How to invest it

  • Gerd Hübner, Klaus Meitinger

The hot twenties.

Lerbach zwanziger

Climate as an investment factor. The fight against climate change will dramatically change the way we do business in the future. This will widen the gap between winners and losers among companies. The Lerbacher Runde explains how investors should react to this.

"There is an interesting study," says Stephan Kemper, BNP Paribas WM Private Banking: "On behalf of the 'Financial Times', the impact of a CO 2 price of 100 euros was calculated for the 1000 largest listed companies - today the CO 2 price is just under 60 euros. The result: the top ten percent would gain 30 percent in market value, the bottom 50 percent would lose." Welcome to the net zero path. "Climate change is a driver of enormous upheaval," Axel Angermann, FERI Trust, is convinced: "This megatrend is strongly progressive and virtually irreversible. Investors need to adapt to it now." "The most important information is: there will be a dramatic spread between winners and losers," says Lutz Welge, Bank Julius Baer, and concludes: "For investors, this will create opportunities." Indeed, huge efforts are needed to move towards a global net-zero economy. The Intergovernmental Panel on Climate Change (IPCC) estimates the global investment volume for a successful transformation at 50 to 100 trillion dollars. That's roughly once the entire world's national product. "This investment is demand. For certain companies, this necessarily means higher sales, higher profits and rising share prices," clarifies Michael Huber, Südwestbank.

The sectors of particular interest are easy to identify. "Wind and solar energy, batteries. Carbon capture technologies. Providers of electric vehicles, fuel cells, alternative fuels and energy efficiency solutions," lists Kai Röhrl, Robeco. "But even apparent losers can turn out to be winners," adds Welge: "Did you know that it takes 70 tons of cement to build the base of a wind turbine? The more wind turbines we put down, the better for the cement industry." "Another exciting topic is water and how we supply water-poor areas. One of the most interesting ways is to export food grown in water-rich regions.

That brings the food industry into focus," Kemper reflects. "Food is a good keyword," adds Michael Huber, "after all, conventional agriculture is responsible for around one third of global CO 2 emissions. Eating habits - especially among the younger generation - are therefore changing dramatically. Companies that make their mark on vegan nutrition will therefore have enormous potential." Ideas, the panel agrees, are more than plentiful. "The difficulty lies in identifying future climate winners and then using them intelligently in the portfolio," Axel Angermann clarifies.

"That's a challenge," nods Christian Jasperneite, M.M.Warburg & CO, "we often don't even know today which technologies will prevail. Identifying entrepreneurial disruption early on is very difficult. Of course, it is clear to everyone that Tesla or Amazon have disruptive characteristics. But who would have bet on that 15 years ago?" Bankers are rising to the challenge. "It's about selection. So we're in demand as advisors. Many companies have fascinating business models. But their shares are extremely highly valued. That's where we have to go with the classic methods of financial analysis," says Welge. "It's also important to look closely at the funds," adds Kemper, "many have nice names, sell themselves with great stories. But they often occupy small niches and then concentrate on a few stocks.

The risks of such products are underestimated by retail investors." The bottom line from the roundtable: funds or individual companies developing transformative technologies for a net-zero economy are a satellite investment and should therefore make up no more than ten to 20 percent of a portfolio. A second way to bring the climate issue into the portfolio is to rank companies according to their CO2 emissions and then minimise this in the portfolio. "The idea behind this is that companies that emit little CO2 are better positioned and less vulnerable if politicians tighten the reins more in future," explains Michael Huber. "Climate-neutral funds or those that explicitly invest only in companies that are compatible with the Paris 1.5-degree target also fit this strategy," adds Kai Röhrl. "The question, however, is always: How do you calculate compatibility in concrete terms?", considers Christian Jasperneite: "We're talking about reduction paths here. Global budgets for CO2 . But we only know these approximately. I therefore have the feeling that many indices and funds are not based on this, but only on the CO2 intensity.

