Latest enhancements to ESG Portfolios: Investing well with purpose

We are pleased to introduce the upgraded Endowus ESG Portfolios, designed to provide retail investors in Singapore with a core portfolio that aligns more closely with broad market benchmarks while maintaining a guiding ESG objective. 

• Closer alignment of Portfolios’ risk and return expectations with broader markets.
• Continued alignment with investors’ values regarding social and environmental responsibilities.

• A higher degree of manager diversification and lowered investment costs, with improved balance in equity styles and geography, and enhanced credit quality in fixed income.

It has been three and half years since the launch of Endowus ESG Portfolios, and during this time, we have actively engaged with our clients to gather valuable feedback. In response, we have refined the portfolio to be more benchmark-aware, making long-term commitment easier while still upholding our high standards to avoid greenwashing.

The universe of ESG funds available in Singapore is still relatively constrained compared to the vast options in the US and Europe. However, the Endowus Investment Office is relentless in its pursuit of sourcing high-quality ESG funds to make them accessible to retail investors in Singapore, both for cash and Supplementary Retirement Scheme (SRS) accounts. 

Our continuous conversations with fund managers worldwide ensure that we bring the best ESG investment opportunities to our clients, helping them invest in a sustainable future.

Built on 3 key principles for long-term success

ESG investments have traditionally been seen as more volatile, concentrated, and thematic, leading to higher costs and susceptibility to specific headwinds. 

This perception can make ESG investments feel riskier and less predictable for investors, and hence harder to invest for the long term, making it detrimental to long-term wealth creation. 

To help investors manage such challenges, the Endowus ESG Portfolios are crafted differently, particularly centred upon the key tenets for long-term investing success: 

1. Global diversification,
2. Long-term strategic asset allocation
3. Low cost

These key tenets are for long-term investing success while maintaining a commitment to responsible investing principles. 

A closer alignment with the broad market

The upgraded Portfolios have been improved to behave more in line with broad equity and fixed income markets, allowing investors to have clearer expectations regarding returns and volatility. 

This alignment is done by reducing the structural biases inherent in the old Endowus ESG Portfolios due to the underlying funds’ implementation of their ESG objectives. At that time, it was unavoidable, given the limited universe of funds at the point of its launch.

The closer alignment of the Portfolios’ performance to broad market benchmarks can be clearly seen by comparing the tracking error of the new portfolios with the old ones. 

What is tracking error?

Tracking error measures how much an investment portfolio's returns differ from the returns of the benchmark. It shows how close the portfolio is to the benchmark's performance.

The charts below show the difference between the Portfolios’ and the respective benchmark’s returns on a monthly basis as well as the overall tracking error of each Portfolio.

The new Portfolios (green dots) stay a lot closer to the axis, indicating that the returns are much closer to the index than before (yellow dots).

Moreover, the upgraded ESG Portfolios confidently adhere to an ESG-aligned investment approach. 

They cater to value-driven investors who prefer to invest in more responsible companies, while seeking to avoid socially and environmentally irresponsible investments. Analysis on the soundness of fund managers’ ESG process is thoroughly integrated into our Investment Office’s fund due diligence process.

The upgraded ESG Portfolios provide a more balanced solution that meets various long-term investment objectives, while aligning with investors’ personal values on sustainability. 

Adjustments to allocation, cost, and volatility

A key enhancement underpinning the improved performance and value alignment of the Portfolios is their improved manager diversification. Importantly, the expanded set of managers and funds for our access also enabled a meaningful improvement in portfolio structure, consisting of a more diverse set of building blocks. 

The below chart compares the ESG 100% Equity Portfolio’s structure and allocation before and after the RPC. 

For the Equity Portfolio, an expansion of building blocks was recommended, namely from mostly active developed market equities and thematic equity funds to a combination of passive and active global equity funds, an emerging markets equity fund, an Asian equity fund and a more defensive infrastructure equity fund. 

Such development allows us to bring the Portfolio’s underlying exposures (regional and factors) closer to the benchmark. The fund manager concentration has been meaningfully reduced as well after the addition of six new funds. 

Not all these funds were initially available for retail investors in Singapore, the fund managers decided to partner with Endowus to bring these Best-in-Class solutions to the Singapore fund market.

Equity component: improved balance in style and geography

Adjustments made to the Endowus ESG Portfolios’ equity component can help create more stability and diversification, ensuring that our Portfolio remains robust and well-positioned for long-term growth. Here are the key changes:

1. Achieve a more globally balanced exposure: The new ESG 100% Equity Portfolio reduced the overweight to developed markets, particularly Europe. 
2. Adjust factor tilt: The new ESG 100% Equity Portfolio reduced the emphasis on growth names, creating a more balanced factor exposure that is closer to the benchmark. 
3. Longer-term resilience: Investing in sustainable infrastructure and utilities to support responsible long-term projects, but also enhance the portfolio’s ability to weather economic cycles.

