Portfolio Manager Update
Ethna-DEFENSIV
Key points at a glance
- Yields continue to rise in wake of exuberance at end-2023 due to higher inflation and cautious central banks.
- Profits taken on short positions in duration overlay.
- Percentage of floating rate bonds increased to 15.6%.
- Yields on longer-dated bonds not expected to fall.
29 February 2024 - Yields rose along the entire length of the curve in February, both in the US and Europe. After the rally at the end of last year, our prediction came true little by little: markets got too far ahead of future interest rate cuts and yields corrected upwards. The correction was triggered in part by central bankers in the US, as their statements dampened market optimism that the Fed would cut interest rates soon, and in part by higher US inflation figures, which stood in the way of a rapid reduction in inflation.
We began the month with short positions in futures on US, German and Italian sovereign bonds (duration of -0.22) and took profits by increments over the course of the month by reducing our short positions. At month-end, portfolio duration stood at approx. 1.1, based on duration of around 2.1 for our bond positions less around 1.0 from the duration overlay. In addition, we increased the proportion of floating rate bonds in the portfolio by approx. 4 percentage points based on our reckoning that interest rate cuts will not start until June. At month-end, we stood at 15.6%. The average rating was thus unchanged at month-end, at a solid A- to A.
Looking ahead, a very robust US labour market and strong consumer spending will drive up inflation. We do not expect the Fed target to be reached any time soon. Having bottomed out, the economies of Europe are very slowly starting to recover – a market situation that doesn’t lend itself to a fall in yields. For that reason, we remain invested at the short end of the yield curve and expect yields at the long end to climb further.
Fund positioning
Ethna-AKTIV
Key points at a glance
- The portfolio remains geared towards an environment of moderate growth, falling but sticky inflation and a rising stock market trend.
- The equity allocation was reduced to 25% and exposure to the Magnificent Seven, which have been extremely successful to date, was completely replaced for tactical reasons.
- High quality and short maturities continue to characterise the bond portfolio. The modified duration was raised from -1.3 to +1.5.
29 February 2024 - The Ethna-AKTIV again participated well in the positive stock market environment, gaining just over one per cent in value.
The brilliant year-end rally resumed in February after a short hiatus. In the absence of fresh impetus from central banks, which are usually very much centre stage, the investment community eagerly turned their attention to the most recent earnings season. The big technology stocks in particular, and most especially the new darling of the stock markets NVIDIA, impressed once more. Driven by enormous levels of investment by cash-rich technology giants, NVIDIA again surpassed even the already high growth forecasts for AI chip makers.
Nor could the quite substantial rise in long-term interest rates during the month and another postponement in the start of interest rate cuts stop the rising trend in equity markets last month. One positive to note is that market breadth increased slightly in February. On the negative side, however, it must be said that sentiment is now very positive (if not downright exuberant). Against this backdrop, not only have a number of equity indices reached new all-time highs but the enormous initial investments and resulting abnormally high rates of growth in AI are, to all intents and purposes, being blindly extrapolated into the future. This doesn’t mean that we doubt the penetration of this technology. But, similar to what happened with the Internet at the end of the 1990s, it is highly unlikely that all investors’ (valuation) dreams will come true. We therefore deemed it appropriate to position the portfolio slightly more defensively, even though our theory that recession will be avoided is increasingly proving true.
In concrete terms, on the one hand we pared back the equity allocation to a neutral 25%. On the other hand, for tactical reasons, we sold our entire exposure to the “Magnificent Seven” at a good profit, replacing it with alternative stocks. On the bond side, there was little cause for changes. Given that reported inflation data remained higher than the central banks’ target range, longer-term interest rates rose by approx. 30 basis points both in Europe and in the US. This prompted us to reduce interest rate sensitivity slightly. Having been -1.3 at the beginning of the month, modified duration was +1.5 at month-end. Looking ahead, Super Tuesday in early March should mark the start of the “business” end of the US election campaign. We are ready for the volatility that is generally associated with this and the, historically speaking, poor seasonality. We will be proactive in seizing any opportunities that arise.
Fund positioning
Ethna-DYNAMISCH
Key points at a glance
- Positive momentum seen in previous months continues in equity markets.
- With robust fundamentals and fair valuations, our view of the market remains constructive.
- We have refined the Ethna-DYNAMISCH investment process. In future, we will track market-dominant segments by conducting additional focused analyses, to further improve the fund profile, including in relative terms.
