Frankfurt This year, Berenberg Bank welcomes an old acquaintance: “Goodbye Tina … welcome back Harry Markowitz”. Because according to the money house, the portfolio theory of the Nobel Prize winner Markowitz is more relevant today than ever. Accordingly, one can no longer only rely on the stock values that have long benefited from the slogan “Tina – There is no alternative”.
According to Klaus Naeve, Co-Head of Wealth and Asset Management at Berenberg Bank, there are two main factors when it comes to asset strategy: diversification and duration. Markowitz received the Nobel Prize in 1990 for his portfolio theory, according to which the optimal diversification of risks means that significantly higher returns can be achieved with a lower overall risk.
As a follower of Markowitz’s theory, Naeve advises all investors to get back to the fundamentals of wealth management, also known as strategic asset allocation (SAA). After all, one finds oneself in a phase of “brutal reassessment of many investment themes” – triggered among other things by the interest rate hikes of the central banks worldwide.
Maximilian Kunkel, who manages the wealthy clients and family offices of UBS Advises Global Wealth Management as an investment strategist, Naeve agrees with regard to diversity: “The focus is on the diversification of assets, the topic is clearly coming back.” UBS the model portfolio contains 47 percent shares, 33 percent bonds and 15 percent alternatives, the rest is cash.
Berenberg Bank’s medium-risk sample portfolio contains 30 percent equities, 40 percent bonds, and illiquid investments — including private equity, private debt, and real estate — 20 percent. In addition, there are liquid “alternatives” such as raw materials and special hedging strategies with ten percent.
The bottom line is that, according to Naeve, an investor can expect a return of around six percent per year after costs with such a mix. To avoid losing capital, investors must plan for a long-term investment horizon, such as 30 years. Even with an investment horizon of seven years, the price fluctuations and thus the possible losses are relatively small.
Stock selection is becoming more important
Over the past 30 years, US stocks have performed best, with an average annual return of 9.5 percent, but investors have had to endure violent price fluctuations. They ranged from plus 38 percent in one calendar year to minus 37.1 percent.
In second place were European equity heavyweights (large caps) with an average return of 7.5 percent. For naeve can Investments in index funds – so-called ETFs – will become more difficult in the future because not all business models can draw on low interest rates. The large tech companies, which have benefited from low interest rates for a long time, often dominate in the index funds.
According to the expert, after the interest rate hikes by the central banks, it is now a matter of selecting the individual stocks – here investors should focus on the company’s level of debt and pricing power. In terms of illiquid investments, Naeve is particularly fond of private credit funds (Private Debt). You benefit from the reluctance of banks to grant loans. In the case of equity capital for companies (private equity), on the other hand, the valuation corrections may not yet be fully completed. This can lead to lower returns from equity funds over the long term.
Benoit Anne, an investment expert at MFS Investment Management, is more cautious about private debt funds. “We believe that classic, listed bonds are again an interesting alternative.” The credit risk of private debt is usually higher because the borrowers are small and medium-sized companies.
In addition, according to Anne: Small and medium-sized companies are often heavily indebted and their financing structures are more complex, so that risks are difficult to assess. “All of this could pose challenges for private debt, especially with a looming recession,” says the investment strategist.
The wrong moment for long-term bonds
Kunkel also agrees: “High quality Bonds are making a comeback. These include primarily government bonds and corporate bonds with a high credit rating.” On the other hand, there is less demand for high-yield bonds, i.e. high-yield bonds with a weak to weak credit rating.
According to Kunkel, when it comes to the question of duration, the focus is on short maturities of two to three years and the medium range of five to eight years. On a euro basis, a return of around four percent can be achieved here, in the dollar segment it is over five percent.
For extreme cross-country skiers, for example 30 years, the time has not yet come. Bonds are now clearly the new competition for real estate, the latter are no longer seen as a panacea in asset allocation, as was the case during the low-interest phase.
Looking at equities, Kunkel says: “We are underweight equities because of the growth risks in US stocks. In Asia, apart from the Chinese market, there are good structural opportunities in markets such as Indonesia or India. In Japan he is still cautious about stocks.
More: How to save for your children.