Portfolio Manager Update

To the latest Market Commentary

Ethna-DEFENSIV

Key points at a glance

• US bonds post gains as economic concerns come to the fore
• German government bonds only slightly in the black
• Is the service sector weakening and is the manufacturing sector recovering?
• Portfolio duration increased to 6.2, swapping floating-rate bonds (floaters) for fixed-rate bonds
• Two portfolio building blocks: continuous interest income and duration overlay

28 February 2025 – In January 2025, bond markets were still cautious, mainly due to uncertainty about the new US president's future policy. Concerns about a renewed rise in inflation prevailed. In February, however, fears of a significant slowdown in the US economy came to the fore. Uncertainty about the extent and timing of further tariffs weighed on sentiment, as did the actual and expected layoffs in the public sector. While inflation concerns have not completely disappeared, they have clearly receded into the background. As a result, yields on long-term US government bonds have fallen sharply.

In contrast, German government bond prices rose only slightly in February. The election result has not changed this. Of course, accelerated defence spending should lead to a greater supply of government bonds and thus higher yields. But it is not just this potential increase in supply that determines yields. General price inflation has not yet fallen to 2%, but it is well on the way. This allows for further rate cuts by the ECB, which should offset the increase in supply.

After the service sector was the global growth engine in 2024 and the European economy also held its own just above the zero line, a shift now seems to be emerging. Currently, sentiment in the sector is deteriorating on both sides of the Atlantic. By contrast, the manufacturing sector is showing slight signs of recovery in both the US (purchasing managers' confidence) and Germany (IFO expectations). These hopes have repeatedly proved deceptive over the past two years, but at some point there is a pent-up demand. In Germany, as an industrialised country, an improvement in the manufacturing sector has a positive effect on consumer sentiment. If the turnaround succeeds without any significant slumps in the services sector, then a recovery of the German economy is likely. However, this hope should still be treated with caution; it has been disappointed too often in the past.

During the month, we swapped some of our floating-rate bonds for fixed-rate bonds. This increased the duration to 6.2. Currently, 4.5 come from the underlying bond portfolio and 1.7 from a 15% Treasury futures overlay. The strong monthly performance of 1.14% (T-class) is due to three factors. Firstly, yields in the US fell significantly, which led to profits on our Treasury futures position. Secondly, the risk premiums on corporate bonds compared with federal bonds have fallen further, meaning that these items have also gained in value. And thirdly, the continuous interest income leads to a quasi-automatic, albeit slow, increase in the fund price.

We also see a very positive performance in the near future. The aforementioned continuous interest income will also continue in March. In addition, we see further short-term opportunities for the Treasury future position, as the economic concerns have only just begun and the unresolved budget situation in the US will, at least in the short term, lead to a lower supply of bonds. Initially, the government will have to draw on the funds it has already borrowed in the past to cover its spending. And perhaps the rise in prices will slow down; in any case, crude oil prices are on the decline.

Ethna-AKTIV

Key points at a glance

• The Ethna-AKTIV (T) lost 0.63% in February.
• The bond ratio rose slightly to 61.1%. The average rating is A- to A. 
• A 26% LONG position in the US 20Y bond future increases the modified duration from 6.1 to 10.9. 
• The net equity exposure remained unchanged at 44.5%. While some individual stocks were reduced, a 5.1% position in the Swiss Market Index (SMI) was built up.
• The currency risk of the portfolio is currently 4.6% (3.0% CHF and 1.6% USD).

28 February 2025 – In February, the positive stock market trend of the previous months continued until around the middle of the month. In addition to the S&P500, a number of other stock indices also reached new all-time highs. However, the past two weeks were characterised by sustained consolidation, which went beyond the massive sector rotation observed to date. As a result, both the US benchmark index and the Ethna-AKTIV were pushed into negative territory for the month.

In addition to the recurring tariff threats from President Trump, who has been in office for a month, it was mainly mixed macro data that once again fuelled fears of a dip in growth. It is true that the leading indicators for the manufacturing industry have emerged from the valley of tears after almost two years. On the other hand, the service sector is now beginning to falter. 

Disappointing retail sales and a decline in consumer confidence are an additional burden. Against this background, and despite the fact that the reported inflation data were in line with expectations, one more interest rate hike was priced in for the US by the end of December than at the beginning of the year. The long end of the curve also responded with lower rates. The German election largely held no surprises. The key question now is how quickly the proposed investment packages for the military and infrastructure will be implemented. More relevant for us, however, is the overall context: the implementation of a pan-European economic stimulus package, on the one hand, and the repeated threat by the Americans to stop providing their military potential without getting something in return, on the other. Whether these demands are justified or not is not the point here. But the resulting uncertainty is having a direct impact on financial markets. They have just come through an earnings season that was generally good. However, it is worth noting that the reaction to disappointing figures or outlooks is more negative than to positive surprises. While price reactions at the index level tend to be muted, beneath the surface there is a strong sector rotation. The winners of the past two years, especially the highly capitalised technology stocks, are being actively swapped for more defensive stocks. We believe this environment will continue.

