Portfolio Manager Update

To the latest Market Commentary

Ethna-DEFENSIV

Key points at a glance

• Labour market data spark concerns about weakening US economy
• Jerome Powell speech in Jackson Hole signals turning point at last
• Performance for month stands at around 1.5% (T class); active duration management makes biggest contribution
• Further fall in yields expected, although divergent positioning makes sense in tactical terms
  
  

31 August 2024 - Bond investors saw a sharp uptick in volatility in August, triggered by weaker US labour market data. These data were reinforced by the manufacturing purchasing managers’ index, which again fell into contractionary territory. Both sets of data sparked fears that the US economy may be cooling. As a result, longer-dated bond yields fell in both the US and Europe. There were no surprises on inflation, as signs mount that it is on a sustainable path towards the 2% target set by both central banks. Increases in negotiated wages in Europe were well below expectations, tempering concerns over stubborn inflation.

The Jackson Hole symposium took place at the end of the month, with Fed Chair Powell unequivocally announcing that the time to loosen monetary policy had come. Central bankers too are now paying more attention to the state of the labour market than the fight against inflation, where victory is within grasp. The markets have therefore revised their expectations and are currently expecting around four interest rate cuts in the US and two to three in Europe before the end of the year. These expectations more or less coincide with our own.

Over the course of the month we managed to elicit a performance of around 1.5% (T class) out of the market. This excellent result is largely (around 1%) down to our active duration management. The rest came from coupon income and price gains on the bonds in our portfolio. At the beginning of the month, we increased the duration to over 6 and benefited from a sharp fall in yields at the long end. At the end of the month, portfolio duration was again reduced to just over 3, as we found the market response excessive in some respects. Basically, we expect yields to fall further – especially in the US. However, we may depart from this basic assessment in the short term, depending on market valuations at the time. If yields at the long end of the curve return to attractive levels, we will seize the opportunity and increase portfolio duration again significantly.

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) showed great stability during the market turbulence at the beginning of the month and quickly reached a new all-time high once things calmed down.
• One of the main contributors was the duration overlay, which was geared towards falling interest rates. We took these profits at the end of the month. The modified duration of the high-quality bond portfolio is now 4.
• The equity portfolio was left at 30% and remains exclusively invested in US large caps.
• The portfolio has 27% USD exposure.

31 August 2024 - August was a month of two very different sides for investors. The first few days of trading were characterised by very high volatility. For example, the Japanese equity index Nikkei 225 saw its biggest one-day drop in years, losing -12.4%. The rest of the global equity market could not escape this volatility either. At the end of this crash on 5 August, even the diversified S&P500 had fallen almost 10% from its all-time high in mid-July. In trying to find the cause, there are a number of candidates in the final analysis: ongoing geopolitical stress and the unwinding of the much-discussed yen carry trade but more importantly the sudden concerns about a weaker US economy. These met with possibly overly optimistic positions in the case of some market participants. Typically, and in contrast to the two prior years, this fall in equity prices went hand in hand with falling interest rates. The yield on ten-year US Treasuries fell to 3.66% at the lowest point from 4.49% at the beginning of July. Portfolio-wise, this was a very welcome development given the rising prices of our interest rate derivatives; from a purely economic point of view, this jibed with the growing expectation of future interest rate cuts. Speaking of interest rate moves – having at the beginning of July anticipated only a couple of interest rate cuts by the US Fed this year, the market has gone back to pricing in five reductions by the end of the year and nine for the full interest cutting cycle up to the end of 2025. This completes the next U-turn in relation to these expectations. Having bet heavily on falling interest rates based on our theory that interest rates had peaked, we benefited from this development to a disproportionate extent over the course of the month. Even when the month showed a different side, as characterised by rising share prices and a rapid resurgence of risk appetite, the downward trend in interest rates continued. Although we expect further falls in interest rates, we closed the duration overlay (for the time being) with a respectable profit. In August alone, the interest rate overlay contributed more than one per cent to performance for the month. In light of the fact that the market breadth we spoke about last month was reflected in the latest rise in prices, we are holding on to our 30% equity allocation – despite the wall of worry ahead of us. In contrast to its market-cap-weighted counterpart, the equal-weighted S&P500 already reached new highs during August. We are currently examining our 27% USD exposure – the third-largest component in the portfolio. There are not yet enough arguments for us to reduce the position substantially.  We still believe that the US has a growth advantage, but the market is obviously giving more weight to the shrinking interest rate differential at the moment – to the disadvantage of the dollar.

