Asset management in times of crisis
Ethenea’s portfolio managers shed a light on how they are managing the Ethna funds in the weeks following the outbreak of the Ukraine war, both on the fixed income and the equities side.
“We have seen a dramatic deterioration of our economic scenario for 2022 as a result of the Russian invasion of Ukraine,” says Andrea Siviero, Investment Strategist at Ethenea. “Coupled with the sanctions subsequently imposed by the US and Europe, it has caused energy and commodity prices to spike dramatically.”
The war represents a major negative supply and demand shock for the global economy – one that will damage supply chains, exacerbate price pressures, and curb growth by undermining confidence and hampering international trade. Andrea Siviero : “This type of stagflationary shock brings with it a significant increase in downside risks, as well as increased uncertainty. Global growth has also been revised downward and inflation is now expected to remain high for longer.”
Bond markets
The situation in Ukraine will only have a limited impact on the US Federal Reserve’s monetary policy, Senior Portfolio Manager Volker Schmidt thinks. “Jerome Powell made it clear that fighting inflation has top priority. Several interest rate hikes are certain this year and interest rate increases of more than 50 basis points are also possible in the future. This would bring the Fed Funds Rate into the range 1.75% - 2% by the end of this year.”
For much of 2021, Ethenea’s portfolio managers already prepared the bond portfolio of the Ethna-DEFENSIV fund for the normalisation of central bank interest rates and reduced the duration in the portfolio accordingly. “This was done by swapping longer-dated bonds for shorter-dated ones and by taking short positions in bond futures,” says Volker Schmidt. “In retrospect, this proved to be the right thing to do and we were able to make gains on the interest rate derivatives position. In the wake of the Ukraine war, demand for secure sovereign bonds was temporarily high once more, which consequently led to a decline in yields. Here we reacted quickly and flexibly to the changed situation and extended the duration to 4 by closing all short Treasury futures in February 2022. However, when the issues of refinancing higher defence spending and a European energy supply independent of Russia took centre stage, we again gradually reduced the duration by once again taking short positions on interest rate derivatives.”
Overall, Ethenea’s portfolio managers reacted very flexibly and were able to benefit from the high volatility in the bond market and the, at times, strong yield movements through flexible duration management. Volker Schmidt : “Since the beginning of the year, the Ethna-DEFENSIV has gained 1.25% through interest rate derivatives, of which around 0.15% is attributable to Bund futures and 1.10% to Treasury futures.”
Equities
“In the Ethna-DYNAMISCH, we are countering the current market environment on the one hand - at the selection level - by focusing on companies with pricing power, business models that are less dependent on the economic cycle, and attractive valuations,” says Senior Portfolio Manager Christian Schmitt. “On the other hand, at the allocation level, we have reduced the equity exposure over the last few months through various hedging instruments in order to mitigate the unavoidable volatility caused by the adjustment processes that have already begun and are still to be expected on the capital markets. Last but not least, the central banks’ compulsion to react to rampant inflation, in addition to declining economic growth, has recently increased the number of negative factors for the stock markets.”