Moving on to the comparison of the ESG 100% Fixed Income Portfolio’s structure and allocation before and after the RPC.

Due to the limited universe the old Portfolio depended heavily on flexible bond funds – these are diversified, multi-sector fixed income funds where the fund managers have a high degree of discretion to move across different sectors, including lower quality and more volatile sectors such as high yield bonds and emerging market bonds. 

The new Portfolio has now been revamped in such a way that it now has an anchoring allocation to high quality, global investment-grade exposure, complemented by flexible bond funds and an Asian bond fund. Three new funds are introduced in this portfolio change. 

Fixed income component: Improved credit quality while maintaining an attractive yield level 

The new Endowus ESG Portfolios’ fixed income component would boast a higher overall credit quality post adjustments while maintaining an attractive level of yield and duration. 

While maintaining its broad diversification across sectors, the new Endowus ESG 100% Fixed Income Portfolio boasts a much higher allocation to investment grade corporate credit and a lower allocation to high yield credit and emerging markets. This means that the overall credit risk of the new portfolio is lower than before. 

The Portfolio remains tilted towards credit sectors, over the government bond-heavy benchmark Bloomberg Global Aggregate Index. However, such deviation is well-compensated by the higher net yield-to-maturity of the Portfolio compared to the benchmark. 

Cost: Significant reduction in total expense ratio

The new Portfolios would have significantly lower costs across all allocations. The total expense ratio is brought down to between 0.58% and 0.68% from a TER of above 1.0%.

This implies, the cost reduction ranges from 0.33% for the ESG 100% Equity Portfolio to 0.46% for the ESG 100% Fixed Income Portfolio.

Risk: Lower concentration and volatility

In terms of risk-return profile, the Portfolios reduce the concentration and volatility relative to the broader market. This has resulted in stronger long-term performance that aligns more closely with the underlying markets, providing greater visibility and predictability in terms of expectations. 

Post RPC: What will happen to the funds removed or reduced in allocation?

The Investment Office wants to highlight that the funds that have been removed or reduced in allocation all remain on the Endowus platform as they continue to be best-in-class ESG solutions. 

However, their specific tilts or narrower scope make them particularly strong candidates for investors seeking exposure to specific themes and who are willing to accept the tracking error relative to broad markets. These funds are excellent choices for satellite positions within a diversified portfolio, offering targeted opportunities while maintaining high ESG standards.

ESG attributes: Product involvement, carbon exposure, and impact

The Endowus ESG Portfolios adhere to guiding ESG objectives to help investors direct their investments to areas aligned with their personal values. 

The Portfolios consist of funds that apply exclusionary screening and tilt towards businesses that deliver positive impacts. It’s also important to note that incorporating ESG factors in one’s investment portfolio would mean more controlled ESG risk over time, an area traditional investment options might overlook. 

The case below is based on the ESG 100% Equity Portfolio, where ESG data for the broad equity market is relatively readily available. 

With exclusionary screening, the Portfolio has close to zero exposure, and much lower exposures compared to the broader market benchmark, to areas that would do harm to society and the environment.

The Portfolio has a significantly lower fossil fuel involvement, compared to the broader equity market benchmark, and hence has lower exposure to energy transition risk. 

Endowus ESG 100% Equity Portfolio is better positioned to transition to a low-carbon economy

Finally, the portfolio has more exposure via its revenue to products with a positive impact compared to the broader equity market benchmark.

A guide to accepting the Recommended Portfolio Change

You can view and opt in for the changes via any of the 3 options below:

• Click ‘Login’ from the Recommended Portfolio Change email you would have received.
• Click the notification bell on your Dashboard, then select ‘Review recommendations’.

• Select the relevant goal’s page under the My Goals section, then select “View recommended changes” under ‘Manage goal’. You can find a video tutorial on how to do so here. 

The platform will display a comparison of the existing portfolio allocation and the updated portfolio allocation.

Choose to accept or reject the recommendation. If you reject the recommendation but subsequently change your mind, you can always come back to modify your choice via ‘Manage goal’ on the respective goal page.

Once the recommendation is accepted, the portfolio will be rebalanced accordingly. The units of the old or overweight share class(es) will be redeemed, and proceeds from the redemption will then be used to invest in units of the updated share class(es).

The entire process will take 5 to 10 business days to complete. While the rebalancing is in progress, you may continue to invest in and partially redeem funds from the portfolio. However, a full redemption cannot be performed until the rebalancing process is completed.

To learn more about why Endowus recommends portfolio changes and how they work, you may read our FAQ here. 

‍Enjoy lower fees and stronger long-term gains with Endowus

The Endowus Investment Office is constantly monitoring your advised portfolios and searching for new options that will improve these portfolios. 

Opt in for the recommended portfolio change today to upgrade your ESG Portfolios. Have more questions? Our MAS-licensed advisors are here to guide you through them.

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