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Ethna-AKTIV | The name says it all

The multi-asset fund weathered the storm in a show of strength

Many investors who – riding the wave of cheap money in recent years – blindly bet on prices to continue to rise had a bitter pill to swallow at the end of the first half of 2022. They were faced with losses on an historic scale. In addition to geopolitical conflicts, central banks began withdrawing liquidity and this, along with higher interest rates, led to simultaneous stress in almost all asset classes. Such were the heavy losses that the first two quarters of 2022 are likely to go down in history among the ranks of worst ever.

But not everyone was so badly caught out. It was and still is possible despite the weakening market to stay in control and not be relegated to the role of mere bystander. Looking at the year to date, the Ethna-AKTIV’s management team has managed to do just that. In particular, the results in the second quarter of 2022 secured the fund an outperformance over its highly notable peer group. Central to this performance is the underlying approach and investment philosophy. The Ethna-AKTIV is an actively managed, flexible multi-asset fund, which is benchmark agnostic and prioritises the protection of investor capital.

Active, flexible and preserving capital – what does that mean in reality?

Actively managing portfolio allocation means that we always have the freedom to dynamically re-allocate the positions we entered into and to adjust to changing circumstances. Fixed allocations are a no-no. In other words, the basis for creating added value under the multi-asset approach is the mix of asset classes held in the portfolio. The mix provides an optimal risk/return ratio, and to put it together, the Ethna-AKTIV can use instruments with daily liquidity from among bonds, equities, commodities, cash and currencies. The matter of relative attractiveness of the individual asset classes at any given time is addressed both at strategic and tactical level. The strategic asset allocation is based on the portfolio managers’ macro-economic assessment, while the tactical allocation tends to account for short-term momentum and sentiment factors.

Flexibility is also central to what we do. The Ethna-AKTIV is not constrained by a benchmark. What’s important is absolute rather than relative performance. The same goes for our investment positions. This is another important differentiator. It is this flexibility that enables us to seize opportunities that arise and occasionally to take up unconventional positionings, and to go the distance. It doesn’t end there, though.

This, combined with the principle of capital preservation, makes for a overarching philosophy that is instrumental in our decision-making process. We are very aware of the fine line between capital growth and capital preservation. Therefore the aim of our approach is to generate a positive risk-adjusted return over a 3-5 year cycle. The year to date has made it abundantly clear how unpredictable the international financial markets can be and that huge drawdowns are possible. We have to avoid such extremes, which of course also have an emotional impact on investors and sometimes lead to irrational actions like selling at the worst possible time. Furthermore, the preservation of capital in times of crisis also means lower losses that would otherwise have to be recouped for capital to be increased long-term. This is why it is essential for us to find an attractive relationship between risk and return for every position we enter into.

Better than peer group – criteria for success in 2022

To date 2022 has been dominated by a combination of uncertainty and losses across the board. There is still relative uncertainty about where inflation is headed, the growth outlook and monetary/fiscal policy. What with this, the war in Ukraine, the COVID-19 situation in China and the resurgence of problems in Europe’s periphery, there are many stress factors for the capital markets. Despite that, the Ethna-AKTIV weathered the storm in a consistent show of relative strength.

How did we actually achieve this?

The answer lies in our investment philosophy. Guided by the principles of active management, benchmark-agnosticism and capital preservation, we have made substantial adjustments to the fund exposure in the year to date. As a result, the fund currently stands at slightly more than -2%. Compare this with a traditional 60/40 portfolio, which is currently down by well into the double digits. This is also proof that static investment concepts can quickly reach their limits in a very challenging capital market environment.

Our team were quite quick to see which way the wind was blowing at the beginning of the year. We anticipated a global economy where growth rates, rather than increasing, were falling sharply. The central banks also instituted a change of policy. Not only did they end their large-scale securities purchases and, in fact, switched over to selling them, but they took up the fight against persistently high inflation with great determination by hiking interest rates rises, and this became a stress factor. A highly restrictive monetary policy in an environment of waning growth stood in stark contrast to the valuations that were still at record highs at the beginning of the year. Instead of reacting to market movements, we tried to act in anticipation of interest rates that were obviously going to rise and share prices that were going to fall. This enabled us to remain agile in the event that this market scenario occurred, and to take any opportunities that arose.

Two examples of this

The Ethna-AKTIV’s equity exposure, which was still high at the beginning of the year, was reduced even before the war broke out and later reduced to zero. When the negative mood in the equity markets coincided with strong overselling in May, we were proactive in taking this tactical opportunity to benefit from the countermovement that was highly likely to ensue by adjusting exposure to around 30%. Two weeks later the allocation was back to zero and the gains were secured. The US dollar allocation was managed with similar dynamism. The gains on our strategic US dollar allocation were realised successively by slowly reducing the position, but it was only dialled back to zero twice. On both occasions, we employed tactics to turn the excesses ahead of ECB meetings to our advantage.

It could be argued that there was a lot of luck involved; after all, one swallow does not make a summer. While the latter is true, the underlying philosophy and the process arising out of it ensures that such results are reproducible. Looking ahead, the decisive point will be to participate to a reasonable extent in the next bull market to generate an attractive risk-adjusted return for the cycle as a whole. We are very well positioned to achieve this. By avoiding heavy losses in recent months we have at least cleared the first hurdle towards reaching this goal.

The current 5-star rating from Morningstar also shows that we are second to none when it comes to generating returns. The Ethna-AKTIV represents a suitable basic instrument both for existing and potential investors, which never loses sight of its target even in stormy weather.

Applies, among others, to the share class Ethna-AKTIV (A).| As of: 30.06.2022

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