That leads the panel to the question of what investors can really do to make a difference. "What do we achieve for the climate if we sell companies with high CO2 emissions?" asks Röhrl. "The fact that a share moves from the seller's portfolio to the buyer's creates no effect," analyses Welge, "after all, secondary market transactions via the stock exchange are not about new capital." "Maybe indirectly the refinancing aspect plays a small role. But in the end I need commitment, the exercise of shareholder rights. The leverage is greater there," Jasperneite clarifies. At the moment, a lot of things are still going wrong: "The stocks that actually need commitment are being sold by sustainable investors. And the buyers don't care about the issue at all." "I therefore think a best-in-class approach, i.e. the selection of the best in each sector, makes more sense than exclusion. You can only make a difference where you're invested. And it also makes economic sense to accompany sectors like energy or utilities in their transformation. After all, in a net-zero world, we will need much more electricity," Welge says.

"However, investors only achieve a real impact by providing fresh equity or debt capital to companies whose activities have a real social benefit," Angermann makes clear. "In the bond market, this is easy. In the case of so-called green bonds, entrepreneurs or governments have to make it clear every year which projects they are financing with them and with what success. But on the equity side it becomes more difficult," says Jasperneite.

"Currently, the relevant funds are still making do with a detour via the 17 UN Sustainable Development Goals (SDGs). They invest in companies whose business models explicitly contribute to these goals with a high share of sales," explains Kemper and continues: "It is interesting that many of these goals also have something to do with CO 2, with the energy transition. And with that, the carbon footprint of these investments shifts at the same time." "But the secondary market problem remains. If you are looking for real impact, you have to look around in the private equity and venture capital market," Axel Angermann makes clear.

Especially in the impact sector, the panel criticizes, there is still a lot to do. "At some point we need uniform and binding rules - when is a fund sustainable, when does it achieve impact? As long as more or less everyone decides for themselves, there will always be a certain suspicion of greenwashing," Angermann concludes.

"But that will come to an end," Michael Huber is convinced. "From next spring, banks and asset managers will be obliged to ask every client whether they are interested in sustainable investments. Then there will be inquiries. And then the client will have to decide for himself whether the respective approach is in line with his convictions." "All in all, however, this means that in future much more capital than before will flow into these areas," says Lutz Welge: "Every decade has its dominant investment theme. In the hot twenties, it will be climate and sustainability."

// What does climate change mean for capital investors?

The fight against climate change will have a massive impact on capital markets for years to come. "For investors, this is the mother of all megatrends, so to speak," says Kai Röhrl. To profit from it, analysis, selection and diversification are needed. "A case for funds," says Stephan Kemper, concluding, "Because 'E' is an important aspect of all ESG investments, it also means that sustainable investments should be the core of every portfolio in the future."


  • Gerd Hübner, Klaus Meitinger

Attractive alternatives.

Lerbach Attraktive

Interest rate substitute. Structuring a successful portfolio has become difficult today. Firstly, interest-bearing securities with good credit ratings no longer preserve the purchasing power of assets when inflation rises. And secondly, in the risk scenario - with rising interest rates - both equities and bonds are negatively affected. The Lerbach Round's solution: more alternative investments must be added to the portfolio.

In the past, Bunds had two roles in the portfolio. They brought reliable returns and were a kind of insurance in the event of a stock market crash. But that is now definitely over. Today, the money invested in them is losing purchasing power.And the insurance thing is probably no longer working either. Because in the event of a risk - i.e. a significant rise in interest rates - all asset classes would lose a massive amount of value.

The Lerbacher Runde has already radically reduced the proportion of government bonds in the portfolio in recent years. On average, just eight percent of the portfolio is still invested in government bonds. Five of the 15 participants even have an even "zero" on the notepad. "It is not only the case that safe government bonds no longer bring a return, but the diversification effect has decreased and as insurance they are now simply very expensive," makes Bernd Meyer, Berenberg, clear.

The freed-up capital flows into corporate or high-yield bonds, but increasingly also into alternative investments. "Alternatives in particular are increasingly in demand from our clients because they can offer attractive returns in the low interest rate environment," says Thomas Neukirch, HQ Trust, explaining the charm. "And used correctly," explains Carsten Mumm, Donner & Reuschel, "they can additionally bring more stability to the portfolio."

The experts distinguish between illiquid investments such as private real estate, private equity or private debt and liquid asset classes such as commodities or gold. In addition, hedge funds can also play a role. So what can investors expect from each alternative?

// Which illiquid investments are suitable?

