• Yvonne Döbler, Gerd Hübner, Klaus Meitinger

Hunt for returns.

52 20190914 DSF5845

Interest investments. In view of negative yields on German government bonds, investors will have to realign their portfolios. But can there even be a substitute for safe and liquid government bonds? And - where do investors still find reasonable returns?

"Christian Fischl, Huber, Reuss & Kollegen, makes it clear that "there is no single asset class that can replace 100 percent of German government bonds." The times when an investment was liquid, safe, diversified by comparison zum Aktienmarkt offered and at the same time a current interest rate of three or four percent, are over.

"Damit Anleger something similar to a low-variation, but positively yielding risk/return profile in the portfolio, it is necessary to pursue a broadly diversified strategy with a combination of many asset classes," says Philipp Dobbert, Quirin Bank. "And both liquid investments and illiquid investments must be taken into account," adds Bernd Schrüfer, Lucatis.

// Liquid, high-yield bonds.

"Driven by the hunt for returns, investors have continually lowered their minimum requirements for debtor creditworthiness - usually from A to BBB, in some cases even lower," says Daniel Oyen, VPC Family Office. "Although high-yield bonds already offer an additional yield of between two and three percent," says Thomas Neukirch, HQ Trust, "you must not forget that you are taking more risk with them. Because apart from the higher risk of default, the price fluctuations are also greater."

The experts point to another danger: if the investment sentiment turns and everyone wants to sell at the same time, this could lead to high book losses. "Nevertheless, like emerging market bonds, they are an integral part of our basic portfolio," explains Dobbert. "Because the yields are still well above those of von US government bonds." In the emerging markets, the central banks have not yet switched off the function of the market. Therefore, the risk is adequately paid for here.

Investors from dem Euroraum should consider the currency risk. "Because hedging is expensive, we consider emerging market bonds both in local currency and in dollars," explains Peter Hollmann, PatriCon. "The higher fluctuations in value that result must then be accepted by investors." One challenge is the concrete implementation. "We advise that this be done through active fund managers who specialise in these segments. ETFs are not a good idea given the merged spreads", erklärt Hollmann.

Christian Fischl also sees an alternative in special bonds of unrated medium-sized issuers, in subordinated bonds or in so-called Fallen Angels - companies that have lost their investment grade rating. "The search for attractive securities is associated with a great deal of effort, as analysts have to have both interest rate and issuer risk under control, as well as - in the case of international securities - political aspects. But those who do this thoroughly will find papers that reliably deliver three percent or more by the end of the term and still let den Anleger sleep reasonably well."

// Receive the illiquidity premium.

"The attraction of illiquid investments", explains Schrüfer, "lies in the fact that investors receive a premium for not having to trade at any time". "One example is Private Debt," explains Neukirch. Investors grant loans directly to companies to finance their growth. "We do this through closed-end funds, where the manager lends directly to small and medium-sized companies to build a broadly diversified portfolio." The disadvantage: "Such loans can default. Therefore an examination of the collateral and diversification is a must ?, macht Neukirch clearly. Investors' capital is tied up for five to seven years, with an average return of between five and six percent.

Infrastructure investments in closed-end funds also offer an illiquidity premium. "Such projects, which include toll roads, ports or alternative energies, yield very predictable annual surpluses and have a low correlation to the classic plants," explains Oyen. "A certain risk is that governments will have a say in the terms. It is therefore not certain that necessary price increases can always be implemented. That would reduce the returns," analyses Schrüfer. "In addition, investors usually have to subscribe to units before investments are made. So you're investing in a black box," says Fischl. What's the point? "With fund of funds solutions, distributions of three to four percent and a total return of six to eight percent are possible," estimates Oyen.

// Absolute return and hedge funds.

"The aim of these investments is to achieve a stable return of five percent over a cycle at drei bis," explains Oyen. However, many of the providers have not achieved this in recent years. "Even hedge funds that are regarded as particularly good have delivered disappointing results, especially in 2018," reports Hollmann.

Why was that? "Many of the computer systems behind hedge funds rely on individual asset classes to perform differently," explains Oyen. "Late 2018 but all lost value at the same time. Deshalb, hedge funds have also come under the wheels at that time." In his view, another aspect is problematic from a perspective: "Many of these funds invest through futures. Since they therefore only need the investors' capital as collateral, they were able to invest it at a good rate of interest in the past. It doesn't work today. They're missing the base rate."

However, the Lerbacher Runde does not want to completely do without these products. "It's the choice that counts. And to constantly monitor the funds", sagt Neukirch. "Since the capital market environment and correlations have changed in the zero interest rate era, many strategies simply no longer function. The intensive dialogue with the fund manager is therefore important. "He must be able to explain plausibly why his approach still works against this background," explains Schrüfer.

"A diversified portfolio of funds from first-class managers should average three percent above the risk-free interest rate over longer periods of time," says Dobbert. Dabei, it is important not to buy any currency risks in addition.

// Specialties.

"CatBonds could also be an alternative," Neukirch considers. Investors assume part of the risk from primary insurers or reinsurers in the event of financial losses due to natural catastrophes. If the previously defined loss event does not occur, the investor receives an interest rate that is significantly more attractive than that of government or corporate bonds. "Since 2012, this investment has yielded a return of around four percent per annum," Dobbert explains. "The interesting thing is that these investments have no structural correlation to the broad capital market," says Hollmann. The risk: Should the insured event occur, this would reduce the repayment of a bond or even lead to a complete default. "This is why investments should never be made in individual cat bonds, but only in broadly diversified funds," advises Schrüfer.

For the experts, the topic of microfinance also belongs in the category of uncorrelated systems. "These are unsecured small loans in emerging markets that are bundled into a single fund by specialised financial service providers", erklärt Dobbert. "The default rates are low and the risk is reduced by the broad diversification of the funds. All in all, this means a cost saving of two to three percent, with only minimal correlation to the established markets."


Adequate earnings.

EM funds: BL EM (mixed fund) (LU0309191905), Vontobel EM Debt (LU0926439646), GAM Local Emerging Bond (LU0984439082)

High-yield funds: UBS USD High Yield (LU0396369489), JP Morgan Global High Yield Bonds (LU0783540387)

Cat Bonds and Microfinance: GAM Star Cat Bond (IE00B3Q8M574), LGT Select Cat Bond (LI0225414825), IIV Microfinance Fund R (DE000A1H44T1), Vision Microfinance (LU0563441798)

Hedge funds: MAN AHL TargetRisk (IE00BRJT7613)

Private Debt Provider: Golding Capital Partners (www.goldingcapital.com), Prime Capital (primecapital-ag.com/category/private-debt)

Closed shareholdings: Yielco Investments (Yielco.com)

Other: Preferred Securities Fund (IE00B3SPD311), Baywa corporate bond: 3.125% LZ 6/24, Non Rated Bond (XS2002496409)



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