Credit Risk as a Strategic Catalyst

Read the market analysis and fund positioning

Credit risks are considered a latent threat. They represent a serious source of danger for portfolios. While many traditional approaches accept these risks as inevitable, we view them as an actively manageable variable – crucial for making the difference between average returns and outperformance. In an environment of systemic risks and heightened correlations (often approaching 1 during periods of stress), simple diversification falls short. This is particularly evident in the high-yield bond segment: the close linkage to equity markets regularly leads to painful losses during crises. For example, the correlation coefficient between the S&P 500 and the ICE BofA US High Yield Index rose above 0.8 during the 2008 financial crisis and the 2020 COVID-19 pandemic – compared to 0.3 to 0.5 during calmer market periods.

Beyond Risk Avoidance: Strategic Active Management for Genuine Diversification

Our approach sets us apart from conventional strategies. Rather than passively accepting risks, we actively manage them to create a strategic advantage. In the Ethna-AKTIV fund, we deliberately avoid investments in high-yield bonds — not simply to reduce risks, but because it is inefficient to hold an asset class that behaves almost identically to equities during periods of market stress and simultaneously becomes highly illiquid. We focus on achieving true diversification — rather than just the appearance of it — to enhance resilience and preserve capital, even in volatile markets.

Three Pillars for Sustainable Value Creation

Our credit risk management is built on three core components: fundamental analysis, valuation discipline, and liquidity management.

1. Fundamental Analysis as an Early Warning System:

   True risk-return optimization requires the ability to identify and take appropriate risks at opportune moments. The most effective tool for achieving superior risk-adjusted returns is in-depth fundamental analysis. We analyze macroeconomic influences with focus and complement this with a close watch on sector and company fundamentals. Rating agencies often provide ex-post diagnoses — we aim to act preemptively. Our internal analysis thoroughly examines companies, assessing their business models and strategic positioning before official rating updates are released. Studies show that about 60% of corporate bond rating downgrades could already be anticipated based on fundamental changes in business models or balance sheet structures before rating agencies reacted. Integrating macroeconomic factors into our investment process further enables us to anticipate interest rate cycles, economic developments, and geopolitical risks, allowing us to adjust both the duration and credit quality of the portfolio early on.

2. Valuation Discipline Over Market Herd Mentality

   Our active positioning in the credit market is driven by strict valuation discipline. We do not blindly follow the market; instead, we act opportunistically when attractive valuations and spreads emerge that adequately compensate for the credit risk taken. We conduct in-depth analysis of credit spreads in relation to expected default probabilities and recovery rates in the event of default. Our goal is to identify asymmetric risk premiums where the upside potential outweighs the downside risk. Conversely, we hold back or reduce our positions when spreads are too tight and do not sufficiently reward the risk. When the market becomes overly optimistic about credit risk and spreads tighten to historically narrow levels, investors are no longer adequately compensated for potential losses. In such cases, capital preservation takes precedence over chasing short-term yield. This disciplined approach allows us to maintain liquidity for more attractive opportunities in future market phases. A concrete example of this approach was our decision to reduce BBB risk exposure in the Ethna-DEFENSIV some time ago, as spreads in this segment no longer adequately compensated for the assumed risk.

3. Liquidity Management as a Strategic Reserve:

   Liquidity management is a crucial pillar of our strategy. In times of market stress, liquidity becomes the most valuable currency. Therefore, our portfolios are designed to ensure we remain fully capable of acting at all times. This allows us to seize opportunities or meet client redemption requests without being forced into distressed sales. Empirical studies have shown that bid-ask spreads for less liquid bonds can widen by up to 200% during periods of elevated market volatility (e.g., VIX > 30).

Current Positioning: Quality as a Shield

Our current credit risk philosophy is directly reflected in the average credit rating of our funds. Both the Ethna-AKTIV and the Ethna-DEFENSIV maintain a rating between A- and A. A fundamental pillar of our active credit risk management has been the decision to invest in the higher-quality segment of the investment-grade universe. While many market participants are willing to accept significantly lower ratings and correspondingly higher default risks for marginally higher returns, we focus on issuers with strong credit quality and robust financial health. This not only ensures a higher probability of capital preservation but also allows us to remain flexible and seize opportunities during volatile market phases. The higher quality of the portfolio reduces sensitivity to economic shocks and systemic risks, ensuring more stable performance — particularly during periods of stress, when capital preservation becomes the highest priority.

Conclusion: Credit Risk as a Manageable Source of Return

In a volatile world, passive diversification is no longer sufficient. Successful credit risk management requires expertise, systematic processes, and active oversight. In-depth analysis, strict valuation discipline, and active liquidity management are the tools we use to transform risks into a controlled source of sustainable returns. Shaping the future actively rather than merely managing — all in the interest of delivering absolute performance for the capital entrusted to us.