Basically, these are long-term investments with maturities of ten years or more. As a rule, investors invest in fund vehicles for which there is no regular trading and no daily stock market prices. This has advantages and disadvantages. "Investors are compensated for the illiquidity with higher returns. But it also restricts them. If you rely on liquidity, you can't invest too much there," says Daniel Oyen, VPC Family Office. "However, for some investors who have a hard time dealing with the fluctuations in the stock market, it is basically an advantage that there are no daily fluctuating prices," Meyer says. "Because they are then not tempted to act rashly in turbulent times," adds Mumm.

Investments in the private markets include private equity, which is the investment in unlisted companies; private debt, which is private lending to companies to finance growth, for example; and infrastructure investment or real estate exposure - private real estate. "All these forms of investment are becoming increasingly important portfolio components in view of low interest rates and rising inflation," notes Neukirch.

The panel finds private equity particularly interesting at the moment. "Historically, it has delivered significantly higher returns than most other asset classes. According to the US Private Equity Index by Cambridge Associates, it has averaged just over ten percent per year for all providers over the past 20 years," informs Daniel Oyen.

There are also other positive aspects for investors. "They can invest in the different stages of development that companies go through. And they can focus on sectors that are not as strongly represented on the stock market. This is an even better way to diversify a portfolio," explains Jan Viebig, Oddo BHF. "If this area is defined a little more broadly, venture capital, i.e. early-stage financing, which is becoming increasingly respectable, also fits into this," adds Daniel Oyen. "By investing in companies at an extremely early stage, investors tap into a source of returns that they would not get via the stock market," says Carsten Mumm, explaining the advantage.

Private debt is also becoming increasingly popular as a substitute in the bond sector. "The investment usually has very long maturities, does not fluctuate in price and yields three to four percent in the senior secured segment," explains Meyer, "and depending on the risk-bearing capacity, higher current yields are also possible." "However, investors can also choose shorter maturities here, which we group together under the term Shorter Term Lending," informs Neukirch. "Then the yields are still well above money market levels, but the capital is not tied up for as long."

Another area that is becoming increasingly accessible to investors is infrastructure investments - these include transport infrastructure, energy, utilities, telecommunications or social infrastructure. "These can generate distributions of four to five per cent and around seven per cent in total returns over the long term," explains Mumm. In his opinion, core investments, i.e. core infrastructure, are particularly suitable: "An important selection criterion is that the conditions can be adjusted during the term. Only then does this investment also protect against inflation."

But this already shows: Investments in the private markets are not easy. "Investors must first and foremost understand what they are investing in, and they should pay attention to costs, transparency and the expertise of the manager. A warning signal would be if a provider changes its investment style," lists Viebig. "The crucial factor is indeed the expertise of the manager," agrees Neukirch. "He needs access to good investments, must have a good understanding of risk mitigation and portfolio construction and, especially in private debt, must know exactly how loans are negotiated and secured." "One point is particularly important to me," adds Oyen. "Because an investment like this runs for a very long time, I want a commitment from the manager that they're going to stick with it for that long."

// Which liquid investments work as diversifiers?

In this area, Runde currently considers commodity investments in particular to be attractive as an admixture. "Industrial metals in particular not only offer a hedge against inflation, but also an interesting investment story," explains Bernd Meyer, "because copper, nickel and co. will be massively needed for the energy transition in the future. For example, five to six times more copper is installed in electric vehicles than in a car with a combustion engine."

In view of the urgency of the fight against global warming, it could also be worthwhile to rely on CO2 certificates. "According to analysts' calculations, the price could go towards 250 euros per certificate, which would be about a fourfold increase on today's price," Oyen explains. "Companies that don't have enough pollution allowances not only have to pay a significant penalty, but they also have to buy those allowances the following year. Because the number of certificates is limited, things can get pretty tight," Meyer adds. Nevertheless, these certificates are not a foregone conclusion. "The risk lies in regulation. If the burden placed on the economy by higher CO2 prices becomes too great, politicians can change the rules at any time and, for example, increase the quantity of certificates," explains Oyen.

Daniel Oyen also considers bitcoin to be an alternative. "We consider it as digital gold," he explains. "For me, the most exciting thing here in terms of perspective is the blockchain technology behind it," adds Viebig, explaining, "The blockchain is a tamper-proof, transparent and decentralized database. Smart contracts based on it can be used to automate business transactions without intermediaries. While we don't invest in cryptocurrencies, as quality investors we look for investments that benefit from blockchain technology." // What can hedge funds do for investors?

