Your questions, our answers
In our latest issue of Clear and Simple, our Portfolio Managers start by outlining what further developments we expect to see in the trade war between China and the U.S. They then answer your questions on performance in a low interest environment, on our expectations for equities given the increased volatility since May, and why the Ethna Funds currently have a high USD position.
The trade war has fired up again, how do you expect this powerplay to develop?
There is one thing we have to bear in mind - the conflict between the two largest economic nations will definitely continue for the next few years. While in the short term we may see progress in terms of intellectual property, market access, or subsidies for domestic and discrimination against foreign companies, in the long term, there will always be conflicts in the battle for the world trade crown. Admittedly, after the recent rapprochement the signs for a short-term agreement are somewhat better. Nevertheless, it would be very optimistic to hope for real progress during the upcoming G20 summit. We believe that both parties are aware of the negative effects of their aggressive tariff policies. However, we suspect that the pressure on both sides will have to increase before an agreement is reached. Along the way, in addition to further tariffs, we are likely to see an extension of the conflict to real organizations, as in the Huawei and FedEx cases.
At this point, we consider China exerting pressure on the United States through a renewed sale U.S. Treasury positions or by further devaluing the yuan just as unlikely as the disruption of the rare earth element supply chain.
The majority of the Ethna-AKTIV and Ethna-DEFENSIV (around 80 percent of the fund) is invested in fixed income. In a low interest rate environment, where do you expect performance to come from?
Yes, we currently have a significant portion of both of these funds invested in bonds - in the Ethna-AKTIV we are sitting at 77% while the Ethna-DEFENSIV is slightly higher at 90%. With these investments, we have constructed an extremely safe bond portfolio comprised of one-third USD denominated bonds and two-thirds EUR denominated bonds. Currently, we are not hedging the currency risk from the former, so the combined bond portfolio (USD and EUR) in each fund is generating an average yield of 2%. Looking at the year-to-date performance, in both the Ethna-AKTIV and the Ethna-DEFENSIV the overall bond portfolio has contributed around 5% to fund performance. Due to the running yield of 2% and possible rate cuts in the U.S., the bond portfolios in both funds have the potential to generate further performance.
However, we do not expect performance to increase at the same pace as we have seen so far this year. We can generate additional performance by using interest rate futures to take positions based on our expectations of yield movements. We also see further potential in gold, which, in addition to its role as a portfolio diversifier, has seen a surge in prices following a more dovish approach by the Fed after its recent meeting. Additional performance drivers include equities and currencies, which we discuss in more detail in the following sections.
After the strong first quarter for equities, we have seen increased volatility on the equity markets since May. What are your expectations for equities?
The increased volatility in the equity markets that we have seen in recent weeks comes as no surprise. After the very strong first quarter, equities needed some time to process the increase, and in this type of environment, small corrections are considered healthy. Over the summer, we anticipate a directionless and, at times, nervous sideways market. Share prices have already priced in a considerable amount of positive news and valuations are somewhat ambitious, at least for the short term. Towards the end of the year, the equity markets could calm down again and be ready for a run of new highs. However, this positive effect is dependent on a resolution to the trade war between the U.S. and China – where there is currently no sign of a quick settlement. In the short term, we anticipate that equity markets will be somewhat muted, but in the medium term we still see equities as an attractive form of investment.
Similar to the market fluctuations we saw in 2018, the coming quarter should also offer a number of interesting opportunities. In the Ethna-DYNAMISCH’s solid portfolio of high-quality single stocks, we prefer companies with attractive valuations in the technology, non-cyclical consumer goods and healthcare sectors in particular, as these generally show relatively stable structural growth and are therefore in line with our long-term investment strategy. We also see more potential in U.S. companies, as these have better growth prospects and are exposed to fewer political risks than their European counterparts. In addition, we are more likely to find companies in our preferred sectors in the U.S. market. However, in line with our cautious outlook, we will continue to pay particular attention to hedging in the fund over the coming weeks.
In the Ethna-AKTIV portfolio, too, we responded in line with the expectations outlined above and took advantage of the latest price recovery to adjust the equity quota towards the lower limit of the strategic range. As soon as we see a decrease in volatility, we plan to increase the Ethna-AKTIV’s equity exposure again.
The funds have a strong position in USD. Where do you expect the currency to move and on what is this view based?
There are several reasons for our positive view regarding the U.S. dollar. The political uncertainty associated with Europe is certainly not good for the single European currency. Alongside the still unresolved Brexit, we also have a range of other negative factors such as the Italian debt crisis, the yellow-vest protests in France, and a potential end to the GroKo (the coalition government) in Germany. Furthermore, in our view, the still ongoing growth differential between the U.S. and Europe - and the fact that the USD is a so-called "safe haven" - are decisive reasons for a high weighting of the U.S. dollar. We believe that a temporary appreciation of the USD against the euro in the direction of parity is entirely possible. As a result, all three Ethna Funds currently have a high U.S. dollar position. Given our expectation of an appreciation of the U.S. dollar, we would like to keep the quota at this level for the time being and expect an attractive performance contribution.
Please contact us at any time if you have questions or suggestions.
ETHENEA Independent Investors S.A.
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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. 21/06/2019