Contibution by ODDO BHF AM
In this new Fund Insight, we explain the positioning of the ODDO BHF Polaris funds' portfolios amid a challenging market environment. Risk factors have increased significantly since the beginning of the year. Higher interest rate volatility, the escalation of the situation in Ukraine and rising commodity prices are weighing on both the (previously strong) growth outlook and corporate margins. China's zero-covid policy further worsens global growth prospects, and the probability of recession has increased. After the highly valued technology stocks were initially hit against the backdrop of rising interest rates, the prices of stocks from other sectors also fell recently as recession fears took hold. As bonds have also fallen sharply since the beginning of the year, the environment for multi-asset funds is not easy.
DEFENSIVE POSITIONING
In this highly volatile environment, we adopt a defensive positioning in terms of asset allocation. We have been slightly underweight in equities since 14 February. The four portfolios are hedged through listed derivatives such as listed options and futures. In the four ODDO BHF Polaris portfolios the net equity quota is lower than in the benchmark. Furthermore, the four funds have increased their cash buckets to between 6 and 16% depending on the fund. A selection of quality stocks and broad diversification, considering company-, sector- and country-specific differences, is crucial. Several sectors offer opportunities in such an environment. These include healthcare stocks, which are benefiting from the need to catch up on postponed treatments following the decline in corona numbers.
The business of manufacturers of consumer goods such as food or cleaning products is also going well, regardless of the state of the economy. And especially important in times of inflation, such brand-name manufacturers have the pricing power to pass on increased costs to customers. In view of rising interest rates, we have also increased our exposure to insurance companies. On the bond side, we are taking a low duration position in view of the risks associated with further rising interest rates.
WHY SHOULD WE CONTINUE TO FOCUS ON QUALITY STOCKS ?
We believe that quality stocks with strong balance sheets and pricing power offer good protection even in this environment. We only invest in companies with high return on invested capital, clear competitive advantages, structural growth opportunities and sustainable business models that trade at a reasonable price according to our valuation framework. We focus on companies with robust business models that, according to our analyses, will be successful over the next five years and beyond. These companies are expected to participate directly in the structural growth potential of today and tomorrow:
Digitalisation and automation of the economy, new consumption and work trends, ageing populations and rising incomes in the emerging middle class. Sustainability ("ESG" - environmental - social - governance) is an important investment criterion of our process.
OUTLOOK
Investor sentiment is already very poor. But before we get more involved in equities again, valuations would have to come down even further. Focusing on what we consider to be stable quality stocks should increase portfolio resilience even in times of crisis. The liquidity bucket of portfolios gives us the ability to invest rapidly in newmarket opportunities. We are convinced that this orientation of the portfolios will enable us to weather the currentmarket downturn well and to take the market rebound.
