ETFs usually pursue a passive management approach. Their portfolio management aims solely to replicate the performance of a certain benchmark (e.g. an equity index). This does not require any analysis or selection processes for individual equities, bonds, or other assets, nor does it require risk management. This is because in the case of passively managed ETFs, the absolute performance of the ETF is usually irrelevant to the fund provider. Instead, the priority is to track the performance of the market/index that they represent as closely as possible. As a result, costs of ETFs are usually lower than those of actively managed funds.

In contrast, actively managed funds typically aim to generate added value for investors through active investment strategies and risk management, for instance through stock selection or asset allocation. This added value can be financial in nature (e.g. higher returns than a benchmark index or market average, or similar returns but with lower volatility) and/or non-financial in nature (e.g. higher ESG quality). Decisions are based on a comprehensive analysis for instance of financial and ESG criteria of the respective securities and market segments. Actively managed funds also require ongoing monitoring of markets, influencing factors and the fund portfolio, as well as active intervention by fund management where necessary.

Index-Selection-Equity combines the two investment styles.

Combining strengths with index selection equity:
Active fund of funds with a favourable cost structure and investments in equity ETFs

• As part of an active fund of funds management, the fund invests in equity ETFs.

• Targeted Investment decisions are made with the aim of outperforming the fund’s benchmark.

• The Index Selection Equity fund uses the MSCI All Country World Index (MSCI ACWI) as its benchmark. This equity index tracks the performance of stocks from 23 industrialised countries (90% weighting) and 24 emerging markets (which account for around 10% of the index).

• The fund offers both active management components and a favourable cost structure.

Investment strategy of the Index Selection Equity fund

• At least 50% and up to a maximum of 100% of the fund’s assets are invested in regional and country ETFs. The aim is to achieve the lowest possible deviation from the MSCI ACWI for the performance of this segment of the fund.

• Up to a maximum of 50% is invested in thematic ETFs, depending on the availability of attractive investment themes. The term "theme" is purposefully broadly defined so as not to exclude any promising ETFs. These might include ETFs that invest in specific countries or sectors, in small or medium-sized companies, or in the shares of particularly high-growth companies.

Active selection of ETFs and its impact on performance

The active addition of ETFs in the thematic segment of the fund’s portfolio aims to outperform the benchmark. This would not be possible with a purely passive investment (i.e. without this thematic segment) because passive ETFs usually inevitably underperform the benchmark index due to their management fees and transaction costs, which the benchmark does not incur. In contrast, the Index Selection Equity can perform significantly better, but also significantly worse than the MSCI All Country World Index.

Achieving a long-term above-average performance in this way is, of course, a considerable challenge. And it is particularly so in the current market environment.

Equity indices are heavily driven by a few very large stocks.

In developed stock markets (especially in the US), a trend has emerged in recent years that has now reached extremes: the strongest stocks and certain sectors (specific areas of technology, particularly artificial intelligence (AI) are significantly outperforming the rest of the stock market, in particular most small and mid-cap stocks. Many people are now familiar with the term of the "magnificent seven": seven stock market heavyweights that have been responsible for the lion's share of stock index gains in the US in recent years. While this trend cannot and will not continue indefinitely, it does pose major challenges for all active managers.

Ways to outperform in this market environment:

1. One could assign an even higher weight to these stocks in the fund’s portfolio than they have in the benchmark index. However, this is not advisable from a diversification and risk management perspective, especially since there is a high probability that this trend might break sooner or later, for all these market heavyweights or for some of them. Then today's stock market stars could become tomorrow's expensive flops. Weightings above a certain level are also not easy to implement because the Index Selection Equity fund cannot invest in individual stocks and instead has to find corresponding ETFs with very high weightings of these stocks. However, these will almost always contain many stocks that the fund management does not want to invest in.

2. One could search for promising investment themes that are rising as strongly as or even more strongly than the current stock market favourites. This is exactly what the fund management team at Index-Selection-Equity. does. Among other things, it has invested or continues to invest in themes such as digitalisation, cloud computing, healthcare, artificial intelligence and certain areas of AI.

The fund’s management is very flexible in its approach. If it spots that certain themes are no longer outperforming, it quickly divests itself of them.

This thematic portfolio currently accounts for around 19% of the fund’s assets, slightly below the midpoint of the of 0 to 50% range.

According to its investment strategy, the fund Index-Selection-Equity mainly invests in other investment funds. The fund exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.