2022 continued on from where 2021 left off — an increase in market volatility, and persistent concerns about the macro environment dominating headlines. With Russia’s invasion of Ukraine in late-February, volatility spiked further to a 12-month high in March. Energy and commodity prices continue to stay elevated, bringing to the fore greater risk of stagflation. Market risks are particularly heightened as sanctions on Russia have set off a ripple effect on the global economy. 

This geopolitical upheaval only adds to ongoing market concerns around the pace of central banks' rate hikes – investors are on alert, watching to see if this high-wire act can be executed without derailing global growth.

The US Federal Reserve in March finally approved a 25 basis point rate hike, its first interest rate increase in more than three years. The market rebounded — a clear sign that it had priced in a lot of negative news. Earlier this week, the Fed also indicated that it is prepared to raise rates by a further half percentage-point at its next meeting if needed, which again spooked markets. Sometimes they give, and then they take away, and the markets react accordingly.

Against this backdrop, the key portfolios constructed by Endowus have shown resilience when compared against benchmark indices. In this new monthly update, the Endowus Investment Office will take clients through portfolio performances, and how recent headwinds have affected returns across the various advised portfolios.

Endowus Flagship Portfolios

Endowus Flagship 100% Equity Portfolio, with its passive strategy, has delivered resilient returns against the broader market

Our Flagship Portfolios are broadly passive, globally diversified, and enjoy a factor tilt from exposure to Dimensional funds. These funds invest in the proven long-term factors of return, and include a slight tilt towards the value factor. With this, the 100% Equity Portfolio delivered resilient returns against the broader market (MSCI ACWI) and other market indices (such as the S&P 500).

The value investing style has made a strong comeback from last year, as investors turn cautious against growth stocks that may find it harder to hit future earnings expectations amid rising rates. This is well demonstrated by the sizeable outperformance of MSCI ACWI Value Index year-to-date. The factor driver of quality and/or profitability has also outperformed this year. 

Flagship Portfolios give investors broad exposure to global markets through a strategic and passive asset allocation. Our allocation strategy means that we largely track the global indices over time.

Endowus Flagship 100% Fixed Income Portfolio has proven resilient‍

With the volatility in the fixed income markets and the continued flight to safety, the 100% Fixed Income Portfolio has slightly underperformed the Bloomberg Global Aggregate Index, which allocates more than half of its holdings into safer securities issued by global governments and agencies. 

The 100% Fixed Income Portfolio consists of a more diversified basket of about 40% to government, and the remainder to corporate credit and other instruments. Still, it outperformed other segments of the market, such as the credit market as well as the emerging markets.

We recommend that most investors start with an allocation to the Endowus core strategies through our Flagship Portfolios. At Endowus, all core portfolios are globally diversified, have a strategic passive asset allocation (SPAA), and are low-cost in nature to take advantage of the broad market opportunities. This approach allows investors to generate long-term compounding returns.

Endowus ESG Portfolios

Endowus ESG 100% Equity Portfolio has more exposure to growth equities‍

ESG investing opportunities, such as in decarbonisation, healthcare, and renewable energy, often come from companies at the fast-growing stage of their life cycle. 

Since the start of the year through to mid-March, growth stocks have sold off  more sharply than value stocks, with the MSCI ACWI Growth Index (-11.1%) meaningfully underperforming the MSCI ACWI Value Index (-1.4%).  

Of all 11 sectors defined under the Global Industry Classification Standard, the traditional energy sector has been the only sector that is up since the start of 2022. Given its sustainability focus, the Endowus ESG Portfolio does not have exposure to this sector as opposed to the broadly passive Flagship or Factors Portfolios.

Endowus ESG 100% Fixed Income Portfolio has been resilient‍

Despite its higher allocation to corporate and emerging market bonds than the broad market, the core ESG Fixed Income Portfolio has delivered resilient performance, tracking closer to the broad market than the credit market.

The broad market, represented by the Bloomberg Global Aggregate Index, was down 4.3%. The credit market, represented by the Bloomberg Global Aggregate Corporate Index, was down 7.4%.

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Endowus Income Portfolios

All 3 Endowus Income Portfolios fared better than most relevant market indices

Stable Income Portfolio experienced headwinds from its relatively higher allocation to Asian corporate bonds. This was offset by exposures to  developed market holdings, including higher quality government, corporate and securitised assets.‍

Higher Income Portfolio showed slight outperformance that was driven by a lower allocation to Asian and EM bonds, as well as a more dividend-oriented equity allocation that proved more resilient than the broad equity market. ‍

Future Income Portfolio’s performance reflects its higher equity allocation. It initially suffered the largest drawdown across the three portfolios, before gaining from a subsequent rebound on the back of stronger equity market performance of late.

All 3 Endowus Income Portfolios continue to meet their expected payout targets despite the drop in price ‍

Negative returns across fixed income portfolios reflect mark-to-market losses from near-term bond volatility, on the back of many major central banks signalling their intent to raise interest rates meaningfully in 2022.

But the trades do not impact actual coupon payments and hence the distributed income of the underlying funds.

A higher interest rate environment could lead to higher income generation for investors in the long term ‍

Higher rates typically lead to higher income generation once initial market dislocations smooth over. Active fund managers are often able to a) buy oversold bonds on the back of knee-jerk selling by other market participants, b) hold current bonds to maturity, and/or c) reinvest proceeds into newly issued bonds offering higher yields.

This is reflected across the Endowus Income Portfolios, with the yield to maturity of most of the underlying bond funds across portfolios creeping up over the last 2 months.

Endowus Cash Smart Portfolios

Cash Smart Portfolio returns remain correlated with their target risks, with the institutional cash deposit and money market funds more stable while fixed income exposures continue to fall with market movements. ‍

The Cash Smart Secure Portfolio posted positive returns year-to-date, in line with what is expected from a portfolio consisting of high-quality institutional bank deposits and ultra short-duration money market funds.

The Cash Smart Enhanced and Cash Smart Ultra Portfolios were not immune to further declines, as volatility across fixed income markets extended into the first quarter of 2022, with short and long-term yields rising to multi-year highs.

The Endowus Cash Smart Portfolios are exposed to fixed income securities that mature within short durations of less than 2 years. This makes them more defensive than fixed income products with longer durations, especially as interest rates rise. However, the strategy does not completely shield them from market volatility. For those looking for a no-risk Cash Smart yielding portfolio, they should choose Cash Smart Secure which has not generated negative returns in any given week since inception, generating steady yield. The Lion Global Enhanced Yield Fund anchors the Cash Smart Secure Portfolio.

‍Investors are compensated for heightened market risk and rising interest rates through higher yields 

Newly revised projected yields have crept up across the different Cash Smart solutions and a gradual rise in projected yields is expected; rising interest rates means funds from maturing bonds can be reinvested at a higher rate.