All in all, the portfolio worked very well in August and at no point did additional hedging need to be completed despite the market turbulence. In spite of the temporarily high volatility we were therefore able to follow the principle that sometimes less is more.

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

• August saw the highest volatility so far this year but ended on a positive note.
• The now-concluded Q2 earnings season painted a constructive picture and allowed us to snap up software company NICE.
• In view of a few warning signals at the macro level we reduced the net equity allocation at month-end to around 50%.
  
  

31 August 2024 - August opened with a mini-crash in global equity markets and the biggest fall in prices this year. This was triggered first and foremost by unexpectedly weak US labour market data, raising the spectre of an economic slowdown. Many investors consequently reduced risk positions, leading to strong fluctuations in some corners of the market. This affected both the – in some cases binary-seeming – rotations between US second-tier stocks and US mega caps (“Magnificent Seven”), but most of all the Japanese equity market. The latter was still being directly influenced by major speculation in the Japanese yen, which unwound all of a sudden, causing the Nikkei to fall -12.4% on 5 August – the biggest one-day loss since Black Monday in 1987. Calm was then restored over the rest of the month and the losses were substantially recouped in almost all market segments.

The Ethna-DYNAMISCH was relatively unscathed by the market turbulence. Firstly, for the most part, we are not invested in the focal points of the market mentioned above. Secondly, our portfolio securities had another good earnings season and contributed to fund performance – thus helping the fund to reach a new all-time high. At the same time, we see a risk that the capital market environment – which has been constructive to date – could start to crack. We have noticed an increase in the signs in this direction of late in our regular market analysis. No sign in and of itself is truly concerning; it’s more a case of the sum of many small observations. These include the fact that the economy is not really getting into gear in either Europe or the US, a slow but ongoing slowdown in the labour market, earnings forecast downgrades despite a very decent earnings season overall, weaker prices in cyclical sectors and a gradual widening of credit spreads in the bond market. If we also consider the fact that September is often a weak month in seasonal terms, the risk/reward ratio shifted sufficiently from the top-down perspective for us to partly hedge the equity portfolio up to the end of the month and to tactically reduce the net equity allocation to around 50%. In terms of execution, the process is identical to the risk reductions undertaken on a phased basis in January and April.

Overall, we remain true to the positioning often referred to recently as a “controlled offensive”. One of the strongest arguments for it is without doubt the bottom-up analysis of our portfolio securities. The combination of attractive opportunities for growth and attractive valuation remains intact, and was again confirmed during the most recent earnings season. The biggest winners during the month were the US cybersecurity company Fortinet, whose share price gained 32% in August. Fortinet is a prime example of a company with a strong market position undergoing structural growth, on which investors had turned their back due to a dip in growth rates. After weak Q1 figures, we added Fortinet to the portfolio this year and are pleased with the latest jump in price on the back of strong figures again in Q2.

We have a similar take on the situation with software company NICE, which, with a market capitalisation of USD 11 billion, is listed on the US Nasdaq exchange and is one of the world’s leading providers of Contact Center as a Service (CCaaS) and Anti-Money Laundering software. In contrast to Fortinet, there is no slowdown in growth to be seen yet in NICE’s case. There are fears of such a slowdown, however – albeit only on the part of some investors and not the company itself, as the strong quarterly figures once again showed in mid-August. We share the company’s view and regard artificial intelligence not as a threat but as a tailwind for future development. Against this backdrop, we added another high-growth quality company to the Ethna-DYNAMISCH portfolio at an expected price/earnings ratio of 15.

Apart from that, we successively made a series of smaller adjustments to the weightings of the 34 single stocks in the portfolio in the context of the high market volatility. Since there were more expansions in positions than reductions, the gross equity allocation rose slightly to 77.3% over the course of the month. This can be interpreted as a sign of our confidence in the medium-term development not only of our equity portfolio but also of the general equity market. This is irrespective of any rough patches that arise, for which we have the right response at the ready in the form of the Ethna-DYNAMISCH toolkit.

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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