They may well be worth considering as diversifiers, believes the Lerbach panel. The most important argument: "They basically aim for a positive return regardless of the market environment," explains Mumm. In this respect, the various strategies differ greatly. "CTAs - i.e. trend-following systems - always do well when markets fall or rise sharply. They thus offer a hedge in the event of sharp price falls, whereas they generate losses in markets that move sideways," explains Viebig. "Merger arbitrage strategies offer stable returns when markets move sideways, but no hedge in the event of a price fall. Macro strategies, on the other hand, are well suited for phases with strong distortions, and long-short equity should bring positive returns in all phases. But often these funds do poorly when the market turns."

This goes to show: investors should be well versed if they want to invest there. "The first step is for an investor to be clear about what they want from an investment in hedge funds. Only from this is it possible to determine which mix of strategies comes into question," summarises Neukirch. The second step is selection. In hardly any other segment is the spread between good and bad managers so wide. "Here, a deep understanding of the manager and his approach is key," says Neukirch and continues: "Ideally, the manager has invested a significant amount of his own money in the fund. Then investors can be confident that he or she will manage the fund over the long term. Once a really good hedge fund has been identified, the key is to get access to it. That's where a good network helps."


Authors: Gerd Hübner, Klaus Meitinger

  • Sonderveröffentlichung: Schroder Investment Management (Europe) S.A., German Branch

Lucrative credit investments.

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Private Real Estate Loans. Banks are pulling back from lending on commercial real estate projects. Private investors can fill this gap. The incentive: attractive returns, regardless of developments on the capital markets. "Because there are projects with different risk profiles, the market offers a broad field for every type of investor," says Peter Begler, Alternatives Director at Schroders.

"It's actually a curious situation," Peter Begler reflects: "We have a real estate boom all over Europe. But banks are increasingly pulling out of the real estate lending business."

And that, says the director of alternative products at asset manager Schroders, has nothing to do with the fact that there are no longer any lucrative investments in the face of higher prices. "It's a regulatory issue. After all, the increased capital requirements imposed by Basel II and III mean that the cost of capital for real estate investments, as well as for project development, is getting higher and higher, making it increasingly unattractive for banks. This is good news for investors looking for high-yield investment alternatives in the current low-interest environment. They can step into the breach."

Specifically, it goes like this: For example, a real estate investor wants to repurpose a property that often has a significant amount of unleased space. So he wants to turn an office property into a multi-use building with retail, restaurants and apartments. These are referred to as "transitional properties." After such a rezoning, the idea is, the value of the property should increase, and a higher rent per square foot can be charged.

"But to do that, the developer needs financing for maybe two and a half years. After that, he wants to sell the property at a higher price," explains Daniel Younis, head of real estate debt at Schroders Germany. But the willingness of banks to finance such projects is low. "And since such borrowers often don't have access to the public bond markets either, they pay lucrative interest rates for the financing," says Younis. This is where Schroders' Real Estate Debt division comes in. "We provide the opportunity to finance such projects."

Younis and his colleagues' task now is to find the real estate projects with the best risk-return ratio. They are helped by the fact that this market is currently slow to emerge in continental Europe. A low supply of private loans meets a rising demand for financing.

In the US, the market is already more developed. There, alternative lending in the commercial real estate market has a volume of about $4.8 trillion, which is about 40 percent of the total market of $12 trillion. In the UK, non-bank lending accounts for at least 27 per cent of the total market. In Europe, however, it is less than six per cent.

"However, we expect both the UK and continental European markets to grow over the next ten years to roughly match the ratio in the US market," Begler makes clear. With a total volume of 72 billion euros, that would be just under 29 billion. "And we can already see that the demand for private real estate is increasing, although the supply is currently still quite limited. That's why the chances are currently particularly good to get into the best and most promising projects," explains Daniel Younis.

In total, Younis and his colleagues look at around 1,000 such projects every year, investing in around ten percent of them that they consider to be the most promising. "We already want to see that the value of the property really increases as a result of the planned conversion work and that higher rents are enforceable," explains the expert. "We always ask ourselves the question of how many euros per square metre a converted property has to be rented out at in order for our financing to be secure and whether the corresponding rent level is realistic."

