CIO ROUNDTABLE Maurice Pedergnana Zugerberg Finanz July 2, 2020
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CIO ROUNDTABLE Maurice Pedergnana Zugerberg Finanz July 2, 2020
3 topics Part I - March 23 until now • How did the crisis impact the companies in the portfolio? • How have reacted to the new situation (be honest !)? • Did your analysis, sentiment match with the psychology & behaviour of investors? Part II - Actions at the bottom of the global recession (in April/May) and at the beginning (May/June) of this new business cycle • Did you change and how (fast) did you change the weight of asset classes? • What actions have you taken? What is the overall market share of risky assets? • What is the role of technology (US, Europa, EM) in your portfolio? Part III - Expectations: 3 most important post pandemic portfolio advises • What are your key learnings ? What are your portfolios return expectations? • What are your 3 most important positions on your conviction list?
March 23 until now…
• We initially underestimated the threat of the pandemic – remember the new
highs in February just before the crash? It seemed like the market was
unbreakable…
• We expected the Fed and congress to move aggressively using the GFC
playbook but were surprised that the market at first continued to sell-off
on the announced measures.
• In Mid-March we decided to stay invested as huge volatility levels meant a
bottom could happen suddenly and forcefully and we would likely miss-time it.
• Then we also decided to stepwise rebalance and add to our highest
conviction single equity names.
• We did not expect the rebound to break above 2.900 in the SPX. This is were
the reopening FOMO really took over.
1Bottom
• Our portfolios are strongly focused on large cap, quality, momentum which
saved us from the worst fallout. Leverage was the toxic factor to own going
into the crisis.
• We sold positions in Japan equity (were afraid of cancelation of Olympics) and
exited EM HY debt completely (global dash for USD potentially a big problem
for EM).
• We decided early on (Mid-March) that mega cap US tech (MSFT, AMZN,
GOOG, MA, ADBE, …) would likely come out strong of the initial crash given
huge cash positions and perfectly suited (digitalized) business models.
• On March 26th we decided to increase our Gold allocation even further – from
10% to 15%. The liquidity induced sell-off in gold was seen as an opportunity.
• At around 0.7% in the 10yr US-T we completely sold our long duration, high
grade sovereign bond exposure. The hedging capabilities now seem greatly
reduced. 2New Business Cycle?
• In early April we bought CoCos (perceived attractive risk/adjusted return
expectations). This time around banks are part of the solution (getting money
to the real economy) and not the problem.
• End of April we also bought CLOs, which we rationalized with the Fed
backstopping this market.
• In May we resisted the urge to jump into the beaten down leisure stocks and
keep our quality focus. A sustainable value rotation seemed unjustified - and
still does…
• We are not sure this really is a new business cycle (old leaders are the new
leaders).
• We never got to distressed valuations and “real despair” as is typical for a
cyclical bottom.
3Outlook I
• 2021 could be a very good year for risk assets, given that historically
increase in money supply impacts risk assets with a lag and infrastructure
stimulus should come through some time next year.
• We expect a 10-15% return in equities 18 months forward with a ~15-20%
drawdown on the way.
• Europe has potential to catch up on better crisis management and steps
towards fiscal union.
• Key learning: Hedge your portfolio when you can, not when you feel you
must. Keep a tail-risk hedge in your portfolio at all time. Market depth
disappears very quickly and computerized trading can lead to relentless
selling. Once the VIX gets above 25, huge moves can happen very fast.
4Outlook II
Conviction list: “Tech / Gold barbell portfolio”
The wave of liquidity together with low rates will likely continue to boost tech
stocks (as long duration, quality play) in 2021, hurt the U.S. dollar and lift gold
as a store of value (negative real yields – don’t underestimate inflation risks!)
• Gold – we expect new highs in 2021.
• Big Tech US and China (MSFT, ADBE, AMZN, BABA, TENCENT, JD, ASML,
INTC)
• Long EUR vs USD and CHF (but if we see a double-dip CHF will likely be
preferred safe haven)
5Happy Future
6The Fed is buying REITs, HY ETFs, selected Fallen Angel Bonds …
7Disclaimer
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8PETER AHLUWALIA
Chief Investment Officer I Partner
peter.ahluwalia@swisspartners.com
As you will see below we increased our equity allocation slightly having moved from a
somewhat neutral stance but is was not an earth shattering move.
