Focus on: Multi-Asset Funds in a low yield environment

Controlled Offensive – Risk Management with Shares

The fund is part of DWS' multi-asset total return family. This product series consists of mixed funds managed dynamically without benchmark indices and with integrated risk management. The individual portfolios have different risk-return profiles from which investors can choose depending on their risk appetite. The DWS ESG Dynamic Opportunities is the most offensive option and aims to generate equity-like returns over the medium term with significantly lower volatility.One of the "golden rules" of investing is to spread capital across different securities or several asset classes such as equities and bonds in order to reduce risk. The fact that this diversification continues to work in principle was demonstrated again as recently as the hot phase of the coronavirus crisis in the spring of 2020. In order to still be able to generate attractive returns in the face of negative real bond yields, the idea of increasing the equity component of multi-asset portfolios is obvious. "This makes it all the more important to deal properly with the higher risk this entails," says Christoph Schmidt, portfolio manager of DWS ESG Dynamic Opportunities, which is now worth around EUR 3.45 billion^[1].

The GICS sectors can have undesirable side effects

The most important prerequisite for constructing a balanced portfolio is the correct analysis of a stock's risk drivers. Schmidt considers the traditional classification according to the Global Industry Classification Standard (GICS) into eleven sectors to be of little use for this purpose. "Amazon is classified as a cyclical consumer stock and Alphabet as a communications service provider. Anyone hoping for diversification from the two stocks on the basis of this sector classification, for example against technology stocks, is likely to be disappointed," he says. Instead, Schmidt argues for a division into different thematic pots that would better reflect the characteristics of the stocks. "One concrete way is to classify them into the pots 'growth stocks and digital economy,' 'defensive stocks and infrastructure,' and 'cyclicals,' which is how we apply them in our portfolios," Schmidt says.

But allocating capital across these pots is about more than "naïve" diversification, he said, i.e. a simple equal weighting. "The reason for this is obvious: cyclicals would contribute disproportionately to portfolio risk because they usually conceal business models with a high sensitivity to economic developments," explains the portfolio manager. The task of ensuring balanced risk contributions from the three pots as well as avoiding unintended style impacts therefore requires the support of risk management.

Cyclicals as a portfolio hedge

The division into thematic pots can also be useful when dealing with interest rate risks, which is currently a very topical issue. Many equities from the "defensive stocks and infrastructure" pot are often used as bond substitutes, but tend to suffer in a scenario of rising yields. The same applies to the "growth stocks and digital economy" pot: Following the discounted cash flow logic, the market grants these stocks higher valuations when yields are falling, but there is a threat of headwinds when yields are rising. Certain securities from the "cyclicals" pot, on the other hand, often benefit in an environment of rising yields and can thus help hedge a portfolio.

"A good example of this was the situation in September and October last year. At that time, we had accentuated the cyclicals pot more, as an end to the uncertainties caused by the U.S. presidential election was foreseeable and news on the coronavirus vaccines was expected. The "risk" was thus a much more optimistic assessment of future economic developments," Schmidt recalls. In November, the sector rotation accompanied by rising interest rates actually began, which lasted until March 2021. In this respect, 'cyclicals' could actually compensate for headwinds in other thematic pots in certain scenarios and help to position a portfolio in a balanced way."

For further information please contact:

Sabina Diaz Duque                                        Reimar Salzmann
Tel. +49 (0)69 / 910 14177                             Tel. +49 (0)69 / 910 14191
Email: sabina.diaz-duque@dws.com             Email: reimar.salzmann@dws.com

About DWS Group

DWS Group (DWS) is one of the world's leading asset managers with EUR 880bn of assets under management (as of 30 September 2021). Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major asset classes and solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground-knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, which guides our investment approach strategically.

DWS wants to innovate and shape the future of investing: with approximately 3,500 employees in offices all over the world, we are local while being one global team. We are investors – entrusted to build the best foundation for our clients' future.