Performance Commentary

Equity World

After a short breather in September and October, the stock markets continued their upswing until the end of the year. The MSCI World Index gained around 14% in Q4 (in USD). The long-awaited breakthrough in the vaccination against Covid-19 and the clear election outcome in the USA provided the necessary boost. The new aid packages and economic stimulus programs of the USA and the EU also ensured that the scenario of a sustainable economic recovery convinced more and more investors. All of this was accompanied by declining risk indicators - the tension is clearly falling.

Unlike in the previous two quarters, the price gains were no longer attributable to just a few, mostly technology-related stocks. Sectors such as financials and industrials also gained ground. Within the sectors, more procyclical and riskier stocks were predominantly sought after. Geographically, other regions were also able to keep up with the strong US market.

Although our risk-based strategies ended the quarter in positive territory, they clearly underperformed their respective benchmarks. Strong positive market performance and declining or low risk indicators were - with the exception of the Corona crash in early spring - the defining features of the stock market year 2020. The year-end result of our strategies is therefore unfortunately also very sobering. In general, it was not a year for investments that focus on risk minimization. Such short- to medium-term "market regimes" have also existed in the past - in the long term, however, disciplined risk-based implementation has paid off.

Equity Emerging Markets

The majority of emerging markets were not hit quite as hard by the second wave of coronas as the USA or Europe. The fall in share prices in early fall was therefore very modest. However, the joy at the approaching start of vaccination then gripped the emerging markets to exactly the same extent. In addition, the weakening greenback gave an additional boost to the countries, which are predominantly indebted in USD. The result is clear to see. The MSCI Emerging Markets Index rose by almost 20% in USD (of course with falling market risk indicators) and closed the year at a new all-time high.

A look at the sector performance shows a similar picture as in the Equity World universe. Although the IT sector continues to dominate, others are now able to keep up to some extent. Within the individual sectors, procyclical stocks were also in favor with investors.

Unfortunately, the parallels to the global equity universe are also reflected in the performance of our fund. Although Q4 saw a solid gain, our fund was unable to keep pace relative to the benchmark. There was also a marked underperformance over the whole of 2020, albeit to a much lesser extent than in the case of the industrialized countries.

Equity Switzerland

The Swiss stock market followed the same pattern as the rest of the world: a dip in October followed by a recovery until the end of the year, accompanied by falling market volatility. In anticipation of the start of a new economic cycle and the end of the pandemic, investor interest in Q4 was focused on "traditional" companies in sectors such as financials, industrials and consumer staples, in addition to technology-heavy companies. But, as befits the Confederation, everything happened somewhat less brilliantly. The SPI is more exposed to defensively oriented companies and holds almost no technology companies. This also explains why the quarterly performance of 4.74% was lower than in other equity universes. Nevertheless, market volatility decreased slightly.

Our Swiss equities fund could only partially keep up with the broad market index. This resulted in a lag of slightly more than 1.5% for the full year.

In Q4, the structural underweight in the "Big 3" - Nestlé, Novartis and Roche - certainly paid off. Market dynamics were dominated by a clear rotation away from more insensitive, less volatile stocks towards higher beta and more cyclical stocks. The latter rebounded strongly after falling behind during the market upswing from late March to late October. This was the case for financials such as Julius Baer or Credit Suisse, consumer cyclicals such as Richemont, and materials stocks such as Lafarge Holcim. These are all stocks that were not selected by our model and whose quarterly performance was in the 15-30% range. The quarterly return of the fund was 2.13%, lagging the SPI by 2.61%.

Equity Europe ex Switzerland

In the second and third quarters, European stock markets recovered rather timidly compared to the US. There was a lack of the large tea stocks, which accounted for the main share of the US rally. However, the good news from the vaccination front against Covid-19 and the gigantic support program of the EU then also caused euphoria to break out on the old continent. The last-minute Brexit deal was also viewed positively.

The equity markets were able to post significant gains across the board in Q4, while market risk was clearly on the decline. In Europe, too, more pro-cyclical, more volatile stocks were in particular demand. It is therefore not surprising that our risk-based strategy was unable to keep pace with the capital-weighted benchmark in Q4, even in this universe. Over the whole of 2020, however, the underperformance was much less pronounced than, for example, in the Equity USA fund.