We remain very modestly overweight the technology sector.
We did get hurt by our tilt towards consumer discretionary in March (autos) but held
our nerve believing in the individual companies. We have no airlines but have 1
insurance company and 1 oil company which we do not view as risky bets.
We are not taking any big bets via individual companies and we recently sold our high
yield exposure on the recovery.
For the next 18 months I expect significantly higher returns (read strong double digits)
as the secular bull market needs to make up significant ground versus other secular
bulls.
What have we learned - the only expert is the virus itself. Nobody really knows but
everbody has an opinion.It is important to disassociate our our human instincts from the market- as individuals we are scared of a second wave but economies are unlikely to be closed again. I expect a v shaped recovery in terms of economic growth, employment numbers and earnings. To be realistic we will not get to the same levels as early 2020 but that is actually good news as it means the glide path for the recovery will be longer into next year supported by increasing fiscal and monetary policy. I am not concerned about valuation as in Jan 1922 the S&P was at 22.58x, in 1934 at 23.73x, 1993 at 22.50x, 2002 at 46.17x and 2009 at 70.91x. We would start leaning into risk more (equities, developed mkts cyclical) on further softness although the market is likely to remain somewhat psychophrenic in the short term. I would not be suprised to see the cyclical, value, Europe and small cap areas outperform if I am right regarding the recovery however this does not mean secular growth cannot increase (albeit at a lower rate). The only certain bet is that COVID19 won`t be with us forever. My gut instinct is that it will get less important as markets get bored like the previous North Korea headlines.
Aquila Independent, disciplined, transparent. And a touch more personal. July 2020 |
Part I
§ Increase frequency of meetings (being honest, this doesn‘t necessarily improve
decisions…)
§ Underweight equities since last year, overweight US and underweight Europe played
out well, overweight Tech/Megatrends was positive as well, infrastructure theme was
underperforming
§ We underestimated the determination, the speed and scale of central bank
interventions
§ We increased exposure to Gold
Ø We consider Gold as a „better currency“, not as an investment!
§ We increased exposure to Gold stocks
Ø We consider Gold stocks as an strategic investment
2 | Aquila Ltd., Bahnhofstrasse 43, 8001 ZurichPart II: Actions taken
§ Bottom of the recession
Ø April : No major changes (stayed overweight Swiss equites and US, underweight Europe and EM),
overweight converts
§ May/June
Ø We think, it‘s not the beginning of a new business cycle. It‘s the attempt of central banks, to establish a
new regime of „agressively managed markets“
Ø May: Reduced EM equities, EM Debt and Gold à increase High Yield and Gold Miners
§ Role of Technology
Ø Tech has always been part of our thematic investment bucket in the total asset allocation. Since 2016
we are invested in our AMC that covers 6 megatrends of which one is Tech
§ Share of risky assets…
Ø EM Debt neutral / Hy neutral / Equities small underweight, slightly underweight small caps / no private
equity / still overweight convertibles
3 | Aquila Ltd., Bahnhofstrasse 43, 8001 ZurichPart III: Expectations
§ Key learnings?
Ø We may be in a different investment regime with managed markets / central banks buying
«everything»; Road to serfom
Ø Lower required rate of return in the new «managed markets regime»?
• Question still unsolved
• Risk of «overlearning» very high, therefore…
• …still unclear, if we just saw the «mother of all bear market rallys» or permanently lower required rates / asset price
targets
Ø Further Research (& Entertainment J):
• Blogpost Managed Markets: https://www.aquila.ch/blog/managed-markets/ (German)
• https://www.aquila.ch/en/blog/managed-markets/ (English)
• https://www.aquila.ch/blog/der-pawlowsche-hund/ (German only)
§ What are your 3 most important postions on your conviction list
Ø Convertibles (positive performance YTD!)
