Endowus Portfolios Performance Update (May 2022) — The Powell Play
Endowus Insights

Endowus Portfolios Performance Update (May 2022) — The Powell Play

Updated
July 22, 2022
published
June 17, 2022
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The Powell Play

The Powell Play

The Fed has made a bold statement with a 75 bps (0.75%) increase in the federal funds rate, the largest rate hike since 1994. Fed chairman Powell stated that he didn’t expect moves of this size to become the norm going forward but left open the door to another possible 75 bps hike, with the market now expecting a minimum 50 bps increase next month. The all-important Fed dot-plot median forecast has shifted to a higher interest rate at the end of 2023 for the first time of 3.8% with the end of 2022 forecast at 3.4% (another possibly 175 bps of tightening for the remainder of the year), thereby backing up their commitment to do what is necessary to bring down inflation. 

What is priced in by the Fed vs the market now? 

Graph on fed pricing during July policy meeting

It all starts and ends with inflation

What drove these Fed actions was the latest US Consumer Price Index (CPI) in May accelerating to a 40-year high at 8.6% year-on-year and up 1% from April, dashing hopes that inflation in the world’s largest economy has peaked. Stocks and bonds have continued to fall sharply following the inflation print, giving up some of the gains at the end of May when markets were hopeful that inflation was peaking. The latest market movement reflects worries that the Fed will get more hawkish, and that a wrong move would trigger a hard landing in the economy, leading to stagflation. 

services inflation continues to build in the US

Growth fears rising, leading to uncertainty and volatility

Powell also stated that unemployment, which is re-approaching pre-pandemic levels of a 50-year low, will rise again and growth is likely to slow, putting recession firmly in the picture. Whether the market has already priced it in is a different issue altogether. Amid fears of a hard landing in the US, the World Bank in June cut its 2022 global growth forecast to 2.9%, saying a recession will be “hard to avoid” in many countries. In fact, US retail sales fell in May for the first time in five months, and consumer sentiment has recently hit an all-time low. The next key data is the May PCE numbers on June 30. The core Personal Consumption Expenditure (PCE) Price Index is the preferred measure of inflation by the Fed. While the markets may get some respite after a tough few weeks in both equities and fixed income markets, uncertainty and volatility is likely to remain elevated until inflation numbers stabilise and there is better visibility on the Fed rate path and growth outlooks. 

Watch our webinar replay: Is the US economy headed for a tough recession?

Key performance highlights for the Endowus Portfolios in May

  • Endowus key portfolios remained largely resilient last month, with the Core Flagship Portfolios outperforming the broader market and benchmark indices for both equities and fixed income.
  • The Core ESG Portfolios maintains its meaningful growth tilts and so underperformed the global benchmark for equities but outperformed the MSCI ACWI growth index. Fixed income outperformed the benchmark. 
  • The Income Portfolios remained resilient in a turbulent market and recovered some of the losses. Most importantly, the payouts remained consistent and with rising interest rates, yields are continuing to move higher. 
  • All three Cash Smart solutions posted a positive absolute return during May with Secure consistently delivering a similar positive return month in and month out. Enhanced and Ultra turned positive in terms of returns. Like the Income Portfolios, projected yields have continued to rise due to rise in market interest rate moves.

Endowus Flagship Portfolios

SGD, monthly data as of 31 May 2022

May 2022 YTD 2022 1Y 3Y
Annualised
Endowus Flagship Portfolios
100% Equity -0.2% -9.7% -1.8% 12.0%
100% Fixed Income 0.2% -9.0% -8.8% 0.3%
Global Indices
MSCI All Country World Index -0.8% -11.4% -3.4% 11.6%
S&P 500 Index -0.7% -11.3% 3.2% 16.3%
Bloomberg Global Aggregate Index -0.1% -7.7% -7.0% -0.3%
Bloomberg Global Aggregate Corp Index 0.2% -10.5% -9.4% 0.3%
JP Morgan EMBI Global Index 0.2% -14.1% -13.7% -1.5%

Source: Endowus, Morningstar. Return is based on monthly data from 1 January 2022 to 1 May 2022. Portfolio performance shown is net of fund-level fees and does NOT include Endowus Access Fees.

The fixed income markets rallied in May, buoyed by belief that rate hikes by the Fed have been mostly priced in and that the central bank’s tightening might start to relax because of heightened fears of a global recession. Some investors are also finding the asset class attractive once again because of the higher yields.

As for the equity markets, the possibility of a slightly less hawkish Fed has also been a positive boost. Most of the major equity indices ended the month flat or with slight positive gains.

Endowus Flagship 100% Equity Portfolio outperformed the broader market

  • This Flagship Portfolio benefited from its slight value tilt as value stocks continue to outperform growth stocks in May. The portfolio was up about 0.3% relative to the MSCI ACWI index — considered a proxy for the broad global equity market.

Endowus Flagship 100% Fixed Income Portfolio generated positive returns

  • The May rally in the fixed income markets proved to be a boon for this Flagship Portfolio as it eked out absolute and related positive returns. Most of the underlying fixed income funds in the portfolio outperformed the broad global fixed income market, contributing to the overall performance.
  • The portfolio’s relative overweight in corporate debt also had a positive impact as corporate debt generally outpaced government and sovereign debt in May.

