October 2020: We are providing an update on the revision of the Endowus Cash Smart Enhanced portfolio from 1.7% ~ 2.0% down to 1.6% ~ 1.9%. In addition, we are revising the Core portfolio projected yield upwards from 0.9% ~ 1.1% up to 1.0 ~ 1.2% due to a pick up in short term yield in our Cash Fund.

How has Endowus Cash Smart performed since launch?

Growth of $100 Since July 1, 2020

As you can see from the above chart, the performance of the two Cash Smart products have been steady and strong since the launch on 1 July.  The chart above shows the trend while the table below shows the monthly and overall performance.  Actual net returns since launch and annualized rate of returns is higher than the projected yield numbers we had shared to our clients.

Endowus Cash Smart has done better than the projected yield at the time of launch

Source: Endowus Research, Bloomberg. All performance numbers are to 28th October 2020

While both Core and Enhanced did better than the projected yield at the time of launch, the reason why Enhanced had more pronounced returns is because the solution includes a short duration fixed income fund with a bias towards longer duration bonds. Some people question the need for taking a greater duration or credit risk. However, it is always important to balance the risk and reward and we believe the improvement in yield outweighs the risks for the Enhanced solution.

We have highlighted the maximum drawdown risk of the Enhanced product compared to Core and why the yield on Enhanced is higher. It is about efficiency. There is a slightly higher risk and that has resulted in a boost in returns. The returns have surely outweighed the risk in this case.

Risk-free options are below 1% - Major interest rates and deposit rates keep heading lower

Source: Endowus Research, Bloomberg

Interest rates continue to fall

Interest rates collapsed globally in March 2020 and have continued to fall in the subsequent months. We are pretty much at or close to the lowest levels in history, especially in Singapore. The 12 month rates - whether it is SIBOR, government bills, Singapore Savings Bonds or bank fixed deposits - are all well below 1% and continue to edge lower as the below chart shows.

With a Fixed Deposit, your money is locked-up and you only get to see the interest and the money after 12 months. If for whatever reason you need to access the money and cancel the fixed deposit, you lose all the interest earned thus far.

Comparison of Endowus Cash Smart with fixed deposits (Oct'20)

Source: Endowus Research, MAS, DBS

Interest rates of Money Market Funds and Enhanced Liquidity Funds

Lower interest rates are the new reality we live in and we should get accustomed to it. Interest rate cuts may persist with some of these promotional rates disappearing over time. The banks typically make these announcements without any prior notice and they publish the details of the board rates on their websites. Therefore, those who have fixed deposits maturing in the future will have no options available to them at anywhere near the previous deposit rates.  

Of course, everything is relative and the rates and projected yields of all fixed income products have fallen as well. The cash funds, money market funds, enhanced liquidity funds and short duration fixed income funds have all seen a fall in interest rates as well. However, what sets them apart is the ability to defend yields better as they push out the duration and take on slightly more credit risk in order to defend the yield. This makes sense as the Fed’s backstop and the strength of the Singapore fiscal balance means that any additional duration or credit risk is marginal compared to the yield pickup investors are able to achieve.

Cash Smart monthly underlying gross projected yields

Source: Endowus Research, Bloomberg

Falling yields across high yield savings options

Many other players with similar products have had to slash their projected yield. The Fullerton SGD Cash Fund stands out having seen the largest fall in yield to now below 0.5%. The nature and mandate of the fund restrict the assets it can hold but it is what gives it its strengths -  by holding mostly institutional fixed deposits, it remains highly liquid and safe. However, this is also why it is difficult to generate meaningful yield enhancements during a period of falling interest rates, as it cannot take longer duration or credit risk to be compensated with a higher yield.

One popular robo-advisory had previously announced that their yield will drop from 1.9% to 1.4%, which is a massive drop in one go. Accompanying it was the admission that they had been making up the difference in the yield with their own money for clients, as they had been advertising 1.9% returns when it was not achievable with the underlying funds alone given the environment. This is just the state of affairs and the reality of falling yields across all financial service providers, whether it be banks or robos, and their feeble attempts at staving off the inevitable.

Risk, return, fees and the smarter cash management solution

The correlation between risk and return is something that nobody - not even the brightest in finance - can overcome, but Endowus has been able to come up with two unique products, that are the most efficient, lowest cost and highest yielding cash management solutions. They have different risk and return characteristics to reflect and address the differing needs of our clients.

