Endowus Q1 2022 Performance Review — The Perfect Storm

‍Endowus Core Portfolios — Q1 2022 Performance Comparison

The Endowus Core Portfolios consist of globally diversified portfolios suitable for long-term wealth accumulation, available across 6 different risk spectrums (100% Equity to 100% Fixed Income) to suit your investment objectives and risk tolerance. While there are divergences due to the different ways the portfolios are constructed, they are all built to be a core allocation in your portfolio to provide global diversification at low cost. We provide commentary and performance drivers for each of the core portfolios from Endowus below.

Endowus Flagship Portfolio — Cash/SRS

Key Performance Highlights: The Flagship Cash/SRS Portfolios posted negative returns in line with markets as a Strategic and Passive Asset Allocation (SPAA) Core Portfolio. The 100% Equity Portfolio returning -4.2% and the 100% Fixed Income Portfolio posted -5.6%. 

The 100% Equity portfolio is built to be a broadly passive portfolio but it did outperform the broad MSCI All Country World index again this quarter. This was again a result of the portfolio’s tilts to the proven factors of returns such as value, small cap and profitability factors via the Dimensional funds.

The Flagship Cash/SRS 100% Fixed Income Portfolio slightly underperformed the broad global fixed income market, as represented by the Bloomberg Global Aggregate Index. The PIMCO Emerging Markets Bond Fund had small exposure to Ukraine debt and exposure to Chinese corporate bonds led to a disappointing Q1 performance, especially in February. That being said, the fund recovered in March, and ended the month as a major contributor to performance within the portfolio. 

The divergent performance of the underlying funds in the Flagship portfolios showcases the importance of having a well-rounded and diversified portfolio of robust, professionally-managed funds that can help weather different market environments.

Endowus Flagship Portfolio — CPF

Key Performance Highlights: The Endowus Flagship CPF Portfolios also posted negative returns in the first quarter of 2022 with the market correction. The Flagship CPF 100% Equity Portfolio returned -5.8%, underperforming the broad equity market as represented by the MSCI All Country World Index, while the Flagship CPF 100% fared slightly better than the Bloomberg Global Aggregate Index with a return of -4.0%. 

The 100% Equity Portfolio also suffered due to its EM equity exposure. The underlying Schroder Global Emerging Markets Opportunities Fund saw a sharper decline in Q1 driven by its greater allocation to Korea and its underweight in India for the quarter.

The 100% Fixed Income Portfolio registered an outperformance in Q1. It provided relative downside protection versus the Bloomberg Global Aggregate Index, aided primarily by its hefty allocation to the more conservatively positioned and lower duration (i.e less sensitive to interest rate movements) UOB United SGD Fund.

Endowus ESG Portfolio

Key Performance Highlights: The Endowus ESG Portfolios delivered mixed results after generating strong positive returns in the past few years. The 100% Equities Portfolio was impacted by its growth style tilt and lack of exposure to traditional energy and value sectors. In the first quarter, growth stocks underperformed value stocks meaningfully, and the energy sector rallied on the back of higher oil prices. The portfolio did outperform the MSCI ACWI Growth Index, which shows that the ESG portfolio is not just about growth but a value-driven portfolio and contains a broader exposure to quality as well. 

The core ESG 100% Fixed Income Portfolio turned in a more defensive performance compared with the global fixed income market, outperforming the Bloomberg Global Aggregate Index. The portfolio benefited from its shorter duration positioning compared to the index and exposure to green bonds.  

We believe that the Endowus ESG Portfolios remain a robust option for investors seeking to do good and do well. Apart from offering the prospect of long-term financial benefit, the portfolios continue to deliver tangible and positive environmental and social impact such as lower overall carbon emissions and alignment to the UN Sustainable Development Goals via the underlying holdings.

Endowus Factor by Dimensional Portfolio

Key Performance Highlights: Launched in February this year, the Endowus Factor Portfolios include seven of the best-in-class funds from Dimensional Fund Advisors. Funds offered by Dimensional provide broad and passive exposure to global markets by owning the most number of stocks, but at the same time are tilted towards academically proven factors of returns. These long-term drivers of outperformance, including value, size and profitability. The Factor 100% Equity Portfolio still fared better than the broad global equity market — as represented by the MSCI All Country World Index — with a return of -4.2% that was a result of the relative outperformance generated by the Dimensional global equity funds over the MSCI All Country World Index. The Factor 100% Fixed Income Portfolio had a sharper drawdown at -5.8% versus the Bloomberg Global Aggregate Index.

The Dimensional equity funds, with their emphasis towards more value-oriented stocks, enjoyed a tailwind as value stocks outperformed growth stocks in the first quarter. The Dimensional Emerging Markets Large Cap Core Equity Fund emerged as the most resilient fund in the first quarter, despite EM equities generally underperforming the broad equity market.

