Gutmann Portfolio Management Report
Focus on individual companies.
In the third quarter, we saw a sideways movement on the financial markets overall. Bonds and stocks continue to battle the headwinds of rising interest rates. Artificial intelligence and a handful of technology stocks are all the talk. Regardless, concentrating the portfolio in just a few names is out of the question for our portfolio management mandates. We remain solidly positioned.
You find a short version of the decisions we have made in Gutmann Portfolio Management and our market assessments below, or click on the download link to read the quarterly report in full in PDF format.
Interest rate headwinds.
Bond yields have been climbing since spring 2022.
We have often heard in the last 12 months that rising interest rates are poison for the stock market and that caution remains warranted. We understand this argument and certainly share the view that future cash flows of listed companies have different present values in an interest rate environment of 1% compared to 5%. The higher the interest rates, the lower today’s value of future cash flows. This is an undisputed fundamental mechanism.
Opportunistic yet defensive.
Current bond weighting.
For more than 10 years, investors had to endure bond yields of zero percent and below. Now, 1-year government bonds yield 3.6% in Germany and 5.4% in the USA. It's understandable that these interest rates seem tempting, as they are higher than longer-dated ones. The question remains how long these levels will persist. Central banks may soon have to cut key interest rates again if the economy cools. On the other hand, interest rates could continue to rise if inflation remains stubbornly high.
Digitalization remains dominant theme.
AI elevates expectations.
All eyes were on chip design company NVIDIA. Expectations were high before the publication of its latest quarterly figures. Surprisingly, NVIDIA even exceeded them. Total revenue for the second quarter topped the already optimistic analyst projections. We have not ignored NVIDIA’s rich valuation either. NVIDIA's steepest growth phase may be over, but data center transformation is still in early innings. Servers will be built differently in the future and most will include accelerator chips from NVIDIA. That's why we remain invested.
The second dominant theme in the past quarter comes from the healthcare sector. This is the success of the GLP-1 drugs from Eli Lilly and Novo Nordisk. These weight-loss drugs give great hope to type 2 diabetes patients in particular, fueling the share prices of both companies. In turn, Insulet and DexCom suffered with their insulin management systems.
Important for portfolio management mandates: Each of the stocks is included in the portfolios in different weightings. This creates balance in the current situation of potential upheaval.
Our equity team tracks developments closely and learns continuously through expert discussions. The balanced allocation offers investments in promising and attractive themes without the enormous fluctuations of individual stocks having an outsized impact on the overall portfolio.
Equities remain overweight.
September and October are traditionally difficult months for the stock markets. The course of events on the financial markets can develop according to a very unique pattern year after year. Nevertheless, there is seasonality. In particular, periods of weakness when the stock markets correct can worry us as investors. The question arises, whether this is just a short-term setback in a bull market or if the next bear market is already looming. Clearly, this can only be answered with certainty in retrospect.
Corrections are part of the life of stock market participants. Those who do not want to or cannot bear them must already take this into account in the strategic allocation of the portfolio. If you invest only half of your portfolio in stocks, you will have to endure only half the setback. Over the decades, it has been shown that setbacks of 15% are normal on the stock markets. It’s true there are always a few years in a row where we are spared major downward movements. However, this does not at all mean that we have entered a new era sans corrections. But we have not had this "problem" in recent years anyway. Rather, investors remain nervous and suspect the next bear market behind every dip.
It doesn’t take much to find reasons for this. Rising interest rates and an inverse yield curve are just two. We do not close our eyes to these facts. But we think that all this information is known and reflected in traded share prices.
We keep a close eye on the indicators and react quickly when necessary. For now though, we remain optimistic and overweight in our equities allocation.
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