Endowus Portfolios Performance Update (October 2022) — A less hawkish Fed ahead?

A less hawkish Fed ahead?

Wall Street might have found some early Christmas cheer in November amid the 2022 gloom, as fresh Consumer Price Index (CPI) numbers on 10 Nov came in lower than expected. The S&P 500 index surged some 5% on hopes that inflation is running a little less hot than before, giving the US Federal Reserve reason to be less hawkish and to dial back on jumbo rates. 

That comes as October capped the third straight session of quarterly losses on the S&P 500 — the longest streak of quarterly losses since the Global Financial Crisis (GFC) in 2008. 

By Bloomberg’s calculations, some US$36 trillion has vanished from the Bloomberg Global Aggregate Index and the MSCI All Country World Index combined, over the three quarters. Coming off years of easy liquidity, this hefty pullback is faster than that seen during the GFC. What was lost in nine months had also been accumulated over about twice the number of months. 

Will the Fed deliver a little gift ahead of Christmas? Or is it destined to be this year’s party Grinch? The final Federal Open Market Committee (FOMC) meeting of the year is due on 14 Dec, and then, markets will be looking for direction from the Fed on where interest rates are headed in 2023. 

Read more: An explainer on inflation and rates this year

All I want for Christmas is yield

With the current uncertainty, Bank of America’s (BofA) latest monthly global fund manager survey in November showed that investors remained the most overweight in cash, and most underweight on equities now. 

Recession expectations remain heightened, as the aggressive rate hikes are expected to trigger an economic slowdown, the BofA survey showed. Economists will watch to see whether employment is softening. The labour market will be digesting the impact from mounting layoffs by Big Tech firms and the dramatic crypto meltdown. 

From the BofA survey, an overwhelming majority (92%) expect a “stagflation” scenario in 2023, in which growth slows while inflation remains above average, even as consumer prices are projected to decline over the next 12 months.

Still, PIMCO’s research shows that historically, recessions have been a natural part of the economic cycle, occurring every 3.25 years in the US. Between 1945 and 2019, the average US recession lasted about 11 months, while the economic expansion that followed stretched for an average of 65 months. 

For investors worried about a recession, PIMCO advises the following:

• Avoid behavioural bias when making investment decisions, such as selling low during market declines and buying high during market upturns, which may lead to less-than-ideal long-term investment outcomes.
• Stay diversified to potentially mitigate portfolio volatility by allocating across different investments, such as equities, core bonds, credit, and alternatives.
• Ensure that your investment portfolio remains aligned with your long-term financial goals.

Daunting as they may be in the short term, recessions are part of a vibrant economy, PIMCO advised. They may also present opportunities for long-term investors.

We tend to agree. For more on how Endowus manages your portfolio in times of volatility, here’s an explainer. 

Key performance highlights for the Endowus Portfolios in October

• The Flagship Portfolios outperformed their benchmarks for the month, with both the equity and fixed-income segments outpacing the broad equity and fixed-income indices.
• The ESG portfolios outperformed their benchmarks in October. The ESG equity portfolio outperformed in part because of its allocation to the Mirova Global Sustainable Equity Fund. The ESG fixed income portfolio’s outperformance mostly came from the shorter duration and higher credit exposure of the portfolio.
• All three Income Portfolios underperformed their respective benchmarks. It is important to note that the payouts remain consistent and, with rising interest rates, yields have continued to move higher. 
• The Cash Smart Secure solution posted positive absolute returns in October, while the Enhanced and Ultra solutions were negative for the month. As with the Income Portfolios, projected yields for the Cash Smart solutions have continued to increase with the rise in interest rates.

Endowus Flagship Portfolio

The Flagship 100% Equity Portfolio outperformed the global equity market in October

• In a reversal from the previous month, the equity markets — represented by the MSCI All Country World Index (ACWI) — posted positive returns in October. Apart from the emerging markets, the other regions had a good month on the back of positive sentiment arising from central banks’ tone of increasing concern over global growth. China, in contrast, returned about -18% (in SGD terms) over news that China will not be changing its zero-Covid policy in the near term.
• The Flagship 100% Equity Portfolio benefited from slight tilts to value and small caps, as value stocks outpaced growth stocks by a significant margin and small caps outperformed large caps. The slight overweight to emerging markets (versus the MSCI ACWI) had a small negative impact on relative returns.

The Flagship 100% Fixed Income Portfolio outperformed the global fixed income market

• The global