The "I" Word

If Jerome Powell says “inflation” 46 times in a short eight-minute speech, it’s safe to say he’d like the American consumer to get the message. And it’s this: The US Federal Reserve is resolutely focused on taming red-hot prices. On 26 Aug 2022, his Jackson Hole speech to drive home that point also triggered a sell-off. 

As investors vacillated between hopes and fears of what an aggressive rate hike path will mean for market performance, markets pushed higher. But as we know now, the gains were short-lived. As August US CPI numbers came in at 8.3%, shooting above consensus, markets rotated back to their bearish state. On 13 Sept 2022, Wall Street slumped the most since June 2020 on fears that inflation remains a painful problem. 

Jekyll and Hyde

The flip-flops in just over two weeks tell us the “I” word will still dominate investors’ concerns. 

To rein in inflation, the Fed will have to raise rates to curb consumer demand by making it more expensive to spend money. A big question remains as to the extent that all these rate moves will hurt the economy. The latest inflation print has set off a fresh round of panic that the Fed will have to raise rates even more aggressively — the upcoming hike at the 20-21 Sept FOMC meeting is expected to land at 75 basis points (bps).

How are investors to respond to the Jekyll and Hyde nature of the markets in 2022? The reality is that while investors are trying to second-guess the Fed’s next move, there is less thoughtful care about whether a single hike at 50bps or 75bps is going to make a dramatic difference.  

No one can predict the bottom of markets either. The advice from Endowus in these times stays the same, in spite — and because — of the current volatility. Focus on your goals and not the movement of markets. Stick to your regular investment plans to improve your probability of success. Stay diversified and avoid trying to time the market.

Key performance highlights for the Endowus Portfolios in August

• Endowus Flagship Portfolios outperformed their benchmarks in August with both the equity and fixed-income segments outperforming the broad equity and fixed-income indices.
• The Core ESG equity portfolio’s meaningful growth tilt was a detractor as value stocks, once again, outpaced growth stocks. The fixed income portfolio’s performance was a different story as it outperformed the broad fixed-income market.
• All three Income Portfolios had strong relative performance versus the broad composite benchmarks. Most importantly, the payouts remained consistent and, with rising interest rates, yields continued to move higher. 
• The Cash Smart Secure and Ultra solutions posted positive absolute returns in August, while the Enhanced Portfolio was flat for the month. As with the Income Portfolios, projected yields for the Cash Smart solutions have continued to increase with the rise in interest rates.

Endowus Flagship Portfolios

This is the first full month of performance since the Amundi Prime USA Fund and Amundi Index Global Agg 500m Fund were added to the Flagship portfolios. These index funds provide exposure to the broad asset classes in a diversified manner, at a low cost.

Endowus Flagship 100% Equity Portfolio outperformed the global equity market in August

• In the equity markets, emerging markets proved to be the lone shining star in a month of disappointing returns from various regions. The MSCI All Country World Index (ACWI), considered a proxy for global equity markets, declined 2.7% while the MSCI Emerging Markets (EM) Index posted a small gain.
• The Endowus 100% Equity Portfolio benefitted from slight tilts to value and small caps, as value stocks outpaced growth stocks and small caps outperformed large caps in August. The slight overweight to emerging markets also contributed to relative outperformance.

Endowus Flagship 100% Fixed Income Portfolio outperformed the global fixed income market

• Yields rose once again amid continued hawkish sentiment from central banks. Inflation remained uncomfortably high even though it had moderated in the past two months. Bonds sold off across the board, in response to the rise in yields.
• The Endowus 100% Fixed Income Portfolio’s relative overweight in credit and high yield proved to be a boon, as high-yield and corporate debt did better than investment-grade and government bonds in August.