Ø Gold
Ø Tech and Healthcare (equity sectors)
4 | Aquila Ltd., Bahnhofstrasse 43, 8001 Zurich5
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| Aquila Ltd., Bahnhofstrasse 43, 8001 Zurich
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«Philadelphia Stock Exchange Gold and Silver Index» divided through
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2020
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40Reference Portfolio CHF Balanced
Tactical Asset Allocation Strategic Asset Allocation Bands
Current
Liquidity 10.5 10 0 - 25
Fixed Income 31 35 20 - 60
Government 12
Investment Grade Corporates 6
High Yield 2
Emerging Market Debt 3
Various 8
Equities 44.5 45 35 - 60
Switzerland 10
Switzerland Small / Mid Cap 4.5
Europe 4
United States 8
Japan 5
Emerging Markets 7
Thematic 6
Other Investments 14 10 0 - 30
Gold 9
Commodity 0
Real Estate 3
Various 2
Total 100 100 100
6 | Aquila Ltd., Bahnhofstrasse 43, 8001 ZurichDisclaimer Produced by Investment Center Aquila Ltd. The information and opinions contained in this document are based on sources that we consider to be reliable. Nevertheless, we cannot vouch either for the reliability or for the correctness or completeness of these sources. This information and these opinions constitute neither a request nor an offer or recommendation to buy or sell investment instruments or to conduct any other transactions. We strongly recommend that prospective investors consult their independent financial advisor before making decisions based on this document in order to ensure that their personal investment objectives, financial situation, individual needs and risk profile and any additional information provided in comprehensive advice are properly considered. 7 | Aquila Ltd., Bahnhofstrasse 43, 8001 Zurich
1 – March 23 until now
For direct lines :
Mainly tech companies were hit like the market and after rebound
Google, Tesla doing the massive rebound
Tencent with delay
On credit side : Hit by MSC Cruise
For credit Fund :
Quiet defensive style except one emerging debt fund
Still overweight Tech and the rest is mainly MSCI World
European Credit not yet recover their loss neither a alternative investment link to the put option
No
We were defensive in February (not due Covid but valuation)
We were more optimist in April (To negative view on Covid Compare to Sras)
Now : Still optimist thank to massive injection in US, Europe, Japan, etc…politics wants to keep the economy
over the water and ready to anything needed
12 – Actions from the bottom
40% Equities in January, 36% February, 30% begin March, 24% March 9
28% end March, 35% mid April, 42% now
We double our tactical certificated (goal : beating MSCI World)
Technology : Nasdaq 10% and recently adding 4% ARKK (innovation tech ETF)
Risky : close to 0 for Equities
European High yield still invested with very cautious fund manager : 30%
Reducing Global High Yield from 5% to 0%, prefer equities
Golds : 10%, cash : between 5 to 25% (average 12%)
23 – Post Pandemics
+5% for S&P end year and close to 0 for Europe then still 10 to 15% up
Most probably before US election
Shaky market
Key learning : Market is not a exact science, Equities are still one of the best asset classes
Fixed Income (G4) : low win, avoid losing a lot.
Top position:
Cash, Gold, MSCI World Equities, European Credit.
3Part 1 • Our Portfolios are mainly built out of Health Care, Consumer Staples, Tech and some Cyclicals and Insurance companies. The defensive side was o.k. The cyclical part obviously not. We sell volatility premium for our clients. Therefore this part was also heavily affected. Spreads of our bonds widened significantly. • We sold our protection and increased risk by taking advantage of the very high implied vol. • We were right but acted too early.
Part 2 • As mentioned before we added to our equity exposure (by selling put options on large names). • We sold options especially on technology companies and some industrials. • It’s a large sector in our portfolios and we’re concentrated apart from BABA on Europe & USA. We are more focussed on the FAANG, Semis and some Software names and avoid some fancy digital names. • We think Value is a theme which has more room to go, but it’s heavily dependent on the Covid-19 curve (and more fiscal help). Materials, energy & insurance are more interesting than travel & leisure. On the bonds we’ve a preference for the hybrid bonds. Relatively hybrids are cheap and give us an inflation protection. We keep those weights the same.
Part 3 • Next 18 months. Fiscal and monetary stimulus is huge, so return potential for the risky assets is still quite high. 18’000 billions stimulus in a world where world equities account for 80’000 billions & world Bonds account for 100’000 billions. But we also reopened some Corona hedges. • Markets adapt very rapidly to the cirumstances. Being early might be better than being too late. Markets developments might well be exteme on both sides, therefore diversified Portfolios with some downside protection still makes a lot of sence. • Microsoft, Alibaba and Axa
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