The Weather Makers

“Unbelievable, snowfall and three nights of frost in a row in southern Styria!” These were the headlines in April a few years ago. It was devastating news for wine  and fruit growers. Since time immemorial, we humans have tried to predict and influence the weather in order to avert damage. Despite protective measures, we  still cannot avoid them entirely. Same goes for investing, we are constantly exposed to unpredictable environmental risks - specifically in the financial markets. 

2022 was a frosty year on the bond markets. The rapid and sharp rise in interest rates caused the bond prices of long-dated securities to virtually collapse. Gutmann was able to reduce the damage to bond portfolios through protective measures but was not able to avoid it entirely. Of course, we followed the weather forecast and kept an eye out for storm warnings. But only in retrospect do the European Central Bank's rapid and sharp interest rate hikes seem predictable. 

Wasn't it the unanimous consensus that the high level of debt and spending during the Corona period wouldn’t allow for significant interest rate hikes? Anyone who thinks that continued negative interest rates would have been an impossible scenario need only look at Japan to be proven wrong. New central bank governor Kazuo Ueda left interest rates at -0.1% at his first meeting. In other words, in negative territory, where they have remained since 2016. As if that were not enough, the target for 10-year government bonds also remained at 0%.

Perfect timing is illusive

In addition to the high quality of the debtors, our protective measure for the bond portfolios was the short average maturity. Above all, it allowed us to reduce the price loss. Would an all-cash positioning been better? Certainly in the phase of rising interest rates. But timing it right was impossible. One could have gone into short-term investments many years ago with the same arguments. Not to mention with negative interest rates! Even if the customers had not left us (“I can hold cash myself! That's what I pay you for?”), when would they have re-entered the capital market? When bonds start yielding positive returns? At 1%? Or only at 2%? Or wait until they reached 3%? 

As you can see, the right timing is also difficult and actually impossible with bonds. It is better to gradually align the portfolio with the new opportunities. In our opinion, positive real returns are again possible with bonds. For investors who do not want to, or cannot hold 100% in equities, bonds have a fixed place in the portfolio.