- The first outcome of this is the recent new addition to the portfolio of Microsoft and Amazon.
29 February 2024 - Equity markets were bursting with strength in February too. New all-time highs were recorded in many instances. These brought the first prophecies of doom, which warned of excesses. Indeed, parallels with the year 2000 were drawn at times. True, investor sentiment can be said to be rather overheated of late and the odd individual name has undergone fluctuations in prices.
Broadly speaking, however, we would describe the market’s condition as “healthy”. Valuations are fair and the fundamental trend is robust. Earnings season in the US, which is already coming to a close, paints a constructive picture. Profit performance in particular was surprising. Once again, it is becoming clear that companies with efficiency and cost control measures in place are in a position to react dynamically to the economic environment. When it comes to sentiment, it can be said that the private investor camp is exhibiting a certain degree of exuberance. Positioning data suggest that institutional investors tend to be more cautious. This is also the prevailing mood that we take from discussions. In short, the market environment is not excessive. Despite that, we are keeping an eye on the state of affairs.
Back at the end of January, we added two new positions – Microsoft and Amazon – to the portfolio, each with a weighting of around 1.5%. We hardly need to give a more detailed description of the two companies, which have achieved impressive market dominance; we do need to provide context, however.
We learned from the market’s imbalance and concentration in 2023. Before this, the attractiveness of investments was assessed separately from their market relevance. In future, we will conduct continual analyses of market-dominant segments as an additional part of our investment process. What we mean by “market-dominant” is those segments that, by dint of their size and discrete performance, deserve special attention. These include, for example, the technology sector, banks, oil stocks as well as large single names like the Magnificent Seven. We have also slightly (!) lowered the investment thresholds for these industries/individual securities. In doing so, we want to take account of clear-cut opinions, and, as the case may be, ensure quicker positioning in relation to potentially market-moving themes. Microsoft and Amazon, for example, “only” meet around 90% of our investment criteria but can still be deemed extremely attractive. This refinement of the Ethna-DYNAMISCH process takes into consideration the fact that investors want attractive, risk-adjusted returns not only in absolute terms but sometimes also in relative terms too. 2023 was a prime example of this. The performance of equity markets was very imbalanced but in no way irrational. By taking the small measures outlined above, we are better equipped for comparable situations in the future. At the same time, our requirement in relation to the absolute risk/return ratio during the selection process remains very high. We are not index investors and that is not set to change.
We made slight adjustments to specific stocks in February. These included Vontier and Demant, which we trimmed to some extent after impressive quarterly figures and a surge in prices. We head into March with a net equity allocation of around 75%.
Fund positioning
* “Cash” comprises term deposits, call money and current accounts/other accounts. “Equities net” comprises direct investments and exposure resulting from equity derivatives.
HESPER FUND – Global Solutions (*)
Key points at a glance
The bumpy road of disinflation
- Global yields drifted higher as rate cut expectations moderated further.
- The Fed is close to achieving its goal of reducing inflation without a recession. However, the Fed cannot declare mission accomplished yet, and should not be in a hurry to cut rates.
- Elections in over 70 countries will determine the outlook for fiscal, trade, immigration and geopolitical policies, which will strongly affect economic scenarios.
- Stocks extended their rally on Nvidia’s record numbers and the soft-landing outlook.
- Chinese stocks rebounded as authorities unveiled more support measures.
- Worldwide equities rose in February, despite the adjustment to more realistic rate cut expectations.
- The HESPER FUND – Global Solutions fine-tuned its portfolio allocation. Net equity exposure was kept above 50% and duration close to neutral most of the time. In FX, the fund sliced its long exposure to the Norwegian krone to 52%, kept the dollar around 64%, reduced the Swiss franc short exposure to -17% and cut short GBP exposure to -75%.
29 February 2024 - The path of rate cuts is still uncertain despite clear direction
Central bankers pushed back on the expectations of rapid rate cuts, rattling the bond markets. Inflation readings confirmed that it will take more time to bring inflation down to 2% in a sustainable way and strong economic data reinforced the Fed’s cautious approach. In the US, a recession seems now unlikely, as consumers remain healthy and the manufacturing sector shows signs of bottoming out. A soft-landing or even a no-landing scenario seems now more realistic than gloomy fears of a US recession.
It may be the year of the Fed’s pivot, but it is also the year of elections. Domestic politics will influence the markets as more than over 70 countries will hold elections. In the US, a rematch between Biden and Trump seems the likely outcome. Thus, volatility is something we are not ready to rule out and it may become more and more likely as we approach November’s Election Day.
