"... but remember to come back in September"

“… but remember to come back in September” is the second, less often quoted, half of one of the most well-known financial-world adages, which suggests that investors reduce their equity portfolios in May and not to invest during the summer months. Even though we rightly warned against such a generalisation in May, heeding this piece of advice would again have saved investors some nervousness this year. Hardly any equity indices are above their end-of-April level at the beginning of September. To say nothing of the rollercoaster ride that investors experienced in the interim.

Behind the scenes

We made the conscious decision to tread this more cautious path. Our decision is based less on the saying in the title and more on our critical assessment of the market at that time. So, all’s well, you might think. Almost – due to the high volatility we have seen a substantial rally both in equities and bonds in the meantime. With defensive portfolios like ours, we, as responsible portfolio managers, are absolutely going through a rollercoaster of emotions in a risk-on phase such as this even though there has not been much change in the fundamental starting situation. Every week it feels like the prices are going against us, we self-critically ask ourselves whether our investment thesis still holds up. What are we missing? What do others know that we don’t? Is now the right time to re-enter the fray after all? Not that we are lacking the experience, trust in our own abilities or self-confidence to hold firm through something like this. But, first of all, there’s a fine line between self-confidence and stubbornness and, second of all, it is this very modicum of humility that, if need be, allows us to correct a flaw in our line of argument in time.

The added value of active management

The fact is that there is no easy way to solve this dilemma that faces every active portfolio manager. The famous investor and author Howard Marks was again right on the money in his latest memo, saying that, and I paraphrase: investors can’t do the same as everybody else and expect to do better than everybody else.

“So, to add value in terms of diversification or,
ideally, also to produce an outperformance for the investor,
we have to go against the tide at times;
that is, take up a position that is not the consensus position,
and then to hold firm.”

Michael Blümke

The latter in particular is a challenge in the current era of constant data availability and practically continuous comparison and demand for immediate explanation and possibly even adjustment. Plus, not only can we ourselves access these data, but so too can every other stakeholder.

What helps us at ETHENEA in this regard is the combination of a several factors. On the one hand, we follow a philosophy and an investment process that is designed for absolute management of the portfolio positions. Our portfolios’ risk and return is not assessed relative to a benchmark or the competitors. We do not escape comparison as a result but we do separate investment decisions from comparison. On the other hand, the decisions are made by a team in our active and risk-conscious approach. The advantages are plain to see: firstly, this sharpens the investment theses and, secondly, puts them under constant scrutiny from all sides. The usual psychological pitfalls of a discretionary approach such as greed, fear or impatience are thus also minimised. No single person can “fall in love” with an investment position and cling to it despite losses, because the team is there as a corrective mechanism.

Therefore, if you were to ask us today whether it is once again time to buy more equities or bonds in line with the title of this piece, the answer does not depend on our current positioning and any resulting bias but is based solely on our market assessment, which we elucidate for you in the individual portfolio positioning updates. The well-known fact that the prediction this entails is not 100% accurate is part of the process, which physicist Nils Bohr’s famous quote puts nicely: “Prediction is very difficult, especially if it's about the future!”