Resolution of the Riddle

Good Morning Ladies and Gentlemen

“Know nothing, understand nothing, say everything can find a majority these days.”
My friend Peter S. in a WhatsApp message yesterday

Last week’s competition

Ladies and Gentlemen, the quote from last week’s competition stems from the book “Melody” by Martin Suter. No one did find the correct answer, and thus the silver coin rests in the drawer for our next competition. Thanks for your participation!

Incrementum All Seasons Fund

This week an investor wrote to me about our flagship fund’s unusually moderate performance this year. I quickly asked my partner and the principal portfolio manager, Hans Schiefen, to write back to the investor. His reasoning makes sense, and I thus want to share the main arguments with you.

Reasoning

The reason for the recent IASF NAV decline has been that, on the one hand, equity markets in economically sensitive areas (incl. energy, shipping, and commodities) have been hammered as investors increasingly anticipate a recession, affecting many of IASF’s long positions. On the other hand, the AI-driven narrative and the familiarity of past investment successes have had investors chasing after the major tech platform companies in an echo-bubble to 2020/21, thus negatively affecting our exposure on the short side to NDX and SPX. At the same time, volatility has been plummeting amid a surprising degree of complacency towards potential risk in this environment. Meanwhile, fundamentals look increasingly less supportive of risk assets. Growth globally is slowing, (core) inflation remains too high and central banks are thus proclaiming higher for longer interest rates, a scenario the market is responding to in the customary manner of buying long-term bonds, whose yields remain profoundly negative in real terms. LEI, the yield curve and many other (historically highly reliable) indicators suggest a recession is on the cards for H2 2023, which still points to a rather stagflationary environment. (If growth does not disappoint as expected, it will keep inflationary pressures higher, and if it does, it would typically end in lower corporate top lines, coupled with pressurised profit margins, lower cash flows and earnings).

Scenario

Given this scenario, tangible assets remain the place for (rationale) investors, while remaining partly hedged long-duration assets remain sensible. If we had not experienced similarly frustrating developments in 2021 (and earlier), we might be more concerned, but our experience tells us that these kinds of pain trade periods are part and parcel of the investment process and experience. The difference, however, compared to 2021 is that risk-free rates are double or triple the levels they were back then, which, if one uses DCF-based valuation, should result in a (significant) contraction of overall valuations, which has not (yet) happened.

Last week

Last week I mentioned, “To invest, you may want to think positively about your investment. Else you might as well let it be.” Today I would like to add; when buying a style-based product, one needs primarily to understand the asset manager’s investment style, have confidence in it, and, as always, show some patience.

Questions

I am always happy if investors come back to us with challenging questions. Investors should write much more questions to their asset managers; questions make huge sense. We cannot foresee the future, and having to explain our different investment solutions (style and/or theme-based) supports our effort in calibrating our thinking.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li