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Quarterly report Q1/2023 

Review

It is typical for the beginning of a new year that optimism and confidence dominate the scene, especially after such a difficult and crisis-ridden last year. Many an index started the first quarter almost euphorically, and those who were not invested rubbed their eyes in amazement and disbelief at the speed of the upward movement.

Buoyed by the generally positive sentiment, the recovery movement that had begun in the last quarter also continued in bonds and was more than just balm for the soul of all investors in this segment. After some significant losses in 2022, the price gains were more than welcome, especially in January. Despite a certain normalization, the bond markets are still far from the liquidity and valuation levels of the pre-war period, so there is still catch-up potential.

Central banks picked up where they left off last year: Turning the interest rate screw upward. Even if the pace and magnitude seem to be slowing down somewhat, further interest rate hikes are to be expected in the course of the year. The message to market participants is clear: inflation is to be fought and price increases are to be contained by all means. Both in the USA and in the euro zone, the rates of price increases have been falling in recent months. In Switzerland, on the other hand, inflation was still rising in January and February.

The banking sector recently caused a drumbeat. Following the collapse of Silicon Valley Bank (SVB) in the USA and the forced demise of Signature Bank, Credit Suisse dominated the headlines. Numerous bad investments over the last 25 years, high write-offs, repeated changes in management, speculation about the correctness of the annual reports and the equity capitalization and, in the end, a lack of confidence in the market: the share price development resembled an E-function mirrored on the X-axis at the end and led to a spectacular transaction. For the seemingly small amount of 3 billion Swiss francs, the takeover by UBS was agreed, which through this deal not only got rid of its arch-rival, but thus also rose to become one of the largest players in the financial industry worldwide.

Performance

Since the beginning of the year, our equity fund shows a performance of +8.47% in Swiss Francs and +7.84% in Euro.

This compares to the major indices: DAX +11.48%, STOXX600 (Europe) +7.86%, S&P500 (USA) +4.07% and MSCI World (global) +4.76% (all values in Euro). Thus, in an incredibly turbulent quarter, we were able to achieve a performance that, with the exception of the (typically highly cyclical) DAX, once again beat the major indices.

Our bond fund is down 1.67% in the Swiss franc tranche and 1.99% in the euro tranche since the beginning of the year.

The comparable Bloomberg Barclays Global High Yield Total Return Index Value Hedged EUR stands at +1.60%.

The encouraging price recovery since the beginning of the year fell victim to the negative news from the banking sector in March. As a result of the turmoil, almost all bonds issued by banks were taken to task, with -- as is typical in such phases -- the quality of the bonds no longer playing a role. As was the case last year, this should prove to be a temporary weakness, with the pressure on prices easing as the period progresses.

Current positioning

We started 2023 on a very optimistic note and further increased our cyclical bias at the beginning of the year. We kept our cash positions very low throughout the quarter. In order to be able to implement our more offensive investment policy with confidence, we increased the hedges rolled into the new year somewhat in February. We are thus taking adequate account of the risk of setbacks and consider ourselves well positioned for possible setbacks.

We further reduced energy stocks at the beginning of the quarter, realized their gains from the previous year, and are now slowly starting to re-enter at a lower level. From mid-March, we started to realize first substantial gains and reinvested the proceeds mostly within the same sector. We focused our purchases on companies with stable dividends, solid cash flow and a high equity ratio on the balance sheet, and in return reduced stocks with low earnings yields and relatively higher debt ratios.

Despite the uncertainty in the financial sector, we are maintaining our investments in this area. We are aware that these fluctuations may continue for some time, but we are convinced that the current rise in interest rates will allow us to earn money in the medium term. Ultimately, the low interest rate policy of recent years has only led to unhealthy developments and excessive risk-taking. This is now increasingly being corrected and the basis of economic activity is being put back on a more solid footing.

In our bond fund, we have increased the weighting in US dollar securities in particular compared with last year, in order to benefit in the medium term from the higher interest rate level there. In the case of new investments, we are generally interested in investing in higher-quality bonds; the average remaining term to maturity has fallen further to well below three years and we are deliberately keeping it short in view of the overall situation.

Outlook

Many questions we have received in recent weeks have -- understandably -- been about the distributions of our bond fund. At this point, we would like to point out once again that a rock-solid distribution is the main objective of our bond fund, irrespective of how equity or bond markets develop in general. We will be able to achieve this goal again in April and deliver a distribution yield that will most likely be in the range of previous years, i.e. well above the 4.5% mark. Even in times of increased interest rates, our investors will thus enjoy an above-average return.

Inflation will remain a dominant issue. Although the rate of price increases in Germany fell to 7.4% in March (February 2023: 8.7%), it is still at a historically high level. Of course, the central banks’ interest rate hikes will help push inflation down, but we see the wage-price spiral as a risk that should not be underestimated. In our opinion, it will be some time before we see an inflation rate of below 5% again. However, it should also be mentioned at this point that most countries are not overly interested in low inflation, as high rates are an excellent way of “working off” a pile of debt.

The development of the euro -- in other words, the persistent weakness since May 2018 and the loss in value of almost 22% against the Swiss franc -- has seen a countermovement since October last year. However, we do not consider this to be sustainable at all, let alone a trend reversal in the exchange rate development, but merely a technical and thus short-term counter-reaction to the strong losses of the past years. The ECB, which in our view reacted too late to the burgeoning inflation, sees itself in an ugly sandwich of fighting inflation on the one hand and the existential continuation of the common currency on the other. From this perspective, we expect the Swiss franc to strengthen further against the euro in the medium term. Under the same premise, we see the U.S. dollar development and consequently expect the greenback to move up again.

As far as the bond markets are concerned, we see a continuation of the easing with regard to mispricing of individual securities, but also with regard to a normalization in liquidity. After the recovery had started, the negative news about SVB and CS weighed on bonds in the entire banking sector. Nevertheless, the overall market trend is clearly pointing in the right direction. It still seems sensible to us to integrate income-oriented strategies into a well-constructed portfolio. Even though the recovery seen so far has not been of bad parents, there is still a fair amount of upside potential due to the price levels.

Last but not least, a word on our own behalf. The award we received for being among the top 50 independent asset managers in Switzerland in 2023 emphatically shows that we have proven ourselves time and again over the past few years, especially in very difficult markets. This award may give you, the reader, the assurance that you have the right partner at your side.

We hope that you will continue to remain loyal to us, in the knowledge that we are doing everything we can every day to maneuver you and your assets through all the shoals of the capital markets in the best possible way.

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