue – contrary to our analysis, we should note – for the majority of central banks. Instead, attention is now being focused on the apparent weakening of economic growth. The purchasing managers' indexes, in their role as leading indicators, only partially confirm this thesis. The picture they paint is a mixed one. We therefore stand by our forecast that this period of weak growth will soon be over. Although it goes without saying that it is important to continue monitoring the incoming data in this regard, there is no evidence of a sustained economic slowdown or even recession. If that does happen, however, we will of course react and adjust our current strategy of risk affinity. Even though the current geopolitical escalation in the Middle East has not yet triggered any significant market reaction, we still believe that this situation could currently represent the biggest risk factor. Furthermore, everything seems to be revolving around the election of the next US president at the moment. Our position here is clear: Ultimately, who is elected will have no bearing on the stock market, as long as the uncertainty surrounding the election, and the mudslinging that has accompanied it, ends. Once the winner has been determined, both companies and investors can get back on track. While the two candidates clearly have different agendas, they are also both in favour of debt-financed, almost unconditional support for the US economy. While this is inflationary on the one hand, it is also good for the markets on the other. The stimulus package introduced by China is mainly monetary in nature. The measures it contains will be enough to free the local equity market from the bear market. The impact on Western markets will be negligible, and in our opinion the same goes for the real economy. Additional fiscal measures will be needed to solve the current problems in the long term.

No strategic adjustments were made within the portfolio – only tactical ones. The biggest change relates to the management of interest rate sensitivity. We consider the change in the market – from just a few interest rate cuts to more than ten in the US within the space of a quarter – to be completely over the top, especially in view of growth prospects, which are not all that bad, and the possibility that inflation might hang around after all. After benefiting handsomely from falling interest rates in August, we partially hedged the portfolio against rising rates over the course of the month. This hedge, which has since been unwound, temporarily reduced the modified duration from 4.1 to 1.3 and contributed a further 23 basis points to performance. In our view, the narratives driving the interest rate market have changed far too quickly in the last 18 months. The equity market is somewhat more constant in this respect. It strives from peak to peak, despite a somewhat sideways trend in earnings expectations. That last point is the reason (among others) that we took some of the profits after the mid-month rise by closing out the equity overlay (5% S&P500 future). The remaining 27% remains invested in US equities only. We will manage the allocation in a firmly data-dependent way. That is to say, we are not ruling out either an increase or a reduction in exposure. However, we do expect to see rising exposure towards the end of the year. The US dollar allocation was reduced slightly to 22% as part of the rebalancing. In our view, a lot of negative news, e.g. the narrowing interest rate differential, has already been priced into the current exchange rate. We expect the current allocation to work very well as a diversifier for the portfolio.

Looking ahead, we believe that the portfolio is well positioned to weather the likely volatile run-up to the US elections, and to participate appropriately in further price gains thanks to the tailwind provided by election certainty. Should the situation develop contrary to these expectations, we can rely on our robust portfolio construction and our effective risk management to see us through.

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 indices reached new highs over the course of the month.
• This is not unjustified, as the overall market environment has been brighter recently.
• It is for this reason that we have unwound the tactical hedges from the previous month. With a net equity allocation of 79%, we are once again on the controlled offensive.
  
  

31 August 2024 – A bold interest rate move by the US Federal Reserve and stimuli from China have given global equity markets a boost, enabling market weakness from the beginning of the month to be left behind as September progressed, while global indices climbed to new highs. There was more than just monetary stimuli in action, however.

Last month, we raised the question of whether the capital market environment – which has been constructive to date – could start to crack. However, the signs that had previously pointed in this direction have had the wind taken out of their sails. In particular, the sum of the smaller observations – be it the latest data points from the real economy, for example from the labour market or industry, or market-related indicators, such as the relative performance of cyclicals and the stability or narrowing of spreads in the bond market – has trended upwards, or at least held up against (low) expectations.

We unwound our tactical risk hedges at the end of September in response to the brightening of the overall market environment. Our entry point at the end of August was very well timed, as it was followed by a significant market downturn. However, we did miss the opportunity to jump off in time to avoid gradually rising prices after the first week of September. We already implemented comparable tactical reductions in the net equity allocation in January and April of this year. The last hedging measure leaves their overall contribution to performance at zero. We are learning to take profits from tactical positionings earlier. We are convinced that there will always be opportunities in a volatile market environment that we can take advantage of to deliver a positive contribution.

This puts our net equity allocation at 79% at the end of the month (previously around 50%) and sees us back on a controlled offensive. The macro picture remains mixed, but the fundamentally constructive micro picture of our portfolio companies gives us confidence regardless. Coupled with fairly valued equity markets, in which breadth rather than concentration is contributing increasingly to strength, we continue to see a healthy starting situation that should not be underestimated.

In addition to this top-down adjustment, we made minor adjustments to our individual securities from a bottom-up perspective. We have taken a contrarian approach and counter-cyclically reduced the size of our positions in PayPal, which finally seems to be winning over the market with its operational and strategic measures, and Prosus, which benefited from the stimulus in China, in the face of strong price gains. Despite these reductions, we continue to see high potential in both securities and are keeping them in our top picks. In contrast, we expanded our positions in NICE (AI profiteer) and SLB (margin expansion via the digital segment). Both securities continue to trade at very low valuations. We suspect that the market is currently (still) failing to recognise the potential of our investment theses.

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.

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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