Dr. Jan Ehrhardt, Chairman of DJE Kapital AG and fund manager of DJE - Zins & Dividende
Interpretation of market sentiment signals
The DJE - Zins & Dividende managed to survive the "corona cut", i.e. the massive market correction that began at the end of February, with a relatively moderate decline. In an interview fund manager Dr. Jan Ehrhardt explains the developments and offers a glimpse into the future.
How was your portfolio set up at the beginning of March?
At the end of February we increased the cash ratio and also significantly reduced the equity ratio (from a maximum of 50% to at least 25% for the DJE - Zins & Dividende), which means that we started the month of March with caution. Already at the end of January we observed companies that are heavily dependent on global travel or Chinese tourists and reduced or sold related positions.
What performed well in the portfolio in March, what did not perform so well?
On the bond side the fund benefited in March mainly from its holdings of US government bonds. These were weighted in March partly with more than 20% in the portfolio. Both short-dated US government bonds and those with a 10-year maturity contributed positively to the performance in March. On the equity side we benefited from highly weighted positions in the health care/pharmaceuticals sector and from positions within defensive sectors such as household goods or food & beverages. The DJE - Zins & Dividende was already underweighted in the sectors oil & gas, industry, automobiles and banks since mid-February which paid off most recently. On the other hand, equities and bonds of companies in cyclical sectors and emerging market bonds had a negative impact in March.
Are you making use of risk systems? When did they react and how?
Our investment process generally combines a fundamental top-down asset allocation with bottom-up driven security selection. Top-down asset allocation is the task of the DJE strategy team, which is made up of board members and division heads from the Research & Portfolio Management and Trading divisions. The strategy team has access to all indicators of our FMM database. This database is the basis for all of our investment decisions. FMM stands for fundamental, monetary and market-related. In this context we also operate a very consistent risk management. Already at the end of January, there were numerous indicators that signaled that we should act with greater caution. The most significant were market technical indicators, such as the put-call-ratio, which suggested that investors were becoming more willing to take risks or to act more careless. In this sense, our systems indicated the risk of a market technical correction at an early stage and we therefore began to reduce the equity risk by hedging or selling individual positions already in January.
What were the key portfolio changes in March?
We were generally defensively positioned and bought selected stocks, for example from the pharmaceutical segment or from the defensive/non-cyclical consumer goods sector. In addition, in the second half of March we also bought quality stocks that we felt had corrected too much due to the corona crisis and thus offered opportunities.
How are you positioned now?
We currently hold 33% corporate bonds and 22% government bonds. In terms of government bonds, we are mainly focusing on US securities, but we also bought Chinese government bonds on a somewhat larger scale. With regard to corporate bonds, we see opportunities in investment-grade (rated securities) with maturities of less than five years. In general, all corporate bond issuers are closely monitored by the DJE research team. The duration of the bond portfolio is currently just under three years. Equities account for around 43% of the portfolio: We have a stronger overweight in the pharmaceuticals/healthcare, financial services and household goods sectors and a clearer underweight in banks, industry and oil & gas.
Your outlook for the future?
As far as the stock market is concerned the peak of the Corona crisis could be behind us by now. From the current level we do not expect another massive sell-off. In general, market technology is doing very well at the moment and the monetary situation is even excellent due to the support measures of the central banks and the immense fiscal policy programs of the governments. But the fundamental situation is very poor. We are likely to face a deep recession in the coming quarters and no one can say how long it will last. Nevertheless, it is realistic that the economy in the euro zone and the USA will only recover very slow and that the tendency of consumers and companies to save will increase due to the continuing uncertainty. However, due to the massive increase in government debt interest rates are likely to remain very low for the foreseeable future, what is favorable for equities. We are currently avoiding sectors that are disproportionately affected by Corona and its consequences. We currently see opportunities primarily in the overweight sectors mentioned above, but also in parts of the technology sector or in the infrastructure sector.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a personal consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.