Endowus July 2024 Performance Review

The global equity markets ended with positive gains in July with the MSCI ACWI notched a small 1.6% return in USD terms. Underneath the small gain, lay large discrepancies and rotations from the previous months. 

AI’s winning streak goes on a hiatus?

The US equity market landed in positive territory in July, though with notable sector rotations. There was a marked shift from growth stocks toward more value-oriented companies. Mega cap stocks, in particular those that had risen on the back of an AI-fueled rally, saw sell-offs. US small caps also outperformed their larger counterparts, after being out of favour for a lengthy period. Sector-wise, real estate, utilities, and financials led gains, with smaller companies also performing well, driven by expectations of potential interest rate cuts. 

The developed markets, overall, had a decent month, with Europe, in particular, the UK and Japan outperforming the US (in USD terms), in July. Small caps did much better than large-cap stocks, in the developed markets ex-US, as well. 

UK equities posted relatively strong returns, bolstered by a decisive Labour Party victory in the general election, which raised expectations for a sustained economic recovery. This positive sentiment was further supported by growing anticipation of a UK interest rate cut, as June’s annual CPI inflation held steady at 2.0%. Business confidence surged in July, with purchasing managers’ indices (PMIs) for both the services and manufacturing sectors indicating that the recovery in UK GDP, observed in May, had continued into the summer.

The emerging markets were nearly flat in July, returning a meagre 0.3%. In contrast to the developed markets, EM small caps underperformed versus large caps. Value, however, outperformed growth in EM as well. China and Taiwan had a challenging July which dragged on broader market returns.

Rate cut expectations grow

Global bond markets generated positive performance, driven by declining government bond yields across major markets as inflationary pressures eased and expectations of interest rate cuts grew.

The prospect of central banks, particularly the U.S. Federal Reserve and the European Central Bank, initiating rate-cutting cycles played a significant role in this rally. U.S. Treasuries saw yields tighten as economic data pointed to slowing growth and lower inflation, with the Fed signalling a potential rate cut in September. This led to a rally in U.S. government bonds and high yield credit, which performed well amid the anticipation of lower rates.

In Europe, corporate bonds generally outperformed government bonds as spreads tightened, supported by a disinflationary trend and expectations of rate cuts by the ECB. French government bonds rebounded following the resolution of political uncertainties, adding to the positive sentiment in European bond markets.

Emerging market debt also posted gains, with local currency bonds outperforming hard currency sovereigns and corporates. The rally was supported by lower U.S. Treasury yields and positive currency moves. However, concerns over global recession risks began to weigh on carry trades, leading to a more cautious approach in emerging market currencies.

Gold continues to surge as dollar weakens

The S&P GSCI had a difficult month in July, declining more than 3.5% in USD terms. The weakest-performing sectors were Industrial Metal and Agriculture and the best-performing sector was Precious Metals. 

Gold notched decent returns, returning more than 4%. Energy also retracted in July, with Natural Gas falling more than 20% in July.

Key performance highlights for the Endowus Portfolios in July

• The Flagship 100% Equity Portfolio (after fund fees) outpaced the broad global equity market, both recording positive returns. The biases towards value and small-cap stocks provided a tailwind for relative performance against the benchmark in most regions. 
• The Flagship 100% Fixed Income Portfolio generated positive returns in July but slightly underperformed the broad fixed income market. The primary detractor was the United SGD fund due to its shorter duration position. 
• The fixed income sleeves of the Income Portfolios underperformed the benchmark due to shorter duration for all three portfolios and higher allocation to high yield bonds for Higher Income Portfolio.
• All three Cash Smart solutions continued to generate positive returns.

Endowus Core-Flagship Cash/SRS Portfolio

‍The 100% Equity Portfolio outpaced the broad global equity market in July

• Both the 100% Equity Portfolio and the global equity index posted positive returns during the month of July.
• Both the Equity Portfolio’s biases towards value and small caps provided a tailwind for relative performance against the benchmark in most regions. The value tilt, via the Dimensional funds, had a positive impact in both developed and emerging markets. The significant outperformance of small caps in developed markets was also additive to the portfolio’s performance. 

The 100% Fixed Income Portfolio generated positive returns in July but slightly 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 Dimensional Global Core Fixed Income fund and the PIMCO GIS Emerging Market fund. The Dimensional kept pace with the benchmark and outperformed ever so slightly while the PIMCO EM fund benefited from its allocation to local currency EM debt.

Endowus Core-Flagship CPF Portfolio

‍The 100% Equity Portfolio underperformed its benchmark by 0.1 % in July

• 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.

The 100% Fixed Income Portfolio had positive returns in July by lagged the benchmark by 0.2%

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index —were in positive territory as yields fell across the board.
• All four underlying funds underperformed the broad index but the primary detractor was the United SGD fund. The United SGD fund had a weak July due to 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 July.
  

Endowus Income Portfolios

‍The Stable Income Portfolio delivered positive performance, despite lagging its benchmark by 0.3 percentage points in July

• Overall, the portfolio’s shorter duration versus the benchmark detracted as duration assets rallied on the back of lower interest rate expectations in July. 
• Despite this, the portfolio delivered positive performance in a risk-off environment. The longer duration funds in the portfolio, such as Neuberger Berman Strategic Income Fund and AB American Income Fund were the top performers for the month, outperforming the benchmark. 

The Higher Income Portfolio performed in line with the 20-80 benchmark in July

• The portfolio’s fixed income component underperformed its benchmark, driven by its overall shorter duration, and higher allocation to high yield bonds which had weaker performance in July. 
• Its equity component benefited from the style rotation from large cap growth to value, small cap and high dividend names, as well as from USD depreciation against SGD as many of the underlying funds are hedged to SGD. Its allocation to real assets via Blackrock BSF Global Real Assets Securities Fund was the top contributor to relative performance as the asset class rallied on the back of lower interest rate expectations. 

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

• Its fixed income component underperformed benchmark due to reasons similar to the Stable Income portfolio. 
• Its equity component benefited from the style rotation from large cap growth to value, small cap and low volatility names, with the top contributor to relative performance being AB Low Volatility Equity Portfolio Fund. 

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 acknowledge 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 0.34% gain in July 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 around 0.3%. 

Cash Smart Enhanced driven by additional boost from Asian credit

• Cash Smart Enhanced generated a return of 0.49% in July.
• This performance was supported by steady returns from the Fullerton and LionGlobal funds, with notable contributions from the United SGD Fund, which benefited from market risk-off sentiments that favoured the Asian investment-grade space.
• The portfolio's allocation into 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 0.62% in July.
• The highest contribution came from the PIMCO Low Duration Income Fund, which benefited from its allocation to securitized assets amid a risk-off sentiment. The portfolio also saw positive contributions from  the LionGlobal Short Duration Bond Fund and Fullerton Short Term Interest Rate Fund, both of which benefited from the positive credit environment.
• The portfolio's strategic allocation into 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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