As the markets priced in the March Federal Reserve rate hike, the shorter-term US government bonds rose sharply, leading to the underperformance of the Dimensional Global Core Fixed Income Fund, which has a significant overweight to the US. This, in turn, weighed on the performance of the Factor 100% Fixed Income Portfolio.

The Factor Portfolios were launched on February 18, 2022. As of April 13, 2022, the Factor 100% Equity Portfolio was up 0.33%, while the Factor 100% Fixed Income Portfolio declined by -3.5%.

The volatility of Q1, with both the equity and fixed income markets declining, has made investing slightly more challenging. However, we continue to hold our conviction that tilts towards long-term proven drivers of return in equity markets — such as value, small cap and profitability — and towards term and credit in fixed income, which are factor tilts employed by Dimensional funds, will continue to drive excess returns in the long run.

Read more about Endowus Q1'22 market update outlook here

Endowus Flagship 100% Equity Portfolio still ahead of competition

A common request from our clients is to understand how we compare against competitors and other investment robo-advisors in Singapore. Endowus is much more than just a robo-advisor, as it has a broad suite of solutions on its total wealth platform. That includes being the first to offer CPF digital investing, as well as offering the innovative and cost-efficient Fund Smart platform. Still, from the clients’ perspective, we understand the call for a comparison. It should be noted that there is no official way to track performance across investment platforms — Endowus is the only digital wealth platform to publish all portfolio returns transparently. 

We were able to leverage the efforts of our broader investment community to gather data on other platforms — this Seedly post is an example of actual investors using longer term performance tracked monthly and over time. We share the table below, to show where the Endowus Flagship 100% Equity Portfolio (Cash/SRS) stacks up versus the others and against the benchmark. Here, we provide both the MSCI All Country World Index — the broadest global index and the MSCI World — the developed market index:

Passive vs Active Investing 

While many of these robo-advisors stake claims on the passive investing style by using ETFs as underlying products, they in fact implement an active and tactical investment strategy that attempts to beat the market by timing it. Endowus, on the other hand, is the only investment platform that utilises its Strategic Passive Asset Allocation (SPAA), to do passive investing in the right way. The performance is meant to track the overall market movements, with some excess returns being possible due to the factor tilts in the portfolio. 

The optimal threshold based automated rebalancing does not take any active views about markets or any tactical asset allocation decisions trying to predict which market will outperform each quarter unlike other players in the market. This is the professional and institutional asset allocation framework that works over the long term. As the table above shows, an investment strategy that starts with the right strategic asset allocation can deliver consistent returns in line with the broad market with less volatility, while a tactical approach results in a highly volatile performance over time.

Endowus Satellite Portfolio

Launched in November 2021, the Endowus Satellite Portfolios are designed to supplement the core portfolios and were created to meet the needs of our clients who wanted to gain specific exposure to opportunities in selected regions, themes, asset classes, and trends. In taking a core-satellite approach, most investors should allocate the bulk of their asset allocation to the core portfolios.

We provide commentary and performance drivers for each of the Satellite Portfolios from Endowus below.

China Equity & Fixed Income Portfolios

In Q1 2022, the Chinese market suffered from ongoing macro and regulatory headwinds faced by the Chinese economy. Such headwinds include regulatory clampdowns on the technology and real estate sectors, geopolitical risk spillovers stemming from the Russia-Ukraine war, and a dire Covid-19 situation worsening amid a zero-Covid policy threatening to stifle both consumer demand and manufacturing. The combination of all these concerns has weakened investor confidence in the China market. Furthermore, there are signs of weakness in corporate earnings as growth slows and profit margins are squeezed by higher input costs with companies finding it hard to pass on to end clients.

With more than 55% allocation to the China A-Share market, the Endowus China Equity Portfolio was hit hard by the challenging domestic market conditions, with a particular drag coming from the JP Morgan China A-Share Opportunities Fund. Some cushion came from the abrdn China A Sustainable Equity Fund, while the portfolio’s intentional diversification to Greater China markets such as Hong Kong and Taiwan provided some protection in the tough market.

Similarly, the Endowus China Fixed Income Portfolio posted negative returns in the first quarter of 2022, burdened by broader Chinese market woes – concerns sparked by September 2021’s property sector debt crisis extended into this year as growth worries weighed on the corporate sector as seen in the widespread risk-off sentiment in the broader Asian high yield bond market. To add, the hawkish Fed positioning tested dollar-denominated bonds — that includes those issued by Chinese companies. The sharp narrowing of interest rate differentials is also leading to a weakening CNY, which will further burden the USD fixed income markets. 

