"... but remember to come back in September"
Hardly any equity indices were above their end-of-April level at the beginning of September. To say nothing of the rollercoaster ride that investors experienced in the interim. Is now the right time to re-enter the fray after all? Ethenea’s Senior Portfolio Managers about the allocation in the Ethna Funds.
“… but remember to come back in September” is the second half, less often quoted, 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”, says Michael Blümke, Senior Portfolio Manager at Ethenea. “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.”
Ethenea’s portfolio management made the conscious decision to tread a more cautious path. Michael Blümke: “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 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?”
There is no easy way to solve this dilemma that faces every active portfolio manager. Quoting physicist Nils Bohr: “Prediction is very difficult, especially if it's about the future!”
Within the Ethna-DEFENSIV fund, Ethenea’s portfolio managers have been and remain cautious. “We only made slight adjustments to the portfolio in August,” says Senior Portfolio Manager Volker Schmidt. “Currencies hold our strongest conviction at present. We have therefore re-raised the U.S. dollar allocation from 20% to 25% and remain invested in the Swiss franc and Norwegian krone. We are only slightly exposed to interest rate risk. The average duration of the bond portfolio is a very low 3.1. This in conjunction with the high quality of our holdings – the average rating of the bond portfolio is around AA – reduces the threat of rising risk premiums for our corporate bonds. We have further reduced interest rate risk by hedging interest rates via futures.”
Within the Ethna-AKTIV fund, Ethenea’s portfolio managers are not yet switching camps to the bulls. Michael Blümke: “However, we have slightly moderated the positioning of the equity portfolio, which was in retrospect slightly too pessimistic, by partially reversing the hedge in a disciplined fashion over the course of the month. Looking ahead, we will continue along this path if, contrary to expectations, the equity market shows further strength. If that comes to pass, this will also manifest, with some delay, in better fundamental data. Quite the opposite of this mixed fundamental and technical picture of equity markets, we believe a much clearer picture is emerging on the currencies front. The strength of the U.S. dollar, or to put it another way the weakness of the euro, is well-founded, evident from the fact that EUR/USD has now broken parity – a level we haven’t seen for 20 years. We are confident that this trend will continue, and therefore we maintain our position in the U.S. dollar at 20%. On the duration front, we took advantage of rising interest rates at the end of the month to take profits on the duration overlay. In expectation of steeper rises in interest rates in the U.S., we have closed the Bund shorts and sold U.S. 5- and 10-year futures that are making a roughly comparable contribution to duration. Thus the modified duration is still slightly negative, and reflects our expectation for interest rates.”
Finally, within Ethenea’s Ethna-DYNAMISCH fund, there were no significant adjustments to individual securities in the portfolio last month, nor to the equity, bond, gold or cash allocations. “Only the U.S. dollar weighting was actively increased from 25% to 35% over the course of the month, by reducing existing currency hedges for the USD papers held in the fund,” says Senior Portfolio Manager Christian Schmitt. “Currencies essentially act as a mechanism for smoothing out the regional differences in economic growth, central bank policy and change in inflation. Even though we have no strong opinions on currencies in general in the Ethna-DYNAMISCH, the current geopolitical and macro-economic situation presents what we believe is an attractive risk-reward scenario for us to take up a corresponding positioning in the leading global currency that will make the portfolio even more robust in the face of further exogenous shocks.”
