Performance Commentary

Equity World

During the first two months of the last quarter, global equity markets continued their peak storm that had lasted since the end of March. The MSCI World Index gained around 12% (in USD) in July and August, reaching a new all-time high. Once again, performance was driven by cyclical technology stocks, which are broadly represented in the US equity market in particular. In September, the picture changed for the first time in a long time. Rising infection figures in Europe rekindled fears of a second wave of corona and market risk indicators rose again. The previous winners of the year, i.e. technology-oriented companies such as Apple or Tesla, were in the red. By contrast, more defensive sectors held up relatively well.

Our risk-based strategies behaved accordingly in Q3. Our underweight in the US market, especially in technology giants, and the generally more defensive stock selection led to an underperformance in July and August. The situation was exactly the opposite in September. However, the outperformance towards the end of the quarter was not enough to close the gap.

The USD continued its downward trend of the second quarter, losing another 3% against the CHF. Although underweight, the USD remains the largest currency position in our Equity World Funds. The losses of the USD were partially offset by the appreciation of the GBP and AUD. In the final analysis, the currency-hedged fund classes performed slightly better than those without hedging.

Equity Emerging Markets

Market dynamics in emerging markets in Q3 were comparable to those in developed markets: rising markets and falling risk indicators in July and August, the reverse picture then in September. Emerging markets such as China, India and Brazil were hit much harder by the pandemic than the rest of the world. The massive injections of liquidity by central banks and the revival of consumption through various economic stimulus packages are also helping these countries and their markets. A possible second wave will probably not stop at national borders. The world will thus become a community of destiny, which is also reflected in a growing correlation between industrial and emerging markets.

The MSCI Emerging Market Index reached a new all-time high practically on the same day as the MSCI World. Part of the positive performance is due to a further depreciation of the USD. This is good news for companies and sovereigns that are mainly indebted in USD. Once again, cyclical stocks have clearly outperformed defensive stocks. The discretionary consumer discretionary sector was the strongest performer, closely followed by information technology. Both sectors are typically underweight in our risk-optimized portfolios. Risk indicators tended to decline, which overall is not an ideal environment for our approach. Overall, the result was a positive quarterly performance, albeit behind benchmark.

Equity Switzerland

The Swiss equity market is known for its defensive composition (and is therefore sometimes in demand). In contrast to many other indices, the SPI was able to post a slight gain in September.

In this slightly positive Q3, our fund outperformed the benchmark by more than 5%. This puts it above the level at the beginning of the year.

The overweight in Sunrise made a significant contribution to the outperformance. The stock rose very strongly in August thanks to an acquisition offer from UPC Liberty. However, the outperformance in Q3 was not the result of a one-time "lucky strike", but was also due to the selective contribution of numerous other stocks - e.g. EMS Chemie, Geberit or Kühne & Nagel. The portfolio also outperformed the SPI in July and September - without the contribution of Sunrise. The weak performance of no-vartis - excluded from our fund due to breaches of ESG criteria - also benefited relative performance.

Speaking of Novartis, the company has concluded a series of legal settlements in recent months and has been ordered to pay large sums of money. The recognition of mistakes and the adoption of corrective measures has meant that Novartis no longer violates our sustainability criteria. The title will therefore reappear in our investable investment universe at the next rebalancing.

Equity Europe ex Switzerland

The summer on stock markets was a little less hot than in the USA, for example. Although cyclical sectors in Europe were also able to gain at times, the overall picture was somewhat more restrained. Investors are worried about the significant rise in the number of Covid-19 infections and the associated restrictions on economic life. The never-ending brexite negotiations also put additional pressure on the mood.

In this (positive) sideways phase, our risk-based strategy performed well with the index. In the end, we even managed to outperform the index slightly.

As the EUR strengthened somewhat against the CHF, the class without currency hedging was ahead of its CHF-hedged counterpart in the final settlement.

