Avril 2012: Buying Healthcare sector and increasing the equity weight

This month we buy the Stoxx600 Healthcare index with 5% weight. According to our CROCI team analysis Healthcare is the only deep value sector on a global basis. The Healthcare sector allows investors to buy a much more stable …    

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earnings stream compared to the Stoxx600 without paying significant P/E premium .

With this step our portfolio still has a low 20% net equity weight and thereof 15 percentage points in defensive sectors Utilities and Healthcare. The equity market has been on the weaker side in the last weeks on the back of weaker economic data, from the US as well as the Eurozone. European Banks have been among the weakest sectors over the last month as the Euro sovereign debt crisis has come into the focus again. So it was beneficial for our portfolio that we had sold the Stoxx 600 Banks index one month ago. In our view, the pressure on the equity market could well continue in the coming weeks.

We stick to our positions in the MSCI Japan, in Gold and in Oil. The MSCI Japan also gives Yen exposure and the YEN tends to appreciate in times of risk aversion and gives currency diversification outside the Euro. Gold should give the portfolio some downside protection, if central banks surprise the market with more easing monetary policy measures. Oil price has held up well relative to news flow on the economic slow down.

We stick to our Crude Oil position as protection against political risk and supply side disruptions. We also stick to our Short IBoxx Euro sovereign position with 15% weight. We see more risks of rising yields than a continuing decline.

We find the risk/return profile of the EM Liquid Eurobond index more attractive than Eurozone sovereigns.

Our absolute return cross asset portfolio earned a a return of 1.0% YTD after 2.1% in 2011, 10.3% in 2010 and 12.0% in 2009 .

5.0% MSCI JAPAN TRN Index

10.0% Stoxx 600 Utilities TRN Index

5.0% S&P 500 Index

5.0% DJ EURO STOXX 50 SHORT

Admittedly, the recent economic data in the US also came in on the weaker side.

5.0% Stoxx 600 HealthCare Index

15.0% Emerging Markets Liquid Eurobond Index

10.0% Euro Inflation Swap 5 Year Total Return Index

15.0% Short IBOXX Euro Sovereigns Eurozone TR Index

10.0% DB Physical Gold Euro HE

5.0% DB Brent Crude Oil Booster

10.0% EONIA TR Index

We think a high cash position is appropriate as risks are higher than implied volatility suggests.

5.0% Fed Funds Effective Rate Total Return Index

Source: 10 Avril 2012:  Absolute Return Index portfolio – Deutsche Bank AG

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rated “BB”. 13% of the basket is rated “B” and this is one issuer, Venezuela. So the country
with the biggest weight in the index is also the country with the lowest rating. While
Venezuela is clearly a high risk country with 13% weight in the index, the remaining countries
are clearly more solid (for more details on the “MSCI USA TRN” ETF see ETF: Ideas and
Flows, 25 November 2009).
“db x-trackers Currency valuation” ETF 20% weight
In currency markets the majority of the participants are “liquidity seekers”. “Profit seekers”
are a minority in currency markets and can generate returns on the expense of the “liquidity
seekers”. Profit-seekers can generate returns by buying “under-valued” currencies and
shorting “over-valued” currencies. A widely used measure to determine “under-valued” and
“over-valued” valuation for currencies is the concept of “Purchasing Power Parity” where
“fair” exchange rates are calculated by comparing the prices of a basket of goods in different
countries. The ETF “db x-trackers Currency valuation” buys each quarter the three currencies
with the “lowest” valuation out of the universe of the G10 currencies and sells the three
currencies with the “highest” valuation using the PPP concept. In addition, the correlation to
equities and bonds is very low and therefore the currency valuation index helps to diversify
our ETF portfolio. The index is currently long in the US Dollar, New Zealand Dollar, and the
British Pound whereas the index is short in the Swiss Franc, Swedish Krona and the
Norwegian Krona. Risks to the investment include that currencies movements become less
rational again. Especially increased uncertainty about the economic development could
trigger a flight back into expensive currencies like the Swiss Franc (for more details on the
“db x-trackers Currency valuation” ETF see ETF: Ideas and Flows,12 June 2009).
Trading portfolio
We have kept the portfolio unchanged this time. Earlier we bought the “Emerging Markets
Liquid Eurobond Euro Index” ETF with 10% weight and sold the “db x-trackers DJ Stoxx
Global Dividend 100 ETF”. The portfolio targets absolute return and has the EONIA index as
benchmark.