That's the defense.
Risk management. We live in the best of all worlds. Growth and, at the same time, ultra-low interest rates are causing prices to rise. But this also increases the risks. "It's like football - we have to be sure at the back to take advantage of the opportunities," smiles Armin Eiche, CEO Wealth Management Germany at private bank Pictet. It shows how investors keep risk under control.
"Armin Eiche, CEO Wealth Management Germany at Pictet Private Bank, asks: "Do you know what counts when you ride the bull? "All too often, the banker has already seen investors sell during correction phases and never make it back to the market again. "diesem Thema is something that we have to deal with seriously right now. Denn the risk of a significant setback to den Aktienmärkten is growing."
The analysts at Pictet Bank have identified four warning signals. "October was the eleventh consecutive month in which the MSCI World Stock Index had set a record. There have been just three such series in the last 35 years," informs Achim Siller, head of portfolio management at bei Pictet Wealth Management in Germany, "that's almost crying out for correction. It is also very unusual that the current upswing takes place with very small price fluctuations.
"Apparently everyone agrees on the direction it's going. This also calls for caution", erklärt Siller. Thirdly, there are a number of investment models which manage their portfolio allocation on the basis of changes in market prices. "The calmer the market, the more we invest in equities. These models have now clearly overweighted equities. If they have to reposition themselves at any point, there will be massive repercussions. And fourth, all asset classes are now quite expensive. The prices include very positive expectations regarding the development of interest rates and earnings. This now makes the markets vulnerable to any kind of disappointment."
"This is very challenging for investors. On the other hand, nothing points to a fundamental turnaround in the markets", erklärt Eiche. Next year, the central banks will raise interest rates - if at all - only in small homeopathic steps. And the banker does not see any real danger of recession in the next twelve months.
"The best of all worlds will therefore probably remain with us for at least another year", meint Eiche and concludes: "The art of investing today is to set up depots in such a way that the pain of a possible correction is alleviated. And thus to prevent investors from losing sight of their longer-term goal at this moment and still allowing themselves to be thrown off."
The first strategic line of defence is to build a depot that is as stable as possible. "A portfolio diversified across different asset classes and currencies cushions possible setbacks on the equity markets and makes them more bearable for the investor", erläutert Armin Eiche.
He advises a broad diversification of liquid assets between bonds, equities and alternative investments. "Expertise in the field of hedge funds is of course a prerequisite. Wir know the successful managers and also have access to their funds."
Although they hardly yield a return, bonds also continue to play a role. "The diversification argument is decisive. In the next recession we will probably be confronted with negative interest rates at a level we cannot even imagine today. Then the prices of first-class bonds will rise significantly. And until then they are a good insurance against possible economic fears," explains Eiche.
After all, the bond component today still delivers a basic interest rate of between one and two percent after costs. "So at least he deserves the inflation rate. Investors get the diversification aspect at no cost."
As an additional way to spread Risiken, Siller considers currencies. "We can find the details of the equity investments at ein Drittel im Dollarraum. There we are consciously invested in the currency and do not carry out any hedging. First, the dollar tends to strengthen during periods of stress. And secondly, we have a strong focus on globally successful companies. They manage their currency exposure professionally themselves. If I intervene, I may unintentionally produce over- or underweightings - I don't know their net currency position. Currency hedge always sounds like hedging. But this can also result in additional risks."
On the other hand, Pictet does not enter into any currency risks in the interest rate area. "The nominal return is disproportionate to the exchange rate fluctuation. That's why we're 100 percent secure."
The second defense line is built by the experts in tactical investment management of the stock portfolio. "We are firmly convinced that independent research is worthwhile. Even the analyst doesn't know exactly what the future holds. But he can identify aspects that tend to point to negative developments. Calculate probabilities. And then try to reduce these risks with as little effort as possible."
Since he considers the danger of a setback to be high today, Achim Siller becomes active. "And we use options. Wir acquire the right to buy or sell securities at fixed prices. The option premium due is therefore a kind of insurance premium for us."
This is particularly interesting today because the insurances are as cheap as seldom. "The most important factor influencing the price of an option is price fluctuation, volatility. Weil this is extremely low, options are very cheap. By using 0.2 to 0.3 percentage points of the portfolio, we can hedge ten to 20 percentage points of the equity component for half a year", erklärt Siller.
The combination of investments on different option markets makes the im Gesamtdepot hedge even a bit cheaper. "We may acquire the right to buy gold at a fixed price or sell shares. It is also interesting to have a strategy that delivers returns if the yield gap between bonds of bad and good debtors rises - which often happens in stress situations", zählt Siller Examples.
Ultimately, this is how bankers buy time and security. "We can relax and sit out a first setback", erläutert Armin Eiche, "and then consider whether there is perhaps more behind it. But we never have to sell in a stressful situation."
Systematic protection is often systematically wrong.
Systematic risk management is usually based on approaches that follow predefined rules." "That sounds good, but it's not always the right thing to do," warns Armin Eiche.
01. rebalancing: If there are major price movements during the year, the weights of the individual portfolio modules are reset to their initial positions at regular intervals. Thus, profits that have gone well are automatically taken away in segments. "That makes quite sense with the allocation between shares, Anleihen, Hedgefonds and cash. However, investors should be careful to reposition only after larger movements. Sonst costs too much," Siller judges. However, this strategy is counterproductive for individual stocks. "Then you would be forced to regularly sell the winners and invest in the losers. We're not doing that. For fundamental reasons, we are convinced of the companies in which we invest. Also, we're sticking with it."
Systematic tactical control: this strategy automatically reduces investment ratios following a fall in prices and/or an increase in price fluctuations. "That has zwei Nachteile , explains oak, on the one hand is only acted after already losses occurred. And secondly, this is very expensive in sideways trends. If prices recover, they will have to be reinvested again. We prefer to follow our fundamental analysis - and hedge equity positions situatively when it identifies higher risks."
Pictet & Cie (Europe) S.A.
Neue Mainzer Straße 1, 60311 Frankfurt gruppe.pictet; Tel.: 069 / 79 500 90