Endowus Portfolios Performance Update (January 2024) — Fed rates held steady

A lacklustre month

2024 started off with a whimper. January saw muted returns across most of the major markets. The “January effect”, the phenomenon where stock prices were seen to generally rise more in January than in other months of the year, was hopefully not a sign that tough times were to come. 

Even the Magnificent Seven stocks (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla) returned a paltry 2.02% on average in January 2024. In contrast, the average return of the Mag 7 was 21.11% in January 2023.

Holding rates steady

The Federal Reserve decided in the January FOMC meeting to hold rates steady in the 5.25% - 5.50% range. This is the fourth time the Fed has decided to maintain the status quo on its policy rate. The rate decision came days after the release of US GDP growth for 2023. The US economy grew 3.3% in the fourth quarter of 2023, and an aggregate of 2.5% for the year. This was better than what most economists had predicted at the beginning of 2023. One of the largest drivers of this growth is consumer spending and the one factor that contributed to this was the resilience of the US labour market.

The market reaction to Federal Reserve chair Jerome Powell’s non-committal remarks on a soft landing for the economy was not unexpected, with equities falling on diminished hopes for a rate cut in the first quarter of the year.

The Fed continued to emphasise the need to monitor the path of inflation and gain confidence in its sustained stability before embarking on rate cuts.

January market commentary

The global equity market, as represented by the MSCI ACWI, returned a mere 0.59% in the first month of the year. This was a contrast to the decent 4.8% returned in the month before. The developed markets (DM) outperformed their emerging counterparts in a continuation of the trend that started in 2023. One of the strongest performing DM was Japan, which returned 4.6% in USD terms and a strong 8.5% in local currency returns. The US (S&P 500) returned a lacklustre 1.7% while MSCI Europe was almost flat with a return of -0.1%. 

Emerging markets as a whole, led by China’s disappointing return of negative 10.6% in USD terms, retracted 4.6%. Chinese stocks faced headwinds amidst lingering fears over the state of the property sector and the economy as a whole. India, on the other hand, generated a positive return of 2.4%. The “higher-for-longer” rhetoric on US fed funds rates weighed on investors’ minds amidst negative sentiment in EM.

In terms of style, value stocks again lagged growth stocks in DM. In EM, it was a different story with growth stocks falling more than value stocks. Similarly, from a size factor perspective, small-cap stocks underperformed large-cap stocks in DM by a significant margin while EM again bucked the trend with EM small caps besting their large-cap peers by almost 3%.

The bond markets experienced a reversal and a decline in returns as hopes of a near-term Fed rate cut withered. Bond yields went up almost across the board. Investment grade corporate bonds saw negative returns but still outperformed sovereign bonds. High yield also generally outperformed relative to investment grade.

Commodities rebounded in January with the S&P GSCI returning 4.5%. The primary driver of this strong performance was the energy and oil sector. The GSCI Crude oil sector rose 6.2% and the Energy sector went up 7.2%. Gold was in negative territory for the month with a decline of 0.7%. 

Key performance highlights for the Endowus Portfolios in January: 

• The Flagship 100% Equity Portfolio underperformed global equity markets in January due to structural tilts towards EM and value stocks while the 100% Fixed Income Portfolio outperformed global fixed income markets boosted by an overweight in corporate bonds.
• The ESG (Environmental, Social, and Governance) 100% Equity Portfolio underperformed the broader equity market in January due to struggles in the climate change theme, despite benefiting from growth style exposure. The ESG 100% Fixed Income Portfolio outperformed the broad fixed income market in January, driven by its positioning with an overweight in credit risk and underweight in duration.
• The fixed income sleeves of the Income Portfolios outperformed their respective benchmarks, benefitting from the shorter duration positioning. The equity sleeves of the Portfolios, in contrast, suffered from the allocations to emerging markets and Asian equity.
• All three Cash Smart solutions continued to generate positive returns in the first month of 2024.

