Active Management in 2020
Munsbach, 11th June 2020 – In the duel between active funds, in which the portfolio management decides which assets are purchased, and passive funds, which invest according to fixed rules, comparisons of the advantages and disadvantages are always popular. For ETHENEA, an active asset manager, both approaches have their justification and - depending on the client's needs - can even be used in a parallel manner. However, Michael Blümke, Lead Portfolio Manager of the Ethna-AKTIV, explains how an active fund management approach can generate advantages for investors, particularly in the challenging market situation we are currently facing.
Active portfolio management is characterised by making and implementing continuous selection and/or allocation decisions based on the portfolio manager's analyses and forecasts. But what ultimately makes for a successful active approach? Michael Blümke explains it in a nutshell: "On the one hand, an active manager is successful if his actions lead to an improved Sharpe ratio. In other words, when there is an excess return for each unit of risk taken. On the other hand, the success achieved should be both sustainable and replicable, even under changed market conditions.”
Unlike passive approaches, active management uses the differences in the performance of various asset classes, individual securities, sectors or regions to generate performance. To achieve this, the portfolio managers need to possess a certain level of forecasting ability. The latter offers added value in terms of performance, particularly when there are both so-called "known unknowns" (i.e. events known in advance but whose outcome and impact on the markets are uncertain) and a certain path dependency in the markets. If we imagine the development of the markets as a path, there are always previously known forks in the road at which it is easy to envisage the markets evolving in different directions. Yet, once a direction has been taken, it is difficult to change to another path. However, based on his forecast, an active manager can prepare his portfolio for these forks in the best possible way and then - if necessary - adjust it flexibly. The market environment currently shaped by Covid-19 is a good example of this. While the outbreak of the virus was, of course, unforeseeable (in other words, it can really be considered the much-vaunted "black swan"), the containment measures taken represent a fork in the road that inevitably represents the path into a recession scenario for the economy and therefore for the capital markets. Contrary to a passive approach, only an actively managed portfolio, such as the Ethna-AKTIV, can benefit from this path dependency and the associated adaptation to new circumstances.
To make this possible, the fund was deliberately constructed with particular emphasis on the multi-asset approach and flexibility. With its focus on asset allocation, the Ethna-AKTIV invests in bonds, equities, currencies and commodities. The experienced Portfolio Management Team determines not only in which asset classes, but also in which regions and sectors, investments are made. These active allocation decisions are already a first step towards taking advantage of opportunities and diversifying the portfolio while minimising risks. The allocation is continuously assessed and - if necessary - adjusted. This differentiates the active management approach from a passive one and can provide significant added value for the investor.
The fund’s core investment is a high-quality fixed income portfolio of corporate and government bonds, in which the duration and credit risk are managed flexibly and independently from the individual bonds. The individual corporate bonds are carefully selected using a rigorous bottom-up fundamental analysis and according to the following criteria: creditworthiness, attractiveness and tradability. Security selection is crucial for robust portfolio construction and can make all the difference in challenging periods. Furthermore, the Ethna-AKTIV can have an equity component of up to 49%, predominantly through liquid futures and listed options, although it does have limited single stock investments. In addition to gold and other commodities, in which the fund may invest up to 10%, foreign currencies are another instrument for generating income and ensuring an appropriate level of diversification. As liquid derivatives are used to manage interest rate, equity and currency risks, the Portfolio Managers can continuously optimise the fund's risk/return profile.
It is precisely this flexibility, and ability to act and adapt that is not only helpful, but also essential in the current market phase. Although the portfolio was still geared towards a global growth surprise at the beginning of the year, it had to be (and was) prepared for the prevailing recession scenario within a very short time. Equity risks were significantly reduced, the duration of the portfolio was actively managed, and currency exposure in Swiss francs and US dollars was increased. These measures enabled the fund to minimise losses in the current crisis. This has created the prerequisite conditions for taking appropriate advantage of future opportunities. An active approach is suitable for an investor who only has a certain risk tolerance and because of this, would have to sell if invested in a passive instrument - probably at the worst possible time. Active management limits losses while, at the same time, takes advantage of opportunities. Because the next fork in the road is bound to come.
Please contact us at any time if you have questions or suggestions.
ETHENEA Independent Investors S.A.
16, rue Gabriel Lippmann · 5365 Munsbach
Phone +352 276 921-0 · Fax +352 276 921-1099
firstname.lastname@example.org · ethenea.com
Legal notices: An investment in investment funds, as with all securities and comparable financial assets, carries the risk of capital or currency losses. Consequently, the unit price and the yield are variable and cannot be guaranteed. The costs of a fund investment have an effect on the actual profit. No guarantee can be given that the investment objectives will be achieved. The statutory sales documents (Key Investor Information Document, sales prospectuses and reports) provide detailed information on potential risks and form the sole legal basis for a purchase of units. These documents can be obtained free of charge from the management company, ETHENEA Independent Investors S.A., the custodian bank, as well as the relevant national paying and information agents. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information, or an offer to buy or sell securities. The contents have been carefully researched, compiled and checked. No guarantee can be given for correctness, completeness or accuracy. The information includes past data which are no indicator of future performance. The management fee, custodian bank fee and all other additional costs are taken into account in the calculation of the unit price as stated in the provisions of the contract. Performance is calculated using the BVI method (German federal association for investment and asset management), which means that the calculations do not include an issuing charge, transaction costs (such as order fees and brokerage fees), custodian bank fees, or other management fees. Including the issuing surcharge would reduce performance. The performance shown is not a reliable indicator of future performance. 16/07/2020