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It also works without advertising

In 2008, the German Finance Agency, which raises funds for the Federal Republic of Germany through debt instruments, launched a large-scale campaign advertising federal savings bonds, which featured a financial expert who happened to be a tortoise. The tortoise/financial expert even had a name – Günther Schild – and Mr Schild’s role was to tempt German retail investors to invest in these bonds. In one TV advertisement, we see Mr Schild in his imposing office. He poses a question from an imaginary client, “How do I make the most of my money?” then counters with the following questions: “Do you want quick returns? Do you want to take on risk? Do you want profit at any cost? Do you like to gamble?” If you answered yes to all of these, Mr Schild’s advice was that German government securities were not right for you. However, due to the low interest rates at the time, the federal savings bonds – bought as a kind of nest egg – were not popular with small investors. So the German State stopped issuing the federal savings bonds at the end of 2012 and the advertising campaign with Mr Schild the tortoise ended too – much to the chagrin of his fans, who in their sorrow even placed obituaries for him online.

It’s been almost ten years since then. What’s the story today? Retail investors no longer hold any German government securities; yields are negative across the entire curve. One would think making a profit on negative-yielding bonds is more for gamblers, but this is not necessarily true. Investors who purchased the new zero-coupon 10-year German sovereign bond with a yield on issue of -0.25% in January are now seeing attractive price gains. The ECB, which is untroubled by negative yields because it is getting the money from banks at even lower rates, is now the biggest holder of German government securities, at least 30% of all bonds. To achieve this, the State did not need Mr Schild to do any advertising and, in future too, there will be demand from the ECB for German sovereign bonds as part of its asset purchase programmes.

German State borrowing is currently surging once again. The funding of additional spending to overcome the slump caused by coronavirus is taking its toll. Back in March 2020, the German State signed off on additional spending of EUR 122.5 billion and also estimated tax revenue to be EUR 33.5 billion lower. In June 2020, a second supplementary budget was passed, which reflects additional expenditure and expectations that revenue would be even lower than projected. In total, net borrowing in 2020 has been put at EUR 218.5 billion.

The German Finance Agency, which is responsible for issuing sovereign bonds, reacted to this. The outstanding issues were topped up back in the second quarter of 2020. In addition, 7-year and 15-year sovereign bonds were issued for the first time. The issue of inflation-linked federal bonds, last seen in 2015, is expected to resume over the coming months. Furthermore, the German government is planning to issue the first Green Bund this September. The Green Bund framework, setting out the projects funded, the documentation requirements and control, was published just recently.

There will be demand for the Green Bunds from investors who take ESG criteria into account in their investments, even if interest rates are negative. Demand for the inflation-linked bonds will be voracious, too, because a good many investors expect inflation to return as a consequence of these extensive fiscal and monetary supports. Therefore, Günther Schild will certainly not be needed to advertise these new products either.

At ETHENEA, we would only invest in negative-yielding bonds in exceptional cases. For example, investment in sovereign bonds may be quite justified for hedging purposes during a crisis. That said, in our opinion, there is not much difference between investing in negative-yielding bonds and buying expensive technology stocks, as further price rises can never be ruled out in either case. In any case, we will not see the potentially inflationary effects of the special monetary and fiscal programmes before this year is out. The overriding issue at the moment is concern about a second wave of coronavirus cases, which would result in fresh falls in demand (for goods and services).

Positioning of the Ethna Funds


The U.S. Federal Reserve redefined its inflation target during the Jackson Hole Economic Symposium. The target will be now be regarded as an average rate rather than a fixed goal. This means that the central bank will target an average rate of inflation of 2% over the longer run. It is unclear what exactly “longer” means and it is at the central bankers’ discretion. Annual average core inflation in the U.S. has been between 1.7% and 2.2% since 2011 and is thus fairly close to the central bank’s declared target. During the coronavirus crisis, it has again fallen well below target, with July’s surprisingly high figure of 1.6% more of an anomaly. The central bankers obviously expect a slowdown in inflation again for the time being. The new targeting means that even if inflation later rises to between 2.5% and 3%, the central bank does not necessarily have to control it by raising interest rates. However, it is rather unclear whether this change will bring about the desired steady rise in inflation. The additional liquidity that the Federal Reserve has been supplying to the financial markets for years has so far tended to increase the prices of bonds, equities and real estate.