There were no significant changes to the portfolio positioning of the Ethna-AKTIV. The bond allocation was increased slightly to 61.1%. While the EUR-denominated (25.4%) and USD-denominated (28.4%) corporate bonds were almost equally weighted, the weighting of government bonds was reduced to 7.1%. The modified duration of the bonds invested in rose slightly to 6.1 as a result. We are maintaining our long position in the US 20Y bond future because we still believe that US long-term interest rates are too high. This increases the modified duration to 10.9.

The net equity exposure increased slightly to 44.5%, of which 30.9% are individual stocks and 13.6% are futures. A new development compared to last month is the addition of a 5.1% SMI future, which represents a first step towards regional diversification of the equity exposure in Europe. We like the index's defensive orientation and the overweighting of financial and pharmaceutical stocks. This transaction has not changed the basic focus on US stocks. Our view on global currency markets remains unchanged. Based on current developments, we are convinced that the US dollar's period of strength is over for the time being. Accordingly, we are maintaining full hedging of our US dollar exposure.

Ethna-DYNAMISCH

Key points at a glance

• Performance was very mixed in February.
• Equity markets are currently characterised by a rotation movement, for which the Ethna-DYNAMISCH proved to be well equipped.
• We remain constructive in our outlook, which is reflected in an equity allocation of 74%.

28 February 2025 – Looking back on February, it is not that easy to summarise the development of the stock markets. The forces at work beneath the surface were too diverse. If we start the analysis with one of the well-known global stock indices, a decline of around 2% can be seen. However, this was mainly driven by US equities and, within these, by the major heavyweights of the Magnificent 7. The picture was different in Europe and large parts of Asia, where the price increases of the previous month continued.

In our view, the forces at work can currently best be compared to a pendulum. A pendulum in which optimism in and for the US has reached a preliminary peak with the inauguration of Donald Trump. Most recently, slightly below-consensus economic data, a decline in consumer confidence and political gaffes were no longer sufficient to support the high valuations in the US in February. This, together with a rotation out of cyclicals into more defensive business models, weighed on the US stock markets. At the same time, the picture in Europe, for example, was almost the opposite. This prompted many investors – despite the undoubted structural risks – to make further reallocations in favour of the old continent, which had been viewed with a great deal of scepticism up to that point. A classic pendulum movement, as regularly seen on the stock market.

In principle, the scenario outlined largely corresponded to our risk/reward assessment and positioning in the Ethna-DYNAMISCH. The fact that we nevertheless posted a small loss at fund level over the month was ultimately due to the reporting season for the 2024 Q4 figures and some unexpectedly strong negative price reactions in the portfolio. The behaviour of our portfolio stocks was a representative reflection of the market as a whole. In retrospect, the majority of companies presented very convincing results, most of which exceeded expectations. However, as soon as the potential emerged that the market’s forward-looking expectations could no longer be fully met in the future, prices fell relatively sharply. Here are a few figures: As of the end of February, 25 of the 33 portfolio stocks had reported Q4 figures. The immediate price reactions on the following trading day were positive in 12 cases and negative in 13 – so overall relatively balanced. However, four movements greater than +5% were offset by eight movements smaller than -5%. This was even more worrying as some of the strongest declines affected several of our largest positions (Becton Dickinson, Medtronic, Nice and PayPal). Incidentally, in none of the cases – even beyond those mentioned as examples – do we see our investment case as being at risk. Nevertheless, the room for additional purchases in such cases is unfortunately more limited than for smaller positions.

This also provides the perfect link to the most recent, overarching approach in the fund and the reason why the Ethna-DYNAMISCH has performed well despite a number of pitfalls. On the flipside, there were a number of equities whose prices rose sharply. Prime examples are our European bank stocks Commerzbank and Erste Group Bank from Austria, which we significantly reduced in February and whose shares were literally snatched out of our hands when we sold them. Another example is the credit card company Visa, which we also reduced significantly. Since the sales were not offset by purchases, the equity allocation fell from 77.6% to 73.9% over the month. By contrast, we have once again slightly increased the long-dated US government bonds (now at 9.3% of the fund allocation). In the event of a further unexpected downturn in the US economy, they represent an attractive counterweight to equities (but even in the absence of such a downturn, they have an attractive risk-return profile).

Looking ahead, we remain generally constructive. We have recently discussed potential tactical equity hedges quite intensively. However, we have seen overshoots on the upside only in very limited areas of the market, which have already declined significantly (keywords Tesla, crypto, etc.), without affecting the market as a whole. At the same time, we see the entrepreneurial strength and attractive valuation of our existing stocks, which allow us to look confidently towards spring.

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