Correction continues in March - unpleasant fund price development
The correction on the stock markets that began in February continued in March. Mellinckrodt's performance was - in contrast to previous months - unpleasant. This is because this is the sharpest fall in the fund price in a month since the fund was launched. The decline is comparable in scope to the cumulative decline in the crisis months of January and February 2016.
Various reasons were responsible for this. The decline in Mellinckrodt's highly weighted tech stocks in the USA and their impact on technology stocks in Europe is certainly one of the main reasons. However, two further effects were just as important for fund price development. What was new in March was that second-line Swiss stocks such as Schindler, SGS and Bucher suffered disproportionately large price declines.
Last week's development in particular reinforces the impression that Switzerland is currently suffering from strong capital outflows. The result is a negative development of the Swiss franc against the euro. It was unusual in March for Switzerland - in contrast to earlier correction phases - not to be a more stable port compared to Germany. The highly capitalized pharmaceutical stocks Novartis and Roche stabilized the leading Swiss index. Unfortunately, however, we were unable to achieve this stabilising effect with the second-line Swiss shares we selected.
Another reason for the negative monthly performance was the high hedging of the fund that we have been undertaking since the middle of the month. This had a negative impact on the fund price in the last week of March because the stock market rose sharply, but the shares in the fund only participated to a disproportionately small extent in this upward trend. Hedging costs were higher than the gains on shares. The further decline in the fund price was the unpleasant consequence.
One consequence of the development in March is that we have decided to change the hedging of the fund. For hedging purposes, we no longer primarily use the DAX, but hedge according to the shares in the individual countries and segments. This already worked well in the first half of April. The fund price has developed much more stably. However, the fund price only participated to a disproportionately small extent in the rise in the stock markets, because capital preservation remains our primary objective. The traffic light is still YELLOW and not GREEN.
In the first quarter of 2018, it became apparent that the price declines had concentrated on the liquid part of the stock market.
LargeCaps were more affected than SmallCaps. Should the correction on the stock markets continue, however, it can be assumed that the small caps - with the usual time lag - will catch up with the downward trend and then fall relatively rapidly more strongly than the broad market. In addition, small caps are significantly worse to hedge through futures than large caps. If you compare the performance of equity funds in the first quarter, you should therefore not forget to check with Morningstar to see how high the average market capitalization of the stocks contained in the respective fund is. With an average market capitalisation of EUR 5.5 billion, Mellinckrodt has a comparatively high value. This is quite different with some of the well-known funds. Nor do we intend to invest more in small caps again. The risks of illiquidity are still simply too great for us.
Despite all the negative news, however, it must also be pointed out that a look at history teaches us that in the 1960s and 1980s, when the USA decided on tax cuts of a similar magnitude as at present, this had a considerable impact. The respective upswing phases in the economy took about twice as long as usual. There is therefore a good chance that the trumps of tax cuts could mean that we are only in the middle and far from the end of the economic cycle.
However, this positive outlook can only become reality if interest rates do not rise too quickly - and unfortunately this cannot be ruled out. And the start of the reporting season in the USA on Friday also showed that the trees are not growing into the sky. US banks presented good figures, but an intoxicating price development was not observed as a result. Sell on good news, I think. On balance, we believe that the environment for strategies that focus on the selection of individual shares remains favourable. The chances of outperforming the indices are absolutely intact. Sunny weeks lie ahead - hopefully not only in nature, but also on the stock exchange.
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