This Is How Investors Are Well Advised
Guest commentary by Georg Höhne, MA, EFA® in ÄRZTE EXKLUSIV | March 2023
Last year was anything but positive for most investors. Extremely high inflation made it practically impossible to preserve real wealth. Georg Höhne, MA, EFA®, managing partner of KRONOS Advisory GmbH, provides insight into how investors can prepare for current and future challenges.
Can conservative investments also be risky?
2022 showed that conservative investors with high bond exposure lost about the same as investors with 100% in equities. On average, global equity and bond markets were down more than 10%. This has only occurred three times in the past hundred years.
Equity investors are generally aware of these risks. For conservative investors, however, the result is often a shock and was certainly unexpected. For years, we have warned that seemingly conservative investment structures can actually be highly risky — and that broader diversification is necessary to achieve more stable and ultimately better results. Unfortunately, many investors tend to expect past results to repeat in the future, instead of asking: What drove past performance, and how likely is it that these drivers will remain?
Can you elaborate on the concept of “drivers”?
As long as interest rates fall, bond prices rise — meaning good performance for bond investors. Rising interest rates inevitably lead to losses. How likely was it that the ECB would further lower rates from minus 0.5%, compared to the risk of a policy reversal?
Austria issued a 100-year bond in 2017. Due to falling interest rates, it rose to 224% by the end of 2020. On October 21, 2022, its value had fallen to just 68.05%. That level of fluctuation exceeds that of almost any stock.
Inflation is expected to stay above the 2% target, the economy continues to struggle, and interest rates are rising. What should investors do?
Seek advice from product-independent consultants and diversify far beyond savings accounts, gold, bonds, and stocks.
How can investors diversify more broadly?
Neutral advisors with the right expertise can provide access to private market investments such as private equity, private debt, diamonds, or infrastructure. Naturally, each strategy is tailored to the investor’s financial situation, goals, and preferences.
Large institutional investors, such as the endowments of elite U.S. universities, have radically changed their strategies over recent decades. While they used to invest the majority of their assets in traditional classes like equities and bonds, they now allocate over 60% on average to alternative, non-bankable investments. This shift has significantly improved performance while reducing total portfolio risk and volatility.
What role does real estate play for investors?
In my view, the coming years will be much more challenging for real estate investors. With steeply rising interest rates, increased construction and operating costs, and stricter capital requirements from banks, we can no longer expect the same positive development as in recent years.
What is your advice to investors?
Selecting the right asset classes and building a sound overall structure are key to preserving value in one’s investments. Access to non-bankable asset classes helps reduce risk and optimize returns. Given the growing complexity and variety of options on the market, careful product selection is essential.