Nvidia powered global record setting rally
Without suffering any meaningful setbacks, US equities were able to adjust their expectations of early rate cuts to more realistic scenarios. Strong corporate results and Nvidia’s positive guidance ignited another leg of the stocks rally, keeping the hype around Artificial Intelligence alive.
A likely soft-landing scenario for the US economy has pushed global equities higher, even though it is unclear whether other countries/regions are also on their way to a soft landing.
In the US, the major indices hit record highs. The tech-heavy NASDAQ rose by 6.1%, the S&P 500 gained 45.2% and the DJIA increased 2.2%. The small cap Russel 2000 index rebounded 5.5%.
In Europe, the Euro Stoxx Index surged 4.9% (+4.5% in USD), while the FTSE 100 was flat (-0.8% in USD). The Swiss Market Index gained 0.9% (-1.8% in USD, as the Swiss franc weakened).
In Asia, Chinas efforts to stabilise its financial markets appeared to bear their fruits. In the latest series of efforts to end the rout, the PBoC cut RRR, Chinese banks cut a key interest rate by the largest amount on record to support property, and a special state vehicle propped up the stock market by buying shares. In addition, authorities clamped down on quant fund trading. The Hang Seng gained 6.6% and the CSI 300 surged 9.4% (+9.1% in USD). The Korean stock market rebounded 5.8% (+5.7% in USD) and the Indian Sensex rose by 1% (+6.2% in USD). The bright spot was once again the Japanese stock market, with the Nikkei rising 7.9% (+6.2% in USD) breaking through its 1989 peak.
Macro scenario of the HESPER FUND – Global Solutions: central banks navigate a tricky path from hikes to cuts in a year full of politics and geopolitical tensions
As mentioned in our previous letter, 2024 will to be the year of the central bank pivot. After a couple of years of painful inflation, the progressive resolution of supply issues and the forceful actions of central banks seem to be yielding results, with inflation apparently coming back under control. Recent inflation data has supported the markets’ view that inflation will be tamed without a hard landing, at least in the US, where the economy is still expanding at a good pace. The Fed has signalled that it is done raising rates but also that it is in no hurry to start cutting. We are not yet convinced of the immaculate disinflation path all the way down to 2%. The road to disinflation may be slower and bumpier than markets are pricing in. With the supply side of the inflation equation already delivering its benefits, we may still need to see some softening in demand to achieve the central banks’ inflation target. The combination of strong fiscal support, a healthy labour market, solid consumer confidence and geopolitical tensions could still delay or even derail the disinflationary path.
Positioning and monthly performance
The HESPER FUND – Global Solutions increased in February (unit class T-6 EUR +0.83%), supported by equities, a slightly negative duration exposure and less-than-inspiring results in the FX space. YTD the fund is up 2.01%.
The HESPER FUND – Global Solutions maintained an overall equity exposure of around 50%. The duration exposure was kept neutral to slightly negative most of the time. The fund continued to trade actively in FX, keeping the dollar exposure above 60%. The NOK long exposure has not worked out yet. GBP and CHF short exposures were reduced to 75% and 17% respectively.
The breakdown of MTD (+0.83%) was +0.37% fixed income (+0.09% long positions, +0.28% short future positions), +0.78% equities, +0% commodities, -0.21% currencies and -0.11% fees and expenses. Equities, hedging duration and the strengthening of the dollar contributed to the performance. Decorrelation with traditional assets such as equities and bonds remained high.
Total assets fell to EUR 59.2 million at the end of the month. The T-6 EUR unit class was 8.6% below its all-time peak on 29 September 2022.
Volatility over the last 250 days rose up to 5.7%, maintaining an attractive risk/return profile. The annualised return since inception has increased to 3.29%.
Looking ahead to next month, the fund has continued to stay far away from its reference currency and has been active in the FX space. Currently, the currency exposure of the HESPER FUND – Global Solutions is as follows: USD 64.3%, NOK 52.7%, BRL 6.7%, CHF -16.8% and GBP -75.7%.
As in the past, we will continue to monitor and calibrate the fund’s exposure to the various asset classes in line with market sentiment and changes in the macroeconomic baseline scenario.
*HESPER FUND - Global Solutions is currently only authorised for distribution in Germany, Luxembourg, Belgium, Italy, France, Austria and Switzerland.
Fund positioning
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