6:12 AM, September 30, 2023

Time for a change of investment strategy?

Banking & Finance
| The European | 5 August 2023

Michael Kohlhase of Dr. Kohlhase GmbH puts today’s volatile global economy into context, and examines whether buy and hold is finally history

If you prefer stock picking or day trading in your investments, the following lines may not be of interest. However, if like me you have been following a buy and hold strategy for a long time, things could get interesting. 

In our company’s history, the bond sector has always had a special significance. After all, my father founded the company when there were still yields of 6% plus on European government bonds. Equities were considered boring, and barely attracted the same attention – at least not if you were risk-averse and didn’t want to get into the situation of having to sell at a loss. Short-term interest rate changes were not to be feared either. But that was 1980 and times were about to change. 

First, corporate bonds became more exciting. Following the collapse of the Eastern Bloc in the 1990s came the euphoria of a Europe free from conflict. This gave way to more streamlined global trade, the opening of international stock exchanges, and an initial run on equities. Our clients increasingly asked for equity investments, and true to the mantra “equities beat bonds”, you just had to stick with it long enough. We complied, although cautiously, because we loved bonds and mainly invested close to the index. We didn’t want the opportunity of a single stock, we wanted the opportunity of the market. And we invested with a buy and hold strategy, as we did with bonds. After all, we were afraid of not being invested when the market was rising. Besides, it is easier to justify a result to clients based on market performance. 

Until the early 2000s, we felt vindicated in our cautious approach. The 9/11 attacks and the bursting of the dot-com bubble showed many people that the risk of shares is different from that of bonds, and that markets can develop their own dynamics through external circumstances. So we repositioned ourselves. We wanted to make the equity components more variable, added higher-yielding corporate bonds and believed we were well positioned for the future. 

Things turned out differently again! Due to the flow of cheap money and the falling interest rates as a result of the financial crisis of 2007, we had to accept more risk in the bonds (quality or maturity) in order to still generate income, although at the beginning we were still able to profit from falling yields through price gains. 

In retrospect, it was the eve of an equity decade and I was often asked during that time whether, or why, I still had a focus on bonds. Many said that equities would be much more exciting and profitable after all. And yes, they were all right! However, they all did not forecast the Coronavirus pandemic and the consequences of the war in Ukraine. Central banks have only put up interest rates hesitantly, and not to an extent that makes economic sense. The global economy is reaching boiling point, and Europe is suddenly investing in military equipment again – the euphoria of the mid 1990s feel like a distant memory. 

As a result, I believe we will see a decoupling of the stock markets from reality. The whole situation will be coupled with very high volatility and, in the bond sector, with increased defaults. 

I have been working for my clients for over 20 years and it has never been easy, but we’ve managed the various ups and downs pretty well. There will always be a need to update your strategies, as they may not work in the future due to potential unforeseen events and market reactions. You must keep close to the markets and act appropriately. So buy and hold is finally history – whether it’s shares or bonds.

About Dr. Kohlhase GmbH

Dr. Kohlhase GmbH is an independent asset management company based in Munich. Run by Michael Kohlhase (above), the company was founded in 1980 by Michael‘s father Dr Detlef Kohlhase and specialises in asset management and investment funds. It also coordinates sales and marketing for its own funds. As a family business, the focus is on liquid funds with a conservative investment approach. The primary investment objective is long-term capital preservation and growth. The product range is suitable for private and institutional investors. Dr. Kohlhase GmbH places particular emphasis on fixed-income investments, an area in which they have a good reputation.

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