Research

Inflation is on the rise, but that may just be due to technical issues, such as tax-increases. The additional money supply created by digital currencies is already as high as all cash holdings in Euro combined. Whatever that should tell us, we prepare an investment account with our SENSIS analysis for inflation and although most interest rate sensitive bond and funds have already been sold, there are some surprising results.

The sensitivity of the NiP Kapitalerhalt portfolio to bonds, i.e. government bonds, Pfandbriefe and corporate bonds is close to zero or even negative (-0.23) in relation to corporate bonds, so there is no need for action right now.

On the other hand in the NiP Ausschüttung portfolio, the sensitivity to government bonds in euros is still 0.16. I.e. when government bonds, e.g. the Bund future, fall by an average of 1%, then the portfolio loses about 0.16%. You can also read it like this: 16% of the portfolio volume is 1:1 linked to government bonds or directly invested.
Sensitivities were measured with the SENSIS model in a 12-month simulation (Monte Carlo, 20,000 scenarios, non-normal distribution, variable correlations). The SENSIS reflect long-term trends in correlations. Individual cases may turn out differently, but if stocks are slightly negatively correlated to corporate bonds, then bonds would fall slightly when stocks rise and vice versa – you never know for sure, they are averages over larger time periods.

A well diversified portfolio should have sensitivities below 30% – or even less

Two charts illustrate the results: The bar chart gives an overview of all important sensitivities, i.e. what happens to the portfolio if one of the asset classes increases by 1%. The sensitivities can also be understood like portfolio shares after deduction of diversification. I.e. the stock ratio is between 25% and 30% , the government bond ratio is about 16%, corporate bonds are almost 0%, i.e. their specific risk is compensated by government bonds and stocks. We still get the same returns with slightly lower, because better compensated risk.
The second chart shows the sensitivities to government bonds only, sorted by the physical portfolio weight per security, which is the individual sensitivity of the security multiplied by the weight of the security in the portfolio. Some of the securities have higher sensitivities to government bonds, but are weighted lower in the portfolio due to risk budgeting. Taking the weighting into account, the lower the sensitivity and the lower the weighting, the lower the impact of government bonds on a security in the portfolio – in total, we call this the „contribution to government bond sensitivity in the portfolio“ in the second chart.

This clarifies how to reduce the government bond, i.e. interest rate risks in the portfolio. With even a negative sensitivity, we could generate additional returns when interest rates rise – theoretically. Growth stocks thus have a negative sensitivity. In reality, however, one should not rely on statistics only, but closely monitor the markets – especially in the short term. In the long term, i.e. beyond 12 months however this could be the right strategy against increasing inflation.