In order not to risk a default, Younis' team attaches particular importance to risk management.

In principle, the investment professionals pay attention to two factors: On the one hand, there is the existing debt. The higher this is, the higher the quality of the property must be. And on the other hand, there is the structural risk - how risky the property itself is. This is about aspects such as the location, the fittings or the rentability. "Overall, it is important to find a balance. Under no circumstances should investors take high risks on both aspects. That's why we have to analyse each individual project and business plan in detail," explains Younis.

At the end of the analysis process is an assessment of the property's future potential. "The decisive factor is how realistic the planned rent increases are after a conversion and how long the property can then be let. That's why it's important to take a very close look at the local supply and demand situation," explains the expert. "This ultimately determines how well the property can be refinanced or sold after the business plan has been implemented. And on that, after all, depends whether we can get our loan back without any problems."

As real estate is also always dependent on local conditions, Younis and his colleagues also draw on around 200 Schroders real estate experts across Europe and locally.

They are not focused on any particular segment of the property market. "While we also see certain areas performing stronger and others weaker due to the pandemic and structural trends," Younis says, "we don't exclude any area." Even a retail center, if the business plan is convincing, may qualify as an investment.

Still, two fundamental risks remain: first, developments in the real estate market itself, and second, the interest rate environment. "Drastic changes in the current situation can jeopardize such projects. If buyers were no longer willing or able to pay the prices required by the project developer, he could find himself in trouble. That's why we see it as our job to find investments that are not dependent on general developments in the real estate market or interest rate trends," says Younis.

That's why good risk management is all the more important, he says, to ensure that only those properties are financed that can hold their own regardless of general trends and do not run into problems when interest rates change. Younis' conclusion: "With such an approach, an admixture of real estate debt, precisely because it does not correlate with developments on the capital market, can be useful for diversifying a portfolio."


Schroders Capital - one brand for all private assets.

Schroders is now bundling its specialist investment capabilities in the area of private assets under the newly launched Schroders Capital brand.

This will bring together the full range of existing products in private equity, securitised products, asset-backed financing, private debt, real estate, infrastructure, insurance-linked securities and BlueOrchard, a specialist in impact investing. This combination will drive knowledge sharing and innovation across Schroders' private assets business.

Due to its significant role in the development of the impact investing industry over the last 20 years, BlueOrchard will retain its distinct brand identity.



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Schroder Investment Management

(Europe) S.A., German Branch

Taunustor 1, 60310 Frankfurt, Germany

Peter Begler (069/975 71 72 56)

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  • Sonderveröffentlichung: Columbia Threadneedle

An optimal combination.

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Dividend Strategy Asia. High-yielding assets are desperately sought at the moment. George Gosden, portfolio manager at Columbia Threadneedle, advises investors to look to Asia. Not only is the long-term economic environment right there, but there are also attractive dividend yields from high-growth companies.

"Those who pursue a dividend strategy in Europe," explains George Gosden, "usually end up with companies with a solid business model but no growth prospects. On the other hand, those that are growing strongly often don't pay dividends. That doesn't satisfy me, though."

The head of Asia ex-Japan equities and fund manager of the Asian Income fund at Columbia Threadneedle looks for high-growth companies that also offer attractive dividend yields - "the best of both worlds". He is finding it particularly in Asia's fast-growing technology sector.

Dividend yields in the region alone are attractive. "In Taiwan, they currently average around 2.7 percent, in South Korea it's 2.4 percent and in Australia it's even 3.1 percent," Gosden informs. In addition, the distributions have remained much more stable than in Europe, for example, especially recently in the pandemic. According to him, the latter has to do with the fact that the companies have come through the Corona period comparatively well. "Also, we keep finding that Asian companies on average have healthy balance sheets with low debt."

Adding to the payouts is the growth appeal. For example, corporate profits in Asia-Pacific excluding Japan have grown steadily. Accordingly, dividend payments have also increased by almost eight per cent a year since 2016. "You have to look a long time to find anything comparable there," Gosden said.

Looking ahead, the expert also sees the environment in Asia as favorable. "We have seen weaker growth recently, though, because in much of Asia, governments are pursuing a no-covid strategy," he explains, "Whenever a case comes up somewhere, there's a lockdown in the city or region."

