Each week sentix Asset Management surveys 5,000 investors , mostly in German-speaking countries, on their assessments of different markets Source: istockphoto.com/MangoStar_Studio

Smart investing with behavioral finance

Author: Patrick Hussy, Managing Director sentix, und Timo Lüllau

Humans behave predominantly based on feelings rather than rational thought. This mood-dependent behaviour underpins the concept of behavioural finance, which sentix Asset Management has also endorsed.

Manfred Hübner und Patrick Hussy, Managing Directors sentix Asset Management Source: sentix

In an interview with Universal-Investment, the managing director of sentix Asset Management, Patrick Hussy, explains how psychology affects the investor and how these aspects feed into the advice of the sentix Total Return -offensiv- fund (DE000A2AMN84) and the sentix Risk Return -A- fund (DE000A2AMPE9).

Universal-Investment: Mr. Hussy, there’s some evidence to support your behavioural finance approach during volatile market periods. What advantages does this approach offer in particularly volatile and eventful times, like now?

Hussy: In times when interest rates are zero or negative, investors are much more sensitive to price fluctuations. The markets, which have become very political, inevitably cause mood swings because investors enter negative territory very quickly. Many analytical methods have to surrender in such an environment. With our proprietary sentix indicators, we can determine these sentiment fluctuations exactly and make use of them. For this purpose, we survey 5,000 investors each week, mostly in German-speaking countries, on their assessments of different markets so that we can better understand the investor’s psychology. Using behavioural finance, we tap into an alternative source of return for our customers. Our objective is to identify favourable capital market opportunities in order to implement them successfully in the funds that we advise on. In this way, we set ourselves apart from market movements, but achieve lasting added value for the investor with our alternative approach. Another advantage is that we stabilise our investors’ portfolios in the long term by using this investment style.

Using behavioural finance, we want to tap into an alternative source of return.”

Patrick Hussy ,
sentix Asset Management

Universal-Investment: What questions do you ask your survey participants? How do these answers feed into your data?

Hussy: We ask the investors about their expectations for market developments, about political topics and about their expectations for the economies in various regions of the world. Since we began our sentix capital market survey 16 years ago, a very dense network of valid data has emerged from this. Using the survey responses, we work out indicators for asset classes, markets, industries and economies. In this way, we can analyse the capital market investor very precisely. When aggregating the signals, we pay special attention to the following factors: sentiment, investor positions and market prices. This way, we can determine market changes very early and identify investor behaviour patterns that appear repeatedly over time. These research signals must then be implemented in portfolio management individually. Depending on the fund’s investment objective, appropriate position sizes are determined and the suitable instruments are selected. If one wished to aptly describe our investment process, then contrarian thought and consistent action are among our success factors.

Universal-Investment: The aggressive version of the Total Return fund provides the investor with an opportunity for higher returns. How do you realise that objective compared with the defensive variant of the sentix Total Return fund?

Hussy: For the aggressive version of sentix Total Return, all signals have a weighting that is twice as large compared with the defensive variant. That’s how the investor gets the chance to double the alpha and therefore to share the opportunity for higher returns. We want to earn money during every capital market phase. We try to anticipate the next market movement and take advantage of both rising and falling prices. As far as the asset classes are concerned, there is no restriction. We invest in equities, bonds, currencies and selectively in commodities.

All of our Total Return funds have a price floor. In the case of the sentix Total Return -offensiv- fund, this limit is initially 80 percent of the first issue price and is adjusted annually at the end of the calendar year. The year-end price is the new starting price for the new price floor of 80 percent. This safety net isn’t guaranteed, but we monitor it very strictly. With this risk management approach, we want to give every investor some planning certainty – even in uncertain times. Those investors seeking an even greater emphasis on certainty can also switch to the Total Return -defensiv- fund at any time. The price floor on this fund is 90 percent.

Universal-Investment:  In contrast to the Total Return funds, the sentix Risk Return -A- fund has no floor value. Why do you dispense with it in this case? How can you optimally manage the risk on this fund?

Hussy: The Risk Return -A- fund has a different defined objective. On the one hand, it involves a pure equity concept. Whoever wants to invest astutely in equities, and do so with much lower risk in the long term, is well served in this fund. The maximum utilisation of opportunities from our approach is the main focus in this mandate. Therefore, we also do without a price floor because we want to take advantage of situations in a courageous way when others are fearful and are literally dumping their stocks.

Value-driven investments are therefore available if the risk is adequately rewarded. This is where behavioural finance comes in. If investor behaviour is dominated by fear and there is little appetite for risk, it is necessary to buy at a low price. Conversely, fund holdings are reduced when investors become reckless and are in a jubilant mood. Anticyclical investing and the courage to take risks are therefore needed. When there are negative signals, the equity component of the Risk Return -A- fund can even be wound down completely. In order to benefit from markets that decline over a long period, short positions can also be taken. Due to the long-term experience gained from our approach, we are convinced that you don’t have to be invested in the equities market permanently in order to share in the potential for returns from equities. In the sentix Risk Return -A- fund, we strive for an annual return target of 7.5 percent. The fund’s volatility of about 7 percent should be well below the volatility of equities.

Universal-Investment: Equities appear to be the only alternative at the moment to achieve an adequate return. Is this also reflected in your survey results and signals?

Hussy: The signals were extremely positive for equities at the turn of the year. All in all, they even looked better than investors expected. In particular, global economic expectations fuelled the demand for dividend stocks. For this reason, we have proposed a 2017 peak of up to 14,000 points on the Dax. In the past two weeks, newly elected US President Donald Trump caused considerable damage to confidence with his first official actions. We are therefore putting on the brakes with equities at the moment, even though the potential for stocks still remains high. However, this example clearly shows how fast politics can produce a spirit of optimism and what immense potential for disappointment exists if the ‟wrong Twitter message” comes from Donald. In portfolio management, you have to be able to respond quickly and resolutely to these turnarounds. Risk management remains the supreme discipline in 2017 as well.

Therefore, 2017 is likely to be a year of two faces, which means that purely passive equity investing over the whole year would probably be unrewarding. It will become important to preserve returns midway through the year. At that point, investors should be ready to gear up for anticyclical purchases in the bond market. 

For more sentix Asset Management funds that are advised based on the behavioral finance approach, see the Universal-Investment Fund Finder

Author: Patrick Hussy, Managing Director sentix, und Timo Lüllau
Date of issue: 2/21/2017