Your questions, our answers

The year 2023 is off to a great start for the equity world. But the markets remain in the grip of geopolitics and persistently high inflation on both sides of the Atlantic. In our first quarterly update of the year, the portfolio managers addressed the following participant questions and presented their perspectives.

Ethna-DEFENSIV

• What are the possible economic scenarios you envision for 2023? How are you planning to align your portfolio? What are the biggest risks and chances?
• When comparing the Ethna DEFENSIV to its category peers 2022 was a great year for your fund what was the main factor for this success?

Ethna-AKTIV

After a gloomy 2022 for equities, we witnessed a strong equity recovery since October in the US, Europe, and also Asia.

• How sustainable do you think this recovery is?
• Do you favor a specific regional area for your portfolio for the coming weeks/months?
• If trying to take a safer approach to equity exposure in 2023, could dividend stocks be a good option in the Ethna-AKTIV portfolio?

Ethna-DYNAMISCH

• How have you been positioned over the last 4 months as equity markets recovered? Do you expect the latest rally to continue? If so, do you favor particular regions, sectors, investment styles or market caps?

Ethna-DEFENSIV

What are the possible economic scenarios you envision for 2023? How are you planning to align your portfolio? What are the biggest risks and chances?

Our base case scenario assumes that the American and European economies slow down, but a technical recession is avoided and the inflation rate remaining sticky. In its updated Economic Outlook, the IMF forecasts growth of 1% in the U.S. and 0,5% in the Eurozone for 2023. The most important reasons for the improving prospects are the reopening of China as well as falling energy prices in Europe. Despite adverse risks have moderated since October 2022, they remain tilted to the downside. As the central banks seek to navigate a narrow channel towards the soft landing, any deviation from the envisioned path is likely to bring economic struggle. On the one hand, a plethora of indicators are pointing to an impending recession in the near future; inverted yield curves, leading indicator indices, and several sectors already seeing a recession such as housing and manufacturing in the U.S. On the other hand, if the Fed’s policy turns out to be not sufficiently restrictive, strong economies will cause central banks to fear that inflation will not crest and fall to 2% and then high (and even higher) rates are likely to stay with us in 2023. Therefore, instead of taking greater risks to achieve higher returns, we strive to make our portfolio resilient and aim for investments that should be able to maintain their values in a possible recession or a tighter monetary policy. With our fairly conservative portfolio as a starting point, we might unwind our defensive positions and increase portfolio duration in the second half of the year if we see economic difficulties resolving. But for the time being we maintain our view that a cautious attitude is appropriate. At the same time, we are looking to selectively allocate funds to attractive new debt issuance without restrictions on maturities. Only recently, we saw chances in several securities and added them to our portfolio. Further chances will arise during the year but for now we exercise cautions and patience when it comes to investment opportunities.

Ethna-DEFENSIV

When comparing the Ethna DEFENSIV to its category peers 2022 was a great year for your fund what was the main factor for this success?

2022 was a year of strong outperformance for the Ethna-DEFENSIV versus its peer group. The main factor that differentiated us from peers was our cautious approach to portfolio construction. In a year when credit spreads widened significantly credit risk became very important. Our focus on high quality bonds and reducing the equity exposure to zero made our portfolio more robust compared to others. Additionally, 2022 saw a significant increase in government yields due to investors abandoning their fixed income investments in the face of rapidly rising inflation. Apart from the fact that our portfolio additions have short tenors and are therefore not very sensitive to interest rates, we used future overlay to reduce duration even further. For this reason, we did not experience drawdowns to the extent that our peers had to. Finally, our “higher-than-peers” exposure to the US dollar enabled us to take more advantage of the currency appreciation against the Euro almost throughout the entire year and contributed to the overall outperformance in our peer group. In addition, despite a difficult and dynamic market environment, we were able to maintain lower volatility than most of our peers throughout the year.

Ethna-AKTIV

After a gloomy 2022 for equities, we witnessed a strong equity recovery since October in the US, Europe, and also Asia.

How sustainable do you think this recovery is?