That disrupts supply chains and hurts the economy, he says. "But when that's no longer the case - I expect a full reopening in the course of next year - Asia's economies will return to their original growth path."

Many countries in the region, such as India and Indonesia, are benefiting from the fact that a large number of young and increasingly well-educated people are entering the labor market," explains George Gosden. This demographic dividend, he says, is driving more consumption in the medium term and boosting growth. "In perspective, that should be reflected in the form of a valuation premium on the stock markets."

Given this, current valuations are quite cheap. "That's largely a result of recent price declines brought on by Chinese regulatory actions," Gosden explains. "However, I believe the markets' concerns here are overblown. By imposing stricter regulation, the government aims to limit the dominance of tech giants and encourage competition, which is more positive in the long run in terms of the region's growth prospects."

He added that it should also be borne in mind that for all China's importance in the region, there are still very many other attractive investment targets. "Taiwan, for example, is much more exciting from a dividend investor's perspective. Companies there have top-notch balance sheets and are sort of forced to invest and distribute because of the tax code." Gosden cites semiconductor maker TSMC as an example. Its payouts have risen by more than 17 percent over the past five years, while South Korea's Samsung Electronics has seen an increase of almost 50 percent over the same period.

When it comes to specific stock picks, Gosden looks at long-term growth prospects, cash flow, debt and valuation."We also want to see strong management and a clear competitive advantage," he summarizes. One aspect in particular is important: "For us, financial stewardship-whether a company is responsible with the capital it's given-is high on the priority list."

Such companies, Gosden goes on to explain, have always united the interests of all stakeholders. "To me, that's a signal that they will also be willing to make attractive distributions on a sustainable basis." This approach is complemented by strict risk management. "If a company doesn't perform as we expect or we find a better alternative, then we sell the stock."

He sees risks for the region at the moment in the tensions between the US and China. An unexpectedly strong resurgence of the Corona pandemic is also an uncertainty factor that should not be underestimated, he said.

Less relevant, on the other hand, are the currency and inflation threats, he said. "Asian companies are coping well with the higher prices so far.In addition, commodity suppliers, some of which we have in the portfolio, are benefiting from rising commodity prices."

As for currencies, which have often been the trigger for turbulence in Asian capital markets in the past, he continues to expect stable conditions. "That's where I think it plays a role that the sovereigns in the Corona crisis took on less debt than many Western governments and therefore have very stable budgets today," Gosden explains, concluding, "Incidentally, that makes our strategy even more attractive for investors from the eurozone. Because governments here are on a clear path of getting further and further into debt."


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Columbia Threadneedle

Philipp Kowollik

Tel.: 069/29 72 99 77

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  • Sonderveröffentlichung: Eyb & Wallwitz

It's getting wilder.

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Currency management. For globally invested assets, exchange rates have a massive impact on portfolio returns. "But because the currency markets have been quiet in recent months, many investors have lost sight of this aspect," recalls Johannes Mayr, chief economist at asset manager Eyb & Wallwitz, predicting, "In 2022, this will change. Investors should prepare themselves."

"Currency management is perhaps the most underestimated aspect of investing," Johannes Mayr reflects, "because exchange rates have tremendous leverage due to the high percentage changes in a very short time. With one swipe, investment results can be pushed up or painstakingly earned returns can be wiped out."

During the past few years, however, this aspect has taken a bit of a back seat. "In all major regions, the response to the Covid 19 crisis has been massive monetary easing. At the same time, policymakers have managed to address national risks very well. This led to similarly rapid recoveries in economies. In response, exchange rates also fluctuated comparatively little," Mayr explains.

But that, the economist suspects, could change in 2022. "In terms of economic activity, we have already passed the peak in some countries. Others are still catching up. And that will be reflected in monetary policy. The US Fed, for example, will curb its expansionary stance a bit, the Australian central bank has already taken this step, and the UK central bank is specifically debating a first interest rate hike. Others, such as the ECB, will remain very expansionary for a very long time. In such a constellation, exchange rates normally move more strongly. The risks on the currency side become striking."

If you want to counter them, you first need to know how changes in exchange rates affect the individual asset classes. "We roughly distinguish between four categories:Equities, bonds, real estate and commodities including precious metals," Mayr explains. "With equities, on the other hand, it's important to differentiate between domestically oriented and strongly internationally active companies."