Global Real Estate Portfolio

After a strong 2021, the Global Real Estate Portfolio fell -3.0%. That said, the sector was a source of resilience versus many of the other sectors in the market. The portfolio’s fall was driven by the market repricing the front-loading of the Fed’s interest rate hikes and rising bond yields, against a backdrop of heightened geopolitical risks and concerns over stagflation. 

The majority of the negative performance in the portfolio was in January, as the sharp rise in real interest rates was a shock to the sector. Widening credit spreads disproportionately impacted higher multiple property stocks and pandemic winners. However, that was followed by a strong rebound in March, with all the underlying funds in the portfolio posting positive returns. The portfolio exposure to infrastructure — an outperforming sub-sector — through the BlackRock Global Real Assets Securities Fund helped with the overall performance and emphasises the importance of diversification across not only geography but also sectors within real estate.

Global real estate should continue to be an attractive asset class in an inflationary environment due to its potential inflation hedging capability. Our diversified portfolio and exposure to both the real estate and infrastructure markets is another key differentiating feature of the portfolio.

Low Volatility Fixed Income Portfolio

Fixed income markets had one of its worst quarters in the first quarter of 2022 as the market continued to reassess the higher expected pace of rate hikes by central banks amid rising inflation. 

The Low Volatility Fixed Income Portfolio returned -4.9% in the first quarter of 2022, in line with expectations as a lower volatility version of the 100% fixed income portfolio in our Endowus Flagship Portfolio series. Hawkish central banks, as a result of record high inflation, pushed the prices of both investment-grade and high-yield bonds lower across the whole quarter. As the portfolio is mostly invested in fixed income, this decline in the bond markets, in turn, led to negative performance for the portfolio. 

About a third of the portfolio is allocated to the PIMCO GIS Total Return Bond Fund. The PIMCO GIS Total Return Bond Fund underperformed the Bloomberg Global Aggregate Credit 1 - 5 Year Index but outperformed the broader credit index. The worst performer in the Low Volatility Fixed Income portfolio line-up for the quarter was the UBS Full Cycle Asian Bond Fund, which returned a disappointing 9.5%. The returns are likely due to the continued underperformance of Asian Credit, impact of the Russia-Ukraine war, and the rising interest rates in Asia and EM.

Megatrends Portfolio

After seven consecutive quarters of positive performance, the Megatrends Portfolio experienced its first quarterly loss of -9.7% in the first quarter of 2022. Much of the quarter’s negative returns was recorded in January, with the portfolio turning more resilient in February before enjoying a solid rebound in March.

In January, one of the largest rotations to value in history negatively impacted the growth-oriented Megatrends Portfolio, with the portfolio’s underlying funds declining by an average of -9.6%. The portfolio was more resilient in February, aided by strong relative performances from the Blackrock Nutrition and AB International Healthcare Funds. March was a positive month for the Megatrends Portfolio, as most of the portfolio’s underlying funds generated positive returns. The Blackrock Nutrition Fund continued to benefit from rising commodity prices, specifically from agriculture equipment names. The Allianz Thematica Fund’s infrastructure theme also got a boost from a meaningful exposure to companies in the materials space.        

Many of the Megatrends Portfolio’s key themes, such as renewables and automation, have arguably become even more relevant in light of the recent geopolitical crisis and related energy supply disruptions. The long-term fundamentals and appeal of the Megatrends Portfolio should remain intact.

Technology Portfolio

The first quarter of 2022 was gruelling for many investors, and the pain was especially severe for those invested in the growth and technology sectors. Aggressive central bank tightening policies translate to concerns over the valuation and growth prospects of the technology companies. Coupled with concerns over the Russia-Ukraine war and the China lockdowns disrupting major tech supply chains, and the increasing possibility of a global recession, market participants rotated into quality or value names in other sectors such as utilities, consumer staples, and commodities. The Endowus Technology Portfolio, despite its diversification across managers and subsectors, could not avoid the overall fall as a sector-focused portfolio, recording a -14.4% loss in the first quarter.

January saw a flight to safety in markets and a swift selldown of growth stocks — the technology sector were hit hard with the portfolio falling double digits in just a short span of time. Although the portfolio’s allocation in the contrarian Fidelity Global Technology Fund provided some cushion through the fund’s exposure to a less growth, more value-oriented style, the portfolio was ultimately penalised by its overall tilt towards growth. There was a slight bounce in March for technology counters as tactical investors scooped up established names that were trading at lower valuations.

We continue to believe that the long-term fundamentals of the technology portfolio remain attractive for investors who want to gain exposure to quality, long-term growth names in the technology sector, and want to complement the core investment portfolio that is more broadly diversified across geography and also sectors.

