Endowus August 2024 Performance Review

The VIX, or the CBOE Volatility index, hit 38.6, a one-year high on 5 August, following the release of a weaker-than-expected job report.

Very quickly though, in a number of days, the VIX calmed and came back down, now hovering in the 14 - 17 range, less than half of its level on 5 August. 

The reasons for the spike in volatility have been discussed in the previous month’s commentary. This episode however serves as a good example as to how resilient markets are and the futility of market timing.

The calm after the storm

The equity markets ended August on a positive note, with Europe returning 3.94%, outperforming the other major markets. 

The US came in relatively weaker with the S&P 500 Index gaining 2.4% for the month. Even Japan’s TOPIX, which declined by 20%, rebounded and ended the month with a slightly positive return - 0.3% in USD terms. Emerging markets, once again, lagged their developed counterparts, by a slight margin.

In terms of style factors, there was a rotation to value in the US with value stocks outperforming growth stocks by almost 1%. In developed markets outside of the US, growth was still very much in favour. 

In emerging markets, value and growth were almost neck to neck. Small caps in EM outpaced their larger peers, while small caps in the US had a difficult month, generating a slightly negative return.

The world awaits the September FOMC meeting

(Editor's note: The Federal Reserve put rates 50 basis points lower in the FOMC meeting. For more, watch our webinar replay here.)

August was a volatile month for fixed income but most major fixed income indices ended the month in positive territory. 

The US market did better than other major economies as investors expected the US Federal Reserve to start cutting interest rates soon, even though there were concerns about the health of the US economy. US corporate bonds, especially riskier “high yield” bonds, performed better than safer “investment-grade” bonds.

After the Fed’s meeting at the end of July, its chairman, Jerome Powell, hinted that they might start lowering interest rates in September. The possible rate cut, combined with weaker manufacturing indicators and US job data caused a decline in yields. Bond prices and market volatility spiked to levels not seen since 2020.

In other countries, bond markets saw smaller gains. Weak manufacturing data in Europe pointed to a downturn in the economy, so expectations for interest rate cuts in the Eurozone rose, with a 0.25% cut from the European Central Bank expected in September.

In the UK, the Bank of England cut interest rates on 1 August. With falling unemployment and improved job data, it looks like the UK economy is recovering. Markets are expecting three more interest rate cuts in the UK over the next six months, with the first likely in November.

The US dollar weakened against other major currencies, reflecting expectations of more significant rate cuts in the US.

The S&P GSCI declined again in the month of August. Within the index, the industrial metals, precious metals and agriculture sub-sectors gained, albeit modestly. Energy, as a whole, was the weakest sub-sector. 

Key performance highlights for the Endowus Portfolios in August

• The Flagship 100% Equity Portfolio (after fund fees) had a negative month, as the portfolio’s slight overweight position in the EM detracted from returns. 
• The Flagship 100% Fixed Income Portfolio generated positive returns in August but slightly underperformed the broad fixed income market. Most of the fixed income funds underperformed the benchmark except the PIMCO GIS Emerging Market Fund. 
• The fixed income sleeves of the Income Portfolios outperformed the benchmark, with Fidelity Asian Bond Fund and AB American Income Fund leading the charge. 
• All three Cash Smart solutions continued to generate positive returns.

Endowus Core-Flagship Cash/SRS Portfolio

The 100% Equity Portfolio underperformed the broad equity market in August

• In SGD terms, both the 100% Equity portfolio and the global equity market had a negative month.
• The Equity portfolio’s slight overweight in EM detracted as EM underperformed DM. The Dimensional Global Core Equity Fund also detracted from relative performance as its value and small cap bias were both challenged during August. In relative terms, the weakest performer in the equity line-up was the Dimensional Pacific Basin Small Cap Fund which has more than 50% in Japan.

The 100% Fixed Income Portfolio generated positive returns in August but underperformed the broad fixed income market.

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — generated positive returns as yields fell across the board.
• Most of the fixed income funds underperformed the benchmark with the exception of the PIMCO GIS Emerging Market Fund. The Dimensional Fund was able to almost keep pace with the benchmark while the PIMCO EM Fund benefited from its overweight allocations to Ukrainian quasi-sovereign debt and Ecuadorian sovereign debt as well as strong security selection in certain sectors.

Endowus Core-Flagship CPF Portfolio

Note: The Flagship CPF Portfolio allocations were updated in July with three new funds from Dimensional. 