Endowus ESG Portfolios

SGD, monthly data as of 31 May 2022

May 2022 YTD 2022 1Y 3Y
Annualised
Endowus ESG Portfolios
100% Equity -1.7% -15.9% -7.5% 14.7%
100% Fixed Income -0.1% -7.6% -7.7% 0.6%
Global Indices
MSCI All Country World Index -0.8% -11.4% -3.4% 11.6%
MSCI All Country World Growth Index -2.9% -20.1% -10.1% 13.1%
MSCI All Country World Value Index 1.0% -2.6% 2.8% 9.0%
Bloomberg Global Aggregate Index -0.1% -7.7% -7.0% -0.3%
Bloomberg Global Aggregate Corp Index 0.2% -10.5% -9.4% 0.3%

Source: Endowus, Morningstar. Return is based on monthly data from 1 January 2022 to 1 May 2022. Portfolio performance shown is net of fund-level fees and does NOT include Endowus Access Fees.

The Endowus ESG 100% Equity Portfolio proved resilient despite its growth tilt 

  • The ESG 100% Equity Portfolio underperformed against the MSCI ACWI Index in May as the growth tilt again hurt the portfolio. 
  • The lack of exposure to the energy sector was one of the biggest detractors to the portfolio as the energy sector continued to be the best performing equity sector in May. 

The Endowus ESG 100% Fixed Income Portfolio outperformed the broad global fixed income market

  • The portfolio’s overweight exposures to corporate debt and emerging market bonds were major contributors to its relative performance for May.

Endowus Income Portfolios

SGD, monthly data as of 31 May 2022

May 2022 YTD 2022 1Y 3Y
Annualised
Endowus Income Portfolios
Stable income -0.1% -8.2% -7.6% 0.4%
Higher income -0.4% -8.6% -7.4% 2.4%
Future income -0.1% -8.5% -6.9% 4.5%
Global Indices
MSCI All Country World Index -0.8% -11.4% -3.4% 11.6%
Bloomberg Global Aggregate Index -0.1% -7.7% -7.0% -0.3%
Bloomberg Global Aggregate Corp Index 0.2% -10.5% -9.4% 0.3%
JP Morgan EMBI Global Index 0.2% -14.1% -13.7% -1.5%

Source: Endowus, Morningstar. Return is based on monthly data from 1 January 2022 to 1 May 2022. Portfolio performance shown is net of fund-level fees and does NOT include Endowus Access Fees.

All three Endowus Income Portfolios fared well against their most relevant market indices 

  • The Stable Income Portfolio performed in line with expectations despite facing headwinds in the Asian fixed income market. 
  • The Higher Income Portfolio was negatively impacted by its higher allocation to Real Estate and European equities. Real estate was the worst performing asset class in May, as fears of slowing housing markets in Europe and the US pummelled real estate equities. 
  • The Future Income Portfolio showed resilience as it performed well against its benchmark. The portfolio’s equity sleeve tends to have a value bias, which has been beneficial to its relative performance in the recent months.

All three portfolios are consistently delivering their respective payout targets 

  • Actual payout remains stable despite the slight negative returns across the portfolios. Negative returns generated by a mark-to-market effect do not impact the actual coupon payments or dividend payout from the underlying funds. 

Higher interest rates might cause short-term dislocation in an investor’s fixed income portfolio but could lead to higher yield in the longer term.  

  • In the long term, a higher interest rate environment means investors can have their proceeds reinvested in higher yielding instruments. This sets the stage for higher income generation for investors seeking a more robust income payout.
  • With the current market backdrop of interest rates moving higher, PIMCO was the first to announce higher distribution through its PIMCO GIS Income Fund — this rises from SGD 0.0334 to SGD 0.0429 per unit from June 2022.
Market volatility had little impact on income objectvie

Endowus Cash Smart Portfolios

SGD, monthly data as of 31 May 2022

May 2022 YTD 2022 1Y
Endowus Cash Smart Portfolios
Cash Smart Secure (latest duration: 3.7 months) 0.08% 0.33% 0.74%
Cash Smart Enhanced (latest duration: 1.1 years) 0.25% -0.65% -0.35%
Cash Smart Ultra (latest duration: 1.7 years) 0.15% -1.97% -2.12%

Source: Endowus, Morningstar. Return is based on monthly data from 1 January 2022 to 1 May 2022. Portfolio performance shown is net of fund-level fees and does NOT include Endowus Access Fees.

All three Cash Smart Portfolios posted positive returns in May

  • The Secure Portfolio continued to provide stable and positive returns as expected despite volatile market conditions. Its ultra short duration means the portfolio is relatively more liquid than other higher duration portfolios. It is also less sensitive to changes in interest rates.
  • Both the Enhanced and Ultra Portfolios saw a rebound after the lows in late-April and mid-May respectively with decent positive returns for the month.  
  • The underlying funds continue to lower or at least maintain their level of duration in an effort to minimise sensitivity against rising rates. 
  • There is also a bias towards higher quality issuers in this volatile period.

Cash Smart projected yields have been on an upward trend with the rising market interest rates

  • The rising rate environment provides an opportunity for the underlying funds to reinvest and allocate the coupon payments and cash from maturing bonds to higher yielding bonds. 
  • The fall in bond prices has a negative mark-to-market impact but it results in a higher yield to maturity of the bonds that are in the portfolio. Hence, while Cash Smart is still showing negative returns for the year and are sensitive to interest rate movements still, the projected yield will continue to go up as long as the market interest rates continue to go up and interest rate hikes by the Fed and central banks continue. 
  • This is something that the underlying fund managers will continue to take advantage of as they reposition the portfolio going forward and does not reflect any changes to the Endowus allocation within the Cash Smart solutions. It is just a reflection of market movements in both bond prices and interest rates.
Historical projected yield range of cash smart portfolios

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