Endowus ESG Portfolios

The ESG 100% Equity Portfolio underperformed the benchmark in August

• The ESG 100% Equity Portfolio underperformed the MSCI ACWI in August, with a -4.4% return. Much of this underperformance was driven by the portfolio’s tilt to growth stocks. The underlying funds in the ESG portfolios tend to have a growth bent, and this style tilt has been a major detractor in 2022.
• The underlying Schroder funds performed in line with the benchmark, but overall, the Mirova Global Sustainable Equity Fund proved to be a major drag on the portfolio’s performance. 

The ESG 100% Fixed Income Portfolio outperformed the broader fixed income market

• The underlying funds in the ESG 100% Fixed Income Portfolio were less affected by the rising interest rate, given their shorter duration, and that helped relative performance. However, some of this positive impact was negated by the portfolio’s exposure to government bonds as those were some of the worst performers in August.
• Even though the PIMCO GIS Climate Bond Fund had a challenging month because of its higher exposure to the high-yield corporate credit segment, it was still able to deliver a performance in line with the benchmark.

Endowus Income Portfolios

The Stable Income Portfolio provided defensive returns in August 

• Exposure to emerging markets and Asian fixed income via the Neuberger Berman Short Duration Emerging Market Debt Fund and the Fidelity Asian Bond Fund positively contributed to returns. 
• In contrast to the previous month, exposure to US high-yield bonds through the AB American Income Portfolio was the biggest detractor in the portfolio, as the hawkish tone from the Fed pushed yields higher. 

The Higher Income Portfolio performed in line with expectations and fared well against benchmarks

• Fixed-income exposure to both emerging markets and Asia contributed to relative performance, similar to the Stable Income Portfolio.
• The BSF Global Real Assets Securities Fund was the biggest detractor for August, as the listed global real estate and infrastructure sectors detracted sharply on the back of a more hawkish Fed. 

The Future Income Portfolio outperformed the broader indices in August 

• Exposure to Asian fixed income and US investment-grade bonds through Fidelity Asian Bond Fund and the PIMCO GIS Income Fund helped with performance, as both segments did well relative to government bonds.
• In the equities bucket, exposure to emerging markets through the Schroder Global Emerging Markets Opportunities Fund had a positive impact, as the fund posted a marginally positive return outperforming developed-market equities. 

All three Income Portfolios are achieving their payout targets 

• Actual payout has remained stable despite the negative returns across the three portfolios. Negative price returns have resulted in a mark-to-market fall and do not impact the actual coupon payments or dividend payout from the underlying funds. 
• As the first chart below shows, the actual payout from each Endowus Income Portfolio — assuming an initial investment of S$100,000 — has been stable and inching up higher on a monthly basis.
• Meanwhile, as the second chart shows, the annualised payout yields for the portfolios have been rising as a function of stable monthly payouts and lower net asset values. 

Endowus Cash Smart Portfolios

Cash Smart Secure continues to generate positive, stable returns

• The portfolio, once again, managed to generate the highest monthly return since its launch (for two consecutive months since July 2022). 
• The underlying funds — the Fullerton SGD Cash Fund and LionGlobal SGD Enhanced Liquidity Fund — continued to capture higher-yield opportunities in the rising rate environment.

Cash Smart Enhanced was flat in August

• The primary detractor of performance for the Enhanced portfolio was the United SGD Fund. It had a slight negative return, negating the positive impact from the LionGlobal SGD Enhanced Liquidity Fund’s performance. The United SGD Fund’s performance has since rebounded through early September 2022.

Cash Smart Ultra turned positive after eight months

• The Nikko AM Shenton Income Fund had a healthy rebound in August, contributing to the portfolio’s performance along with other funds such as LionGlobal SGD Enhanced Liquidity Fund and the LionGlobal Short Duration Bond Fund.

Cash Smart projected yields have been on an upward trend with rising interest rates

• The fall in bond prices has a negative mark-to-market impact, but it results in a higher yield to maturity of the bonds that are in the portfolios.
• The rising rate environment provides an opportunity for the underlying funds to reinvest and allocate the coupon payments and cash from maturing bonds to higher-yielding bonds. The underlying fund managers will continue to take advantage of this environment as they reposition their funds for the next few months.

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