Luca Pesarini, founder and senior portfolio manager of Ethenea Independent Investors, does not mince his words, and so the management of the Ethna-AKTIV fund he helped found in 2002 is no nonsense. For instance, in a recent interview, he shows that he does not have a good word to say about European Central Bank policy and expects a return of inflation. He therefore preaches short-term paper for bonds. For equities, he is not negative but still quite cautious (Ethna-AKTIV fund).
How do you manage your fund which is basically a macro fund?
We are indeed a macro fund and that means, in a nutshell, that we only invest in a certain number of assets and try to keep it as simple as possible. So we invest in bonds, stocks, in currencies especially than the dollar but we can also take positions on duration and credit ratings and can go short and long on all these assets. In contrast, we do not invest in gold, derivatives and complex structures. In addition, we are allowed to invest a maximum of 50% in equities. We are very flexible because if we have a very negative view, we can go to 0% as we did in 2008/2009. Usually, however, we are between 20 and 30%, which is our sweetspot. Basically, our fund is for the investor who wants low volatility and stable returns.
Is there a reason why you limit yourself to these investments?
That one is very simple: we are not the best stock pickers. We just have to make sure we are in the market when it goes up. We are almost exclusively invested in US equities, not counting some speculative positions. Why? Because first and foremost, many investors do not own US stocks and this allows us to differentiate ourselves and secondly, the US stock market accounts for 60-65% of global market capitalisation. Apple alone is as big as the entire German stock market and of the 50 largest companies in the world, 42 are American! So in the US there is higher liquidity, one finds better names, a wider range of offerings and bigger opportunities. In other words, the rest of the world is negligible in stock market terms.
How is your equity portfolio structured and how is it structured today?
For the equity part, we always work with two layers. On the one hand, we have a basic portfolio consisting of a portfolio of US equities that serves as the foundation of the portfolio. This piece, accounting for 22-23% of the total, we review once a quarter. Our objective with this piece is to shadow the performance of the S&P500 as closely as possible: we don’t want to lose returns with wrong stock choices. We have been working this way for two years. On the other hand, if we want to increase our exposure to equities, we buy futures on the S&P500 index. We do this to move quickly without having to touch our base portfolio and is also cost-efficient. For the summer holidays, we reduced our equity exposure from 40% to 22-23%. During the summer months, it is always walking on eggshells so we prefer to be cautious.
And what does the rest of the fund look like?
The bond part currently accounts for 65%. Half of this is nicely split between German Bund and US Treasuries and we hold mostly short-term paper. Short duration because we believe that interest rate hikes are not over yet and interest rates will remain high for a longer period than expected. The other half consists almost exclusively of high-quality corporate bonds yielding between 4-5%. We have no high yield paper because we already have equity exposure, we reason. The rest consists of cash, good for a yield of 3.5% to 3.6%, and mavericks such as the Reimann family’s private equity funds, good for 5%, which have been in our portfolio for more than 10 years. Over the next 12 to 16 months, these funds are going to phase out. Although I have a penchant for private equity, it is difficult to find solutions for this that would fit into our fund.
You also mentioned some speculative positions. Which ones are those?
We have 5% of the fund invested in the Chinese local stock market index, not Hong Kong, because we expect the Chinese government to implement more quantitative easing. For now, there is a lot of negative news coming out of China and at some point this will prompt the government to take additional measures and the latter should push the Chinese stock market up. Currently, we are looking at a small loss.
Remarkable because shares from emerging countries and Europe do not interest you, right?
Our Chinese position is rather an exception and a trading opportunity. Otherwise, emerging countries are not on our list because we only want to invest in safe countries. Moreover, there are so many other players who have more knowledge about emerging markets than we do. Europe cannot appeal to us because it is in deep trouble. The ECB is completely behind the times and started raising interest rates way too late. On top of that, there are a lot of problems in the countries in the periphery. It is also much simpler for the Fed: this institution only has to manage one country and is run by professional economists. This cannot be said of the ECB because there are too many politicians and, whichever way you look at it, they are not financial experts.
Do you see Europe playing a second-class role on the economic front?
Surely it’s remarkable that in Europe we are now importing Chinese cars, which never actually happened. Everything is now geared towards energy transition but if this is handled wrongly as it is now, then surely you are killing yourself and the European automotive sector will be wiped off the map. Surely this is not a healthy policy!
What do you expect from equity markets for the rest of the year?
We are not euphoric for equity markets but from now until the end of the year we still expect a rise of 3-7%. With rising interest rates, there are now alternatives for investors hence the new acronym TARA (there is a reasonable alternative) is emerging and that instead of TINA. On short-term T-Bills or Treasury Notes, you now get around 5% while the dividend yield on the S&P is only between 2.5 and 3%. Still, it should also be said that the US economy is very robust with very low unemployment while the inflation rate is crumbling.
Still, you are not comfortable on the inflation front.
Look, inflation was already there before the war in Ukraine started and before commodity prices went through the roof. Indeed, the monetary authorities pumped so much money into the system that high inflation was inevitable. It was enough to look at ECB and Fed balance sheets to predict this. However, the Fed faced the problem much too quickly. In turn, the ECB waited far too long to let the cat out of the tree. Now it is too late and much harder to curb inflation. The problem is that if you wait too long to tackle inflation, many people with lower incomes, accounting for about 25% of the population, will foot the bill more than average and that will cause social unrest. Inflation will rebound in early 2024 partly due to the effect of recent wage increases that are currently driving higher consumption. It will take a long time to halt inflation.
How will this affect interest rates?
Given persistent inflation, central banks will not be able to cut interest rates for the next 2-3 years. Short-term rates will rise to 3.5 to 4.25% in Europe and longer-term rates will continue to rise, forcing long-term bonds to record a lot of losses again in 2024. That is why many market players are more likely to invest in short-term bonds. Today, it is not interesting to buy 10-year German government paper at 2.5% when you can get more than 3% at 1 or 2 years.
Information about the fund can be found here.