Endowus Portfolios Performance Update (April 2022) — The 4Rs

Resilience amid a downturn

• Amid this, the key portfolios constructed by Endowus remain resilient because they are well-diversified in terms of sector, geographical and factor exposures. Each portfolio holds thousands of individual securities, helping to mitigate the idiosyncratic risks associated with investing in individual stocks. 
• In this downturn, take heart: building wealth through investing in markets is a matter of time and discipline. Data shows that investors who stay in the markets stand a much better chance of positive gains. We only have to look back at the Covid-induced market collapse in March 2020. Then, panicked trading resulted in bad outcomes and those who stayed invested or maintained discipline in their monthly plans had much better outcomes. 
• The S&P 500 index was started nearly 100 years ago. Tracking its performance shows that time and time again, investors who try to skip the worst days by exiting the market amid a downturn risk selling at a low, and being too late to capture the biggest bounce. The best performing days often follow the worst performing days and the optimal way to scoop up the strongest gains in that same period is to stay invested. Even buying into the S&P 500 even at the peaks — i.e., the worst possible days — over 20 years through to Dec 31, 2018 would have returned 6.9% annually, reports show.
• Of the 24 market corrections (Nov 1974 - mid-February 2020), just five became bear markets (when markets fell by at least 20% from a recent high). The average bear market stretches about 15 months; the average bull-market run goes for 68 months. American economist Paul Samuelson famously quipped that the market has correctly predicted 9 of the last 5 recessions. 
• While we cannot predict whether markets will be in a bear market or whether the economy will record a recession, staying invested amid a downturn can let time do the work for you.

Endowus Flagship Portfolios

Endowus Flagship 100% Equity Portfolio held up well against the broader market

This Flagship Portfolio leans slightly in favour of the value investing style and offers an overweight to smaller cap stocks relative to the broad equity market index (MSCI ACWI). Its value tilt pushed the portfolio to an outperformance of more than 1% over its benchmark in April. 

As growth stocks continue to be sold off, as exacerbated by disappointing Q1 results from some of the Big Tech names, investors have turned to value stocks that typically have been more resilient amid rising inflation.

Despite the recent correction in growth stocks, the valuation spreads between value and growth stocks remain wide. In an inflationary environment, value stocks have traditionally performed better than growth stocks. We would expect the Flagship Portfolio to still outperform if this continues to hold true.

Endowus Flagship 100% Fixed Income Portfolio proved resilient

Fixed income portfolios performed better than equities and provided some resilience to portfolios in a falling market environment as a source of diversification. But it was another month of negative returns for both assets. 

This portfolio has been more disproportionately impacted by the performance of emerging market (EM) bonds. The slight overweight in EM bonds, amid continued volatility in the fixed income markets, led the 100% Fixed Income Portfolio to underperform the Bloomberg Global Aggregate Index.

The Bloomberg Global Aggregate Index allocates more than half of its holdings into investment grade securities issued by global governments and agencies. By comparison, the portfolio holds more than half of its assets in corporate credit and other instruments, with the rest in government securities.

Endowus ESG Portfolios

Endowus ESG 100% Equity Portfolio performed in line with the broader equity market

The portfolio’s performance in April was in line with the broader equity market index (MSCI ACWI). As ESG investing opportunities typically come from fast-growing companies, the ESG 100% Equity Portfolio leans towards the growth style. 

It has been surprisingly resilient compared with other growth sectors. In fact, it has outperformed the MSCI ACWI Growth Index, highlighting the value of our asset allocation and fund selection approaches. That said, it underperformed the Endowus Flagship Portfolio due to its growth bias. 

The portfolio dodged weaker performance with its underweight to the worst-performing communication services sector — which in turn reflected the weak performance from info-communications names such as Facebook, Alphabet, and Netflix. The portfolio’s sustainability focus also means it would not capture gains in the energy sector, which benefits from rising oil prices. 

Endowus ESG 100% Fixed Income Portfolio outperformed the benchmark

Despite its higher allocation to corporate and EM bonds, the core ESG Fixed Income Portfolio delivered resilient performance, tracking the Bloomberg Global Aggregate Index closely in April and year-to-date. The portfolio benefited from its shorter duration positioning when compared against the benchmark; exposure to green bonds added a nudge to performance.

Endowus Income Portfolios

All 3 Endowus Income Portfolios held up well against market indices

• The Stable Income Portfolio tracked the benchmark in April, with the portfolio’s shorter duration supporting performance. 
• Higher Income Portfolio’s overweight in real estate and infrastructure sectors provided a buffer against a larger exposure to high-yield and corporate bonds.
• The Future Income Portfolio held up despite its higher equity allocation. This reflects the mix of high quality and lower duration exposure in fixed income, and the allocation to European equities and dividend-oriented equities. ‍
• All 3 portfolios are still delivering at the higher end of the income payout range

Actual payout remains the same despite the negative returns across the portfolios. Negative returns do not affect actual coupon payments or dividend payout from the underlying funds. The yield to maturity of most of the underlying bond holdings and the latest dividend yield of the equity holdings have risen since inception of the portfolio. 

Higher interest rates cause short-term dislocation in an investor’s fixed income portfolio. But in the long term, a higher interest rate environment means investors can have their proceeds reinvested in higher yielding instruments. This sets the stage for higher income generation for investors seeking a more robust income payout.

Endowus Cash Smart Portfolios

Cash Smart Secure held up well again; Enhanced, Ultra stayed in negative territory ‍

• The sharp falls in fixed income markets spilling over to short duration bonds has been a continuing theme. The safer Secure Portfolio, without bond exposure, has continued to generate good positive yield, while Enhanced and Ultra Portfolios are showing negative returns due to rising interest rates. 
• The Secure Portfolio has done better than the reference interest rate for interbank lending in Singapore, SIBOR (Singapore Interbank Offered Rate), on a comparative 3-month and 6-month basis. Its mix of institutional cash deposit and ultra-short duration money market funds has made it more resilient than other fixed income securities.
• With losses in the fixed income markets extending into April, the Enhanced and Ultra Portfolios recorded negative returns. The drags came mainly from exposure to US Treasury bills and Asian fixed income markets.

Fund managers of the underlying funds have shortened overall duration in the funds, decreasing sensitivity to interest rate movements. A shorter duration portfolio typically is more resilient in periods of high volatility.

Despite the negative returns, rising interest rates offer one silver lining. As central banks around the world raise interest rates, the underlying funds are able to reinvest the coupon payments and cash returned from any maturing bonds into higher yielding bonds. This is reflected in the increased projected yields. If interest rates peak, the headwinds of performance are set to dissipate for the Enhanced and Ultra Portfolios. 

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