Within a short time, many indices have already recovered a large part of the losses of the past year. European indices - such as the DAX or the EURO STOXX 50 - are only about 5% below their all-time highs reached 13 months ago. The more technology-oriented S&P 500, on the other hand, is still missing 15% to reach its all-time highs. Calculated from the respective lows, a remarkable performance was generated on both sides of the Atlantic in only four months. Although a recession seems to be avoided economically, growth expectations are still average to the maximum. Against the backdrop of further declining returns, we believe that many stocks have risen too much and too fast in the short term. Against the expectations, we are again experiencing the so often quoted "Fear Of Missing Out" (FOMO). This rally is by far not sustainable - in the sense of "it will continue in the same way". For example, the P/E ratio of the S&P500 (calculated on expected returns) has already reached a level comparable to the environment identified as expensive directly before the Covid crisis. However, we are comfortable with the idea that we have already seen the lows. With reservation that a bottom is indeed forming in profit expectations, consolidations from this level should be seen as buying rate. We do not advise chasing this rally.

Ethna-AKTIV

Do you favor a specific regional area for your portfolio for the coming weeks/months?

With the strong performance of European and Asian indices in the recent past, this question is justified. For some time now, we have limited the selection for our equity portfolio exclusively to US stocks. In principle, this approach is questioned on a continuous basis, but despite the current "renaissance" of stocks from the old continent and Asia, there is still no reason to deviate from it. Especially if one considers that the underperformance of the American benchmark index has been caused mainly by the megacaps and their weighting in the index. Since the beginning of the bear market, the equally weighted S&P 500 has shown exactly the same performance pattern as e.g. the STOXX Europe 600. Since our portfolio structure tends to allocate the index heavyweights below their normal weight - i.e. we are closer to the equally weighted index - there is not much difference to a European index here either. Consequently, this means that we continue to focus on large American stocks with a convincing market position.

Ethna-AKTIV

If trying to take a safer approach to equity exposure in 2023, could dividend stocks be a good option in the Ethna-AKTIV portfolio?

Last year, this would have been a perfect call. However, we are very cautious in extrapolating such trends. Therefore, we do not see it as a granted that this is an approach that promises more security in 2023 as well. As stated in the previous question, our equity portfolio is a high-quality reflection of the US benchmark index. By focusing on high-dividend stocks, we would enter into a style and sector bias, which we do not want. Even if these stocks perform very well in crisis years (such as 2022), they are not as strong in growth in the long term and our approach of being able to hedge the base portfolio with index derivatives at any time without too much base risk would no longer be feasible.

Ethna-DYNAMISCH

How have you been positioned over the last 4 months as equity markets recovered? Do you expect the latest rally to continue? If so, do you favor particular regions, sectors, investment styles or market caps?

For large parts of the past year, we kept the net equity ratio low at around 30% and – with this defensive positioning – took the numerous stress factors 2022 (economic, monetary and valuations) into account.

At the same time, we also recognized early that it is important in such turbulent market phases that the foundation is laid for significantly more attractive returns in the future. From a bottom-up perspective, this is why we have been building up new positions in quality companies since September that offered attractive entry opportunities in the negative pull of the market – regardless of their fundamental strength.

As the immediate pressure of the adverse factors eased, from a top-down perspective we raised the net equity allocation towards 40% in mid-November. In addition to the gradual improvement in our overall market view, it was also the extreme pessimism with which many investors were looking towards 2023. This prompted us in mid-December to anti-cyclically increase the net equity ratio to around 50%.

With this strategic positioning, we were able to profit from the equity market rally in January. However, we had not expected its strength and breadth at that time. Although the overall strategic market evaluation has improved, it is still not good. The current reporting season shows that the economic risks are only slowly materializing. With falling profit expectations and the recent rise in equity prices, valuations – especially in the USA – have increased again significantly. We therefore assume that the rally has already gone most of its way. Our bottom-up perspective confirms this view: currently, no particularly attractive entry opportunities are crystallizing in individual single stocks. From a tactical perspective, we are therefore more inclined to reduce the net equity exposure again. Flexibility and patience continue to be important attributes for us.