Endowus Cash Smart Portfolio

The Cash Smart Secure Portfolio recorded another quarter of consistent, positive returns – the portfolio’s allocation to institutional bank deposits and ultra short duration instruments and money market funds remains an attractive option for investors seeking a high quality, highly conservative investment with the potential to provide higher returns than a pure cash instrument, while still providing virtually no downside. Cash Smart Secure finished Q1 2022 as the only Endowus advised portfolio with a gain.

Meanwhile, the exposure to bonds and fixed income instruments for the Cash Smart Enhanced and Cash Smart Ultra Portfolios has subjected them to the mark to market movements of fixed income markets, with the unprecedented speed with which the market interest rates have moved up and repriced the bonds — leading to a larger-than-expected loss to bonds generally. 

Despite allocations to the shorter-duration and amortised performance of LionGlobal Enhanced Liquidity Fund, which anchors most of our Cash Smart solutions, the remainder of the portfolio’s exposures did not bode well for the pricing of the portfolio. Moreover, the Asian credit market has continued to face severely challenging times amid China’s regulatory crackdown and concerns about the real estate issuers last year, and the sharp backup in market yield driven by expectations of more aggressive US Fed rate hikes. To add, the resurgence of Covid-19 and China’s zero-Covid policy has given investors pause. No geography or sectors have been spared in this fixed income market rout. 

The losses in the Cash Smart Enhanced and Ultra portfolios are relatively muted compared with other Endowus fixed income portfolios. This behaviour is in line with the fundamental design of the portfolios and our performance expectations — with risk and returns correlating both on the way up (last year) and on the way down (this year). The portfolios have also performed in line with relevant indices of similar durations, such as the Markit iBoxx ABF Singapore Government 1-3 Year Index, and have even outperformed the US Treasury 1-3 Year Index by a significant margin.

The Cash Smart Portfolios are designed to be relatively conservative while retaining the potential for higher returns over pure cash instruments. That said, there are still inherent risks embedded in these products, as reflected by the maximum drawdown numbers. The current performance reflects the difficult market conditions that we are experiencing now across all fixed income markets.

When the price of bonds falls, the yield on that bond (all other things being equal) will rise from the perspective of yield to maturity (YTM). Also, any new bond issuances these days would command a much higher yield considering that market interest rates/yields have gone up sharply. This is why all interest paying notes or deposits or bonds are all seeing a rise in the interest rates or yields or coupons go up. During periods of negative returns, it may not be something it may seem counterintuitive, but the nature of bonds is that unless the borrower — the issuing country or company of the bond — does not go bankrupt or default on the bond, the bond will mature and the bondholder will get returned at the par value at which the bond was issued.

Therefore, at maturity, the bond will recoup all of the losses incurred by the mark-to-market impact. This is why duration matters, as the shorter the duration, the faster the bonds mature and these returning funds can be reinvested at higher interest rates, thereby driving up the YTM of the overall portfolio. Projected returns are calculated purely based on the YTM or the expected yield of the bond from when it was bought, to when it receives the full amount back upon maturity of underlying instruments. With continued increase in the market interest rates, the projected return or YTM of the portfolio can only increase. 

Endowus Income Portfolio

The Endowus Income Portfolios were not immune to the elevated market volatility in the first quarter of 2022. The Stable Income, Higher Income and Future Income Portfolios were down 5.6%, 5.0%, and 5.2% respectively. However, this was within expectations and all three Endowus Income Portfolios fared relatively well compared to most relevant market indices. 

The Stable Income Portfolio is a 100% fixed income portfolio with around 50% allocation to EM and Asia because of the more attractive yield profile of those regions. The relatively high allocation to Asia translated to some headwinds. On the other hand, the relatively short duration of the portfolio — at 4.1 years as of Feb 28 — helped partially protect it from rising yields during the quarter. 

The Higher Income Portfolio, despite its 20% allocation to equities, did slightly better than the other two portfolios. The lower allocation to Asian and EM bonds in its fixed income portion helped relative performance. In addition, its more dividend-oriented equity allocation, including a small allocation to real assets, turned out to be more resilient than the broader equity market in the recent drawdown.

To achieve its dual objective of income and growth, the Future Income Portfolio has allocated about 40% of its assets to equities. Given this, the  Future Income Portfolio also experienced the largest drawdown at the start. It then posted the largest rebound among the three Income Portfolios in the second half of March as the equity market bounced back while the fixed income market remained in the doldrums. 

It is important to note that the portfolios continued to meet their expected payout targets on a monthly basis despite the drop in price/net asset value (NAV). Given the objective behind the Income Portfolios, which is to generate income and accumulate wealth for investors over the long term, it is crucial for income investors to stay focused on the long-term outcome and remain invested through difficult markets.

Learn about Endowus Q1'22 market update outlook here

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