Equity USA

July and August brought new historic highs for the US stock market. Investor optimism was reflected in the continued strong performance of cyclical sectors and the declining level of risk indicators. The large technology companies in particular knew only one direction: upwards. In September, this optimism seemed to have evaporated. What followed was the first negative month since March. Uncertainty about the continuation of support measures for companies and the unemployed and the rising number of infections led to the September correction. The presidential elections are also becoming more and more the focus of attention and are causing further uncertainty. Against this backdrop, valuations for some investors seem to be starting to be somewhat high.

Until the end of August, the underweight in cyclical growth stocks meant that our risk-based strategy failed to keep pace with the benchmark. However, the gap was narrowed somewhat in the more volatile September.

The USD weakened further against the CHF. The currency-hedged fund class therefore performed slightly better.

Foreign currency bonds (CHF hedged)

Both the FED and the ECB underlined once again in Q3 that the interest rate level will not rise for the time being. Moreover, the monetary policy requirements for such an interest rate move are becoming longer and longer and the criteria are becoming more and more vague. Thus, the FED is no longer aiming for a fixed inflation target, but now for an average inflation target. Most yield curves shifted slightly downwards in Q3 as well, which led to a positive quarterly performance for bonds. For qualitatively weaker borrowers this effect was somewhat more pronounced.

In this environment, our two bond foreign currency funds with medium ("mid-term") and long ("long-term") durations were not quite able to keep up with the respective benchmark index. The reason for this was, on the one hand, the somewhat lower duration and, on the other, our focus on debtors with the highest credit ratings.

Bonds CHF

In March, the flight to liquidity led to strong selling pressure and rising interest rates on high-quality CHF bonds. With the markets calming down, these bonds are in demand again despite negative interest rates. This led to falling interest rates in Q3 as well as in Q2 and thus to positive returns.

The fund's performance in Q3 was a reflection of Q2. Although the lower duration compared to the market index put some pressure on performance, this was largely offset by the better performance of debtors with lower ratings. Indeed, compared to the market index, some government bonds are being replaced by AA and A-rated public or publicly controlled issuers. The SNB once again stated that an end to the negative interest rate policy is not yet in sight. Given the many uncertainties, solid CHF bonds remain one of the few investment opportunities to reduce portfolio risk.

Mixed fund Smart Invest 65

Our mixed fund with 65% equities closed Q3 virtually level with the benchmark (with 40% equity exposure). While the risk-based equity building blocks for emerging markets and industrialised countries slowed performance somewhat, the building block for Swiss equities was convincing. On the bond side, the lower duration and the focus on debtors with high credit ratings were a particular burden. The higher equity weighting was an advantage in an environment of rising prices and was thus able to compensate for the underperformance of risk-objected strategies. The lower foreign currency ratio was also an advantage for the fund. For example, the USD lost 2.7% against the CHF.

Mixed fund Smart Invest Dynamic

Our balanced fund with dynamic allocation achieved only a relatively low positive performance in Q3. The portfolio was 100% invested in bonds throughout Q3. The reason for this is the still very high level of risk in the market, even though the now record performance of the equity markets makes such risks less obvious. The dynamic model measures the attractiveness of our risk-based equity and bond strategies, which are the building blocks of our investments. In the model estimates since April, the risk/return ratio has been superior to a 100% bond strategy. This was helped by the fact that the market recovery since the end of March has been very heterogeneous and not all stocks and sectors have been equally supportive. The pandemic did not affect everyone in the same way: while technology-oriented and cyclical stocks were in the focus of investors and posted strong gains, defensive stocks and our risk-based equity funds only posted minimal gains. 

A higher or even a fully utilised equity quota of 100% (with monthly rebalancing) would have led to a negative performance in Q3.

We repeat what we already emphasised in our commentary on Q2: For investors who continue to focus on reducing portfolio risk in uncertain times, this approach offers an opportunity to do so in a systematic way. However, patience and discipline are still required to benefit from the added value of this approach.