We also apply the  innovative 100% trailer fee (kick back commissions paid by fund managers to the distributors) rebates Endowus first introduced to the industry. It is imperative that we remove those hidden fees so investors can benefit and improve their financial outcomes.  It is also important to know the difference in costs of traditional players versus a low-cost platform like Endowus.

The hidden fees can mount up especially when you use the expensive trailer fee ridden fund platforms like Dollardex, POEMS or iFast Fundsupermart (which also has platform fees on top of trailer fees). These Do-It-Yourself (DIY) fund platforms tout zero sales charges or zero fees, but receive a large commission kick-back from the fund managers that are much more than any platform fees. These are not one time in nature but they continue to get paid these trailer fees every year. This additional burden is borne and paid for every year by the client without them even knowing it. It is this lack of transparency and high cost that Endowus is fighting so hard to bring to light and to remove.

The cheaper way to invest in a cash management solution

Source: Endowus Research, FSM, Dollardex, POEMS, UOB Kay Hian

Historical and Future performance of Endowus Cash Smart

Endowus Cash Smart solutions consist of cash funds, money market funds, and short duration high-quality bond funds.  The daily value is updated based on the Net Asset Value (NAV) of the funds, and that in turn is dependent on the underlying investments, which are also priced daily. Bond prices are affected by interest rate movements, and therefore performance is subject to interest rate movements. The Cash Smart Enhanced product returns were good as a result of the fund NAV (and bond price) appreciation.

Returns are a function of both price movement (daily interest rate moves), and also the coupon (interest payment one receives). The projected yield is derived from the yield to maturity of all the holdings of the money market instruments and fixed income securities that are in the funds. That is the basis of our projected yields and is the most accurate reflection of what the fund as a whole will be able to generate if the underlying instruments are held to maturity with the fixed coupons that were locked at the price at which the securities were purchased for the fund.

Past returns are therefore not an accurate reflection of future returns. It is not a good predictor of returns especially when there is meaningful movement in interest rates. Realized returns also do not necessarily have a direct impact on future returns.  Just because the returns were good in recent months does not mean that the future returns will be just as good. It also does not mean that you’ve gotten a certain return and your future returns will be lowered by that same amount either.

Endowus commitment to the transparency of yields

In our continuous effort to improve transparency and industry best practices, Endowus publishes monthly updates of the gross yields of the underlying funds as well as the two Cash Smart solutions - Core & Enhanced - on our FAQs and websites, or on a biweekly basis when there are major changes. Your existing Cash Smart investment values are also updated on each business day on the Endowus platform. This is to ensure that you have the most updated information to make the best choices for yourself.

We recently lowered the range of projected yield for Cash Smart Core from 1.1~1.3% to 0.9~1.1% and also Cash Smart Enhanced to 1.7%~2.0%. We are further reducing the Enhanced yield to 1.6%~1.9%. However, we are revising the Core projected yield back up to 1.0~1.2% due to a pick up in short term yield in our Cash Fund. The adjustments are a much smaller reduction in yield if you compare to the slashing of deposit rates seen at banks for their fixed deposits or the cuts you have seen at other robos. We prefer to show a range rather than a single number to give an indication to our clients that the yield is not guaranteed, that it is not fixed and can change in the future. It is a conservative number but it is still an estimate (using numbers provided by our fund manager partners), and the actual return can be higher or lower than this range depending on when you begin your investment and the change in market interest rates.

We cannot make a prediction on the future direction of interest rates but we will continue to revise down or up, whenever the net yield moves. We can only adjust as the market moves but we will keep our promise of full transparency. In fact, Endowus receives weekly updates from our partner fund managers but often these changes are marginal.  If there is any meaningful shift we will continue to make those changes as frequently as possible to give a more accurate reflection of projected yield and at least on a monthly basis. Similar to how banks would announce their lowering of published interest rates for fixed deposits or savings accounts.
If you have any other questions or need advice from one of our MAS-licensed representatives please reach out at support@endowus.com or visit our Cash Smart landing page here. If you would like to do more research on the Cash Smart products, please find the in-depth Endowus Investment Office research Insights article here.