As the EUR strengthened somewhat against the CHF in Q4, the class without currency hedging was ahead of its counterpart with CHF hedging in the final account.

Equity USA

The damper in September and October was short-lived. The outcome of the presidential election and the arrival of the long-awaited Covid-19 vaccine gave the US stock market a new boost. The generous stimulus package also pleased investors. The prospects for a post-Corona era appear promising. Accordingly, it was no longer only the digitalization beneficiaries that gained, but also other pro-cyclical stocks and sectors (e.g. energy, financials, industrials). The price gains were accompanied by declining market volatility.

The underweight in cyclical growth stocks and the generally more defensive, risk-minimizing portfolio design resulted in a clear underperformance also in Q4. Thus, Q4 joins a year that was anything but favorable for risk-based strategies.

The USD continued its weakening trend and weakened significantly against the CHF also in Q4. The currency hedged fund class therefore performed slightly better.

Foreign currency bonds (CHF hedged)

Higher sovereign debt and a weak USD pushed up inflation expectations in the USA and with them interest rates on US government bonds. The CAD yield curve also shifted upward, especially at the long end. In Europe, by contrast, additional debt was not (yet) seen as a driver of inflation. The risk of overheating is somewhat less pronounced on this side of the Atlantic, as economic development tends to lag somewhat behind. The appreciation of the EUR against the USD could even have a negative impact on economic momentum. Against this backdrop, interest rates for the EUR and GBP fell slightly in Q4. However, they tend to be the exception. Not only in North America, but also in many other regions, long-term interest rates in particular rose (e.g. AUD, SEK, NOK).

Our two bond foreign currency funds with medium ("Mid Term") and long ("Long Term") duration ended the quarter slightly behind their respective benchmarks. While the underweight in USD was beneficial, the overweight in CAD, SEK, NOK and AUD offset this. In the euro area, interest rates declined somewhat more in countries with lower credit ratings - these are structurally underweighted in our portfolio. The underweight in JPY (excluded from our investment universe due to lower credit ratings) also had a negative impact. Interest rates in the Land of the Rising Sun hardly moved, as has been the case for years.

Bonds CHF

Interest rates also declined slightly in Switzerland. As in the euro zone, there is currently no sign of the economy overheating and thus no acute risk of inflation. On the contrary, the weak USD could even weigh on export business. Credit spreads also declined in the CHF bond market. More risks are being taken than before. Both effects helped our fund to achieve a positive return. It was thus virtually on a par with the market index. The return for 2020 as a whole was also positive - a very pleasing result given the current negative interest rate environment.

Mixed fund Smart Invest 65

Our mixed fund with 65% equities was unable to keep pace with the benchmark index (with 40% equities) in Q4. This is primarily due to the weak performance of the risk-based equity components. The higher equity allocation paid off as equities outperformed bonds. However, our risk-based strategies gained significantly less than the average equity market. The strong positive performance combined with falling volatility made it difficult for investment strategies that focus on risk. Incidentally, this is not only true for Q4, but for most of the past year.

Mixed fund Smart Invest Dynamic

Our mixed fund with dynamic allocation was slightly negative in Q4. This is not a pleasing return in an otherwise very positive quarter - especially for risky assets. In anticipation of the start of a new economic cycle and the end of the pandemic, investors have invested confidently in risky assets. Market risk indicators have declined significantly to January 2020 levels and the fund allocation has increased the equity allocation during the quarter - first to 25% in November and then to 37% in December. However, the higher equity allocation did not translate into positive fund returns. In Q4, the risk-based equity components performed well below the market average. As mentioned above, investors tended to prefer assets with a riskier profile. Moreover, most of the market rally came in the first 2 weeks of November and thus before the first increase in the equity component.

We take the disappointment very seriously given the unpleasant results in the quarter and even more so in the full year. We continue to work on an enhanced version of the model to improve the reaction function. The goal remains to implement a strategy that systematically manages portfolio risk, for example, to avoid staying invested during a prolonged market correction. In 2020, we experienced a market correction of historic proportions, but concentrated in a few weeks. This was followed by a brilliant market recovery, largely driven by a few digitally savvy companies. Our risk-based approach was unable to address either of these (historically unique) dynamics.