Following the Fed’s announcements, yields on 10-year U.S. Treasuries have again climbed slightly to roughly 0.7%, which could equally be attributed to slightly higher inflation expectations. However, overall, we’re not expecting an interest rate rise above 1%, since the central bank would once again step up purchases of U.S. Treasuries in response. Since mid-July, the Fed has purchased approximately USD 4 billion in Treasuries every day. It varies little from its average and is thus more or less on autopilot. It is also authorised to purchase more, if required. In addition, there is talk in the U.S. at the moment of another economic programme of USD 1 trillion or more. This, too, would have to be funded by issuing bonds.

The economy in Germany continues to recover and, in the process, is no doubt boosting the outlook for Europe as a whole. The ifo Business Climate indicator rose further in August to 92.6 (90.4 in July). The indicator has improved in the manufacturing and services sectors. The fresh rises in coronavirus case numbers in Germany (as well as other parts of Europe) and fears surrounding the reintroduction of restrictions that goes with them are a depressing factor on consumer sentiment. The GfK Consumer Climate indicator in Germany recently fell slightly from -0.2 to -1.8.

In this environment defined by hopes and fears as well as monetary and fiscal support, the Ethna-DEFENSIV remains true to form and continues to invest primarily in corporate bonds, gold and the Swiss franc. The performance of all three asset classes was stable in August. Overall, in August, the Ethna-DEFENSIV (T class) was up again slightly by 0.06% and its performance has thus been positive in seven months of this year. YTD performance has therefore increased to +1.33% (as at: 31 August 2020). In terms of bond investments, our focus will remain on intermediate maturities, since we expect strong demand from investors in this maturity bracket in particular, and thus low price volatility. Corporate sector issuers now prefer long maturities because there is sufficient demand there as well, and they wish to secure refinancing at low cost in the long-term. If entry levels in this bracket were to improve, we would take opportunities selectively. At the moment, duration remains moderate at 5.3.


Even though the pace of economic recovery has slowed slightly, most indicators still point to an improvement in the situation, which was not on the horizon just a few months ago. Suggestive of a relatively swift return to a post-COVID-19 normality are mainly due to the fact that the labour market is improving and consumption is holding steady, as well as the purchasing managers’ indices. Our fear that prospective credit defaults, company bankruptcies and long-term unemployment would take a heavy toll on the economic cycle for a prolonged period and thus the capital market, has not been realised thus far. Quite the contrary: with the tailwind provided by ultra-accommodative monetary policy and the prospect of even more fiscal packages, there is even a possibility that the global economic trough already occurred in the second quarter.

We think this is possible, but the trend in prices in global capital markets gives the impression that this is more than likely. While there is a clear gap between the winning and losing companies in the crisis, the tailwind behind growth stocks is so strong that even broad indices, such as the S&P500, hit new all-time highs despite negative market breadth. The U.S. central bank’s latest decision to change their fixed inflation target to an average inflation target (AIT) means that the central bank is explicitly permitting inflation to exceed its target, and thus indirectly means that we are heading into a prolonged period of accommodative monetary policy. Against this backdrop – and we know this from experience – this bull market may last for quite a long time. We cannot yet say whether this cyclical upturn will become an overarching trend. At least the monetary and fiscal foundations have been laid.

For this reason, within the Ethna-AKTIV we have increased the equity allocation from “neutral” to “overweight”. With an equity allocation of 35%, we have adjusted the risk to the current volatility level so that immediate action is not required in the event of another correction. There were no major changes in the other positions within the fund. Despite the current phase of consolidation, we are sticking with the maximum gold weighting and have even built up additional exposure to a number of gold mine operators. On the currency front, we still hold around a 20% position in the Swiss franc. The fact that even the latest strength in the euro had hardly any effect on the exchange rate only serves to confirm our position. On the subject of the euro’s strength, we expect that the very strong movement versus the U.S. dollar will turn out to be a flash in the pan. By the time the uncertainty over the U.S. election has passed, if not before, we expect the euro to revert to its old weak trend, and we will position ourselves accordingly. There were no significant changes on the bond front. With an average rating of BBB+ to A- and a modified duration of 5.2, we feel that we are well placed.

In September it remains to be seen how the conflict between the U.S. and China will develop. From our point of view, however, all measures taken in the next two months must clearly be seen in light of the upcoming U.S. presidential election. For this reason, we do not expect any major surprises from the forthcoming central bank meetings either, which, with all other things being equal, is likely to continue to support the markets.