In our globalized world, most large companies have long since ceased to be concentrated in the currency area in which they are headquartered. Often, the larger share of revenues and costs are incurred in different currencies. Apple, for example, makes only 45 percent of its revenue in the United States. Thus, when investing, an indirect currency hedge takes place. The company benefits when the U.S. dollar depreciates through higher export demand and higher margins on overseas business. The share price could therefore rise in dollar terms.

For the euro investor, the exchange rate effects offset each other to some extent. "What dominates the bottom line is different for each company - depending on where sales are generated and how many inputs are sourced. The issue of foreign debt also plays a role on the cost side," Mayr explains.

The currency effect becomes more directly visible with investments in bonds. "The exchange rate development has a much greater significance here," Mayr explains. "An interest rate advantage of one or two percentage points can be eroded very quickly by a negative development of the currency. If exchange rates fluctuate very strongly, the bond component, which is supposed to bring calm and stability to the overall portfolio, also takes on a speculative touch." Basically, with foreign currency bonds, it is always a matter of asking whether there is actually a high probability of an additional return remaining after the expected change in exchange rates.

Similarly, the professional said, the same applies to illiquid assets such as real estate, land or forestry. "These assets are almost 100 per cent anchored in the respective region, everything plays out in the respective currency." Complicating matters further is illiquidity. "If there are problems with the exchange rate, it is difficult to get out of these currency areas," Mayr explains.

Commodities and precious metals have a special place in his investment matrix. "It's true that the currency risk here is also high. But gold or commodities are quoted in dollars. This also results in a kind of indirect hedge," Mayr analyses. If the dollar weakens, this is first negative for the gold portfolio. On the other hand, in such a case, the demand of international investors increases again, because the acquisition of gold in the domestic currency now becomes cheaper for them.

"Currency management," concludes Mayr, "is therefore a challenging, multi-faceted task." Many investors, he says, respond in two ways. "Some swear by forecasting - which usually doesn't work very well.The others on hedging - which costs a lot." In addition, companies often run their own internal currency management."Those who don't know this in detail probably hedge too much or too little. The investment result is then likely to turn out differently than planned."

"It is better to understand currency risk in the overall context," Mayr makes clear. The first step, he says, is always to check whether the currency risks do not balance each other out across the various asset classes. "For example, we look very closely at how the costs and revenues of public companies are distributed.And in which currency they are financed - this aspect is also important when valuing corporate bonds." After all, he says, nothing is gained if a portfolio is optimally hedged indirectly in one asset class, but unwanted currency risks emerge in another.

Once this homework is done, Mayr turns to the key question. "What is the maximum appreciation or depreciation that I can cope with? If the risk then seems too high, asset classes are spread differently across regions."

This, the economist explains, is a very different approach to considering whether or not to hedge currency risk for each individual investment. "In the overall portfolio, a completely unexpected currency risk may come out that way. The surprise is then often great when exchange rates move significantly."

An overall view of the portfolio is more efficient, cheaper - simply smarter, he says. In the coming year, Mayr suspects, this aspect will become important. His advice: "Prepare yourself."


// Managing currency risks - the E&W way.

"In the funds from Eyb & Wallwitz, we manage currency risk using so-called stress tests," explains Chief Economist Johannes Mayr. Specifically, the experts ask themselves:What happens in the portfolio in the event of a currency effect of x percent? If the test shows that there is too great an impact on fund performance in the event of a contingency, the risk is obviously too high. "Then we try to reduce the stress by making changes in the asset classes."

Currently, for example, 48 per cent of the Phaidros Funds Balanced is invested in dollars and 44 per cent in euros. On the equity side, the greenback dominates at 73 per cent. On the interest rate side, the euro portion is dominant at 92 percent.

"Our simulation analysis has now shown that if the dollar were to depreciate by ten percent, the portfolio would lose only 2.8 percent in the equity portion. This is the effect of indirect hedging by investing in international companies. Overall, the portfolio remains almost unchanged at minus 0.8 percent. That," concludes Mayr, "we can bear. We therefore save ourselves the high hedging costs."



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Eyb & Wallwitz

Publishing address

  • Private Wealth GmbH & Co. KG
    Montenstrasse 9 - 80639 München
  • +49 (0) 89 2554 3917
  • +49 (0) 89 2554 2971
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