SOPHIE MONNIER, CFA, PRODUCT SPECIALIST IN BOND AND DIVERSIFIED MANAGEMENT AT ODDO BHF ASSET MANAGEMENT 1st FEBRUARY 2024

Sophie Monnier

Through its global funds with different risk profiles, the ODDO BHF Polaris range implements long-term, diversified management based on conviction, with companies operating on a global scale. Alpha creation is based on the selection of quality stocks in both equities and bonds : portfolios favour companies with solid fundamentals, satisfactory financial and extra-financial viability, competitive advantages and a real ability to withstand all phases of an economic cycle.

How is asset allocation positioned for 2024?

In the fourth quarter of 2023, we took advantage of attractive valuations in certain sectors and equities and very negative market sentiment to increase our exposure to our ODDO BHF Polaris Balanced fund to a net equity exposure of 52%.

Equity selection remains focused on quality and on companies that are well positioned to cope with the current environment of higher inflation and slower growth. We maintain a well-diversified equity portfolio focused on companies with long-term growth prospects. We bear in mind that these companies offer higher returns on invested capital and equity than their peers, as well as lower leverage and debt.

As for bonds, we have continued to invest mainly in quality corporate bonds (42% of the fund), which offer attractive premiums and low credit risk. We have also invested just over 2% of the fund in speculative high yield bonds to take advantage of the prospect of higher yields. We have gradually increased the duration of our portfolios and started to invest in government bonds. The portfolio's yield at the end of December 2023 is 3.4% and its duration is 4 years.

What is the outlook for the markets and their impact on portfolios?

Current bond yields have reached levels not seen in Europe or the US for many years. In this more attractive environment, our approach tends to favour bonds with low credit risk and longer maturities. In addition, if key interest rates are cut in the coming months, this could create opportunities for price gains.

The upturn in yields also means that diversified portfolios have become more attractive once again. The era of zero or negative interest rates is over. As a result, adding bonds to portfolios will again have a diversification effect that will help to reduce risk. 2024 could be an excellent time for diversified funds.

At the same time, businesses are suffering from tighter financing conditions and weak demand, which makes it harder to pass on rising costs to consumers. This could increase pressure on margins.

However, equity markets should benefit this year from the end of interest rate rises, or even the start of rate cuts. In addition, analysts expect earnings growth to accelerate in 2024. Finally, average valuations are not particularly high at present. Indeed, the price/earnings ratios of the S&P 500 and the Euro STOXX are currently close to their long-term averages and look fairly attractive in some sectors. Nevertheless, investors should remain selective when investing in equities. For example, they should avoid cyclical stocks, which are particularly sensitive to economic risk, and concentrate on defensive, quality and growth stocks. We prefer companies with good returns on capital, moderate levels of debt and the potential to benefit from long-term growth trends, among other things. This is the case in technology, particularly artificial intelligence; in healthcare, which should benefit from demographic changes; and in luxury goods, driven by rising incomes in emerging markets.

The investment approach of the funds in the ODDO BHF Polaris range is to seek long-term growth potential by identifying the major trends that will run through our societies. Among the four trends targeted by the funds is the ageing of the population, along with the digitisation of the economy, new ways of consuming and working, and the increase in the number of people in middle class.

The funds in the ODDO BHF Polaris range present a risk of capital loss, equity risk and interest rate risk. None of the companies mentioned constitutes an investment recommendation. Past performance is not a reliable indicator of future performance and is not constant over time.