Investing in Turbulent Times

November 9, 2022 | Igor Hirsch

Uwe Paßmann
Uwe Paßmann has many years of experience in the financial sector and in advising high next worth private clients. Before joining Scalable Capital, he worked as a senior consultant advising private clients and entrepreneurs on the structuring of their overall assets. After studying in England at the University of Hull, he first worked for an international private investor. He then joined the Swiss asset manager VZ Group, among others.

The central banks of the Eurozone and the USA are vigourously tightening the interest rate screw. This makes newly issued bonds more attractive. Does Scalable Capital's algorithm take this into account?

Uwe Paßmann: To answer the question, let's first take a look at how a bond ETF works: Unlike an investment in a single bond, when you buy a bond ETF you acquire a basket of different bonds with different remaining maturities. The basket provides diversification and thus minimises the default risk of individual bonds. If the general interest rate level changes, newly issued bonds are gradually integrated into this basket. In the current market phase, new bonds with more attractive conditions are thus automatically factored in.

This applies to all bond ETFs we use in the different strategies, whether Value-at-Risk (VaR), ESG or climate protection portfolios. Thus, bond ETFs as part of a managed ETF portfolio are a more convenient alternative to individual bonds, especially for long-term investors.

Since October, an ultra-short bond ETF has been integrated into Scalable Capital's wealth portfolios. What are the benefits of the new ETF and in which portfolios is it used?

Uwe Paßmann: With this ETF, we are expanding our value-at-risk investment universe to include short-dated bonds. This innovation is an important addition to our VaR portfolios with a low risk appetite (VaR 3 % to VaR 9 %), as it brings three advantages: Thanks to the short maturity of the bonds included of less than one year, these ETFs are less sensitive to interest rate fluctuations.

In addition, short-dated bonds offer a higher effective yield of currently around 2.6 percent compared to traditional overnight money. In addition, the new ETF enables our algorithm to reduce the average maturity in the bond component of the VaR portfolios in periods with stronger synchronisation, i.e. higher correlations, between different asset classes in order to reduce fluctuations.

In addition, short-dated bonds offer a higher effective interest rate compared to classic overnight money.

The prices of many shares as well as bonds have fallen over the course of the year. What is the point of switching between the two asset classes in the portfolio at all?

Uwe Paßmann: Typically, the mix of equities and bonds serves to reduce fluctuations in portfolios. If one of the asset classes moves down, the other tends to increase - at least that is the theory. In periods of strong economic growth, investors tend to be less risk-averse, while in downturns they want to reduce their risk through defensive products such as bonds. This has not been entirely the case in practice recently, as the existing return potential of bonds could not be exploited due to the worsening geopolitical situation and further rising interest rates. Broad bond indices, which are tracked by the ETFs in our portfolios, therefore yielded less in the past quarter.

Due to the rise in interest rates, bonds have become more attractive and can prove to be an effective portfolio component in the current uncertain market conditions and to cushion fluctuations in equities in the future as well.

With falling stock markets and a weakening economy, does it still make sense to invest in broadly diversified ETFs instead of picking individual stocks? Aren't there currently many more companies that are doing badly compared to a few that are doing better?

Uwe Paßmann: I think that an investment in ETFs pays off especially in turbulent economic phases because the overall risk is lower than with individual stocks. The overall risk of a security is made up of systematic and company-specific risks. Systematic risks are, for example, wars, as is currently the case in Ukraine. Company-specific risks, on the other hand, include management errors. By investing in broadly diversified indices, you can greatly reduce the latter, while systematic risks remain. If you invest your capital exclusively in individual securities, you generally forgo the broad diversification effect of ETFs and thus exacerbate the already increased overall risk of your portfolio.

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Igor Hirsch

Financial Editor

Igor is an editor specialising in financial investments and the stock market. He previously worked as an editor at Finanzen100 and the industry service for asset managers Citywire. Before that, he worked as a self-employed financial advisor (§ 34d and § 34f). He holds a degree in cultural studies with a major in economic and social history and studied at Saarland University.

There are risks associated with investing. The value of your investment may fall or rise. Losses of the capital invested may occur. Past performance, simulations or forecasts are not a reliable indicator of future performance. Please refer to our risk information.

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