Endowus Flagship Portfolio

‍The 100% Equity Portfolio underperformed the global equity markets in January

• The global equity markets — represented by the MSCI All Country World Index (ACWI) — posted positive returns in January of about 2% (SGD terms). With EM underperforming DM and value stocks lagging growth stocks, the Portfolio’s structural tilts detracted from relative performance in January.

The 100% Fixed Income Portfolio outstripped the global fixed income markets by 0.2%

• The global fixed income markets — as represented by the Bloomberg Global Aggregate Index — posted negative returns, in the face of “higher for longer” rhetoric and rising negative sentiment in fixed income.
• The portfolio’s overweight in corporate bonds relative to its benchmark proved beneficial in January. The PIMCO Income fund was the largest contributor to relative performance while the weakest performer in the fixed income line-up, for the month, was the PIMCO Emerging Markets Bond fund.

Endowus ESG Portfolio

‍The ESG 100% Equity Portfolio underperformed the broader equity market in January by 0.5 percentage points

• The portfolio benefited from its exposure to growth style, as large-cap growth stocks continued to outperform in January
• However, the climate change theme, to which the portfolio had exposure, struggled in January, offsetting the positive relative performance.

The ESG 100% Fixed Income Portfolio outperformed the broad fixed income market in January by 0.4 percentage point

• The ESG 100% Fixed Income Portfolio’s positioning  - overweight in credit risk and underweight in duration - contributed to its relative performance in January. 
• Among the underlying funds, United Sustainable Credit Income Fund delivered the strongest outperformance against the broader fixed income market.

Endowus Income Portfolios

‍The Stable Income Portfolio outperformed the benchmark in January by 0.5 percentage point 

• The portfolio’s shorter duration relative to the benchmark contributed to relative performance. Market expectation on the magnitude of rate cuts was pared back in January, leading to weaker performance of longer duration bonds. 
• Most of the underlying funds delivered outperformance against the benchmark, with PIMCO GIS Income Fund leading the charge. 

The Higher Income Portfolio underperformed slightly the 20-80 benchmark in January 

• The portfolio’s fixed income component outperformed the broader fixed income market, boosted by its shorter duration positioning and allocation to the high yield market. 
• The equity component is responsible for the slight underperformance. Its allocations to emerging markets and Asian equities were the biggest detractors as both markets struggled despite newly announced stimulus from the People’s Bank of China. 

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

• Similar to the Stable Income Portfolio, Future Income Portfolio’s fixed income component outperformed due to its shorter duration and strong fund selection. 
• The portfolio’s equity component, however, underperformed the equity market due to its allocations to emerging markets and Asian equities. 

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. 

Endowus Cash Smart Portfolios

‍Cash Smart Secure continued to generate stable and positive returns

• Cash Smart Secure maintained positive returns throughout the first month of 2024. 
• Both the underlying funds (Fullerton SGD Cash Fund and LionGlobal SGD Enhanced Liquidity Fund) continued to benefit from elevated yield levels.

‍Cash Smart Enhanced grew steadily in January

• Cash Smart Enhanced demonstrated stable positive performance throughout January, with each of the three underlying funds generating returns of approximately 0.30% for the month. 
• United SGD Fund experienced a generally positive performance in January, despite a few days of negative returns attributed to market movements across the Asian market.

‍Cash Smart Ultra ended January on a positive note

• All underlying funds delivered positive returns during the month.
• Notably, funds like the LionGlobal Short Duration Bond Fund provided an extra boost, capitalising on the improving investment environment, particularly in Singapore.

‍Cash Smart projected yields have started to decline slightly from peak yields

• As the markets started to price in the possibility of peaking interest rates and potential rate cuts, money market and short duration bond funds saw a slight decrease in yields.
• The rising rate environment in the past two years has provided an opportunity for the managers of the underlying funds to reinvest and allocate the coupon payments and cash from maturing bonds to higher-yielding bonds.

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Note that the projected yield range as of 31 October 2023 is reflecting that of the new Enhanced and Ultra portfolios.

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