Comparisons like “1999 was even worse – many companies didn’t even make a profit that year” are cropping up more and more often. One has to look to the biggest phase of stock market euphoria by far in recent decades to find some sort of context for the present developments in growth stocks – especially on the U.S. technology market Nasdaq – and to explain them. The highest-value listed company in the world, Apple, topped a market capitalisation of USD 2 trillion for the first time in August. This means the technology company known for its smartphones is worth approximately as much as all 2,000 companies in the U.S. small- and mid-cap stock market index Russell 2000 combined. After a sixfold increase, car maker Tesla meanwhile has double the market capitalisation of its competitors VW, Daimler, BMW, Renault, Peugeot and FiatChrysler combined. One could add to this list many other remarkable developments, all of which centre on only a small number of stocks. They may be small in number but (now) have a substantial weight in the indices.

Apart from these few outstanding and – from a fundamental perspective – predominantly overblown stocks, the equity markets have recently been solid and also made further, albeit small, advances in August. On the whole, however, the past two and a half months have been very sluggish. Most of the goodwill that investors have shown since the lows in March has been exhausted. Now it’s up to the economic environment to provide further positive stimulus. Thanks to ongoing broad state support, the conditions are right, but the list of risks is just as long as the list of opportunities.

Within the Ethna-DYNAMISCH portfolio, we continue to take a duly cautious approach. After very strong performance in both long-dated U.S. Treasuries and the price of gold, we reduced both positions from around 8% to 5% at present, and took profits. Two new stocks (Morningstar and TJX) were added to the single stock portfolio. Equity purchases were financed partly by reducing the size of equity positions that were doing well, such as Alibaba, Alphabet and Berkshire Hathaway, and partly out of the cash holding. The net equity allocation thus increased slightly over the course of the month; but at 42.5% the positioning is still on the defensive side.

We make no secret of the fact that the present environment makes it difficult to find good companies with attractive valuations. Both the broad-based financial services provider Morningstar and leading off-price retailer in the U.S. TJX – known in Europe by the store name TK Maxx – currently come under the “fair valuation” category. The attractiveness of both investments in the medium term stems mainly from the solid growth prospects and the quality of the business models. In the case of both stocks, we were able to use the volatility following the publication of the quarterly results as an entry point.

The pace is slow and steady at the moment. For much of the market that is unlikely to change soon. And even if the comparison with 1999 is flawed, at the time of writing on the evening of 31 August, Apple was up around 5% and Tesla up 10%. This equates to an absolute gain in market capitalisation of EUR 90 billion (Apple) and EUR 35 billion (Tesla) versus the previous day. Both stocks carried out an objectively value-neutral stock split on this day, which makes the share prices appear subjectively cheaper. At the same time, three quarters of S&P500 stocks are down and the EURO STOXX 50 closed trading in Europe at minus 1.30% a few hours beforehand. Stock market exuberance has seldom been more in evidence than in those few hours. So, be on your guard!

Figure 1: Portfolio structure* of the Ethna-DEFENSIV

Figure 2: Portfolio structure* of the Ethna-AKTIV

Figure 3: Portfolio structure* of the Ethna-DYNAMISCH

Figure 4: Portfolio composition of the Ethna-DEFENSIV by currency

Figure 5: Portfolio composition of the Ethna-AKTIV by currency

Figure 6: Portfolio composition of the Ethna-DYNAMISCH by currency

Figure 7: Portfolio composition of the Ethna-DEFENSIV by country

Figure 8: Portfolio composition of the Ethna-AKTIV by country

Figure 9: Portfolio composition of the Ethna-DYNAMISCH by country

Figure 10: Portfolio composition of the Ethna-DEFENSIV by issuer sector

Figure 11: Portfolio composition of the Ethna-AKTIV by issuer sector

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.

The investment funds described in this publication are Luxembourg investment funds (fonds commun de placement) that have been established for an unlimited period in accordance with Part I of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “Law of 17 December 2010”). An investment in investment funds, as with all securities and comparable financial assets, carries the risk of capital or currency losses. The price of fund units and income levels will therefore fluctuate and cannot be guaranteed. The costs associated with fund investment affects the actual performance. Units should solely be purchased on the basis of the statutory sales documentation (Key Investor Information, sales prospectuses and annual reports), which can be obtained free of charge on the website or from the fund management company ETHENEA Independent Investors S.A., 16 rue Gabriel Lippmann, L-5365 Munsbach. 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 a solicitation of an offer to buy or sell securities. Contents have been carefully researched, compiled and checked. No guarantee for correctness, completeness or accuracy can be provided. 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. Munsbach, 02/09/2020