The 100% Equity Portfolio underperformed the broad equity market in August 

• The portfolio’s overweight in emerging markets was a headwind as EM underperformed DM. The weakest performers in the equity line-up were the Dimensional Emerging Markets III and the Schroder Global Emerging Opportunities funds.

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The 100% Fixed Income Portfolio had positive returns in July and outperformed the index by a slight margin

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index —were in positive territory as yields fell across the board.
• The biggest contributor to relative outperformance was the Eastspring Singapore Select Bond fund. The United SGD fund underperformed in August because of its shorter duration position. Funds that had longer duration positioning did better as they were able to better capture the declining yields and higher prices in August.
  

Endowus Income Portfolios

The Stable Income Portfolio delivered positive performance, outperforming its benchmark by 0.1 percentage points in August 

• The portfolio’s allocation to Asian and emerging markets contributed positively to performance as both markets outperformed in August. 
• Most underlying funds outperformed the benchmark during the months with Fidelity Asian Bond Fund and AB American Income Fund leading the charge. 

The Higher Income Portfolio outperformed the 20-80 benchmark by 0.6 percentage in August

• Both the fixed income and equity components outperformed the respective market benchmarks. 
• Its fixed income allocation benefited from allocation to Asian and emerging markets as well as high yield bonds. 
• Its equity component benefited from its allocation to real assets via Blackrock BSF Global Real Assets Securities Fund as the fund rallied 4.2% in August on the back of rate cut expectations. Additionally,  the underlying currency hedges helped as USD depreciated further against SGD in August and many of the underlying funds are hedged to SGD, cushioning the funds from losses on the currency side. 

The Future Income Portfolio performed in line with the 40-60 benchmark in July 

• Its fixed income component outperformed benchmark due to reasons similar to the Stable Income portfolio. 
• Its equity component benefited from the currency hedges as well as its slightly overweight position to European equities. 

All three Income Portfolios are achieving their payout targets 

• Actual payouts have remained stable despite the fluctuation of prices across the three portfolios. Volatility in price returns will result in mark-to-market changes (decrease or increase) in the portfolio value, but will not impact the actual coupon payments or dividend payouts from the underlying funds. 
• Yields in the fixed income market have risen meaningfully following the increase in global interest rates, creating a higher yield environment for income-seeking investors. 
• The changing interest rate environment has resulted in a divergence between the respective payout yields of Stable Income and Higher Income. This divergence is a reflection of the enhanced ability of investment grade flexible income funds to generate income in the current environment of elevated interest rates, compared to high yield and equity funds. These dynamics were pivotal in the Recommended Portfolio Change in November 2023, where we improved the credit quality of all three portfolios while maintaining the target payout levels. As we continue to monitor these evolving market conditions, it's crucial to remember that the Higher Income Portfolio is strategically crafted to yield a higher total return than the Stable Income Portfolio over the long term.

Endowus Cash Smart Portfolios

Cash Smart Secure continued to generate stable and positive returns

• The Secure portfolio maintained its stable return profile, posting a 0.30% gain in August 2024. 
• This performance could be attributed to the continued positive returns from both the underlying funds, Fullerton SGD Cash and LionGlobal SGD Enhanced Liquidity; each contributing 0.3%. 
• It is worth noting that the total returns of the underlying funds are showing signs of reduction as market yields decline with expectations around Fed rate cuts. Investors seeking higher yields may consider increasing their duration exposure through Cash Smart Enhanced or Ultra.

‍Cash Smart Enhanced driven by additional boost from Asian credit

• Cash Smart Enhanced generated a return of 0.44% in August.
• This performance was supported by steady returns from the Fullerton and LionGlobal funds, with notable contributions from the United SGD Fund.
• The portfolio's allocation to slightly longer duration assets and credit components provided an additional boost to returns over Cash Smart Secure.

Cash Smart Ultra benefiting from allocation into longer duration and credit components

• Cash Smart Ultra achieved a return of 0.45% in August.
• The highest contribution again came from the PIMCO Low Duration Income Fund, which benefited from its allocation to securitized assets amid risk-off sentiment. The portfolio also saw positive contributions from  the LionGlobal Short Duration Bond Fund, Fullerton Short Term Interest Rate Fund, and United SGD, which benefited from the positive credit environment.
• The portfolio's strategic allocation to greater duration and credit components compared to Cash Smart Secure and Enhanced provided additional returns, making it well-suited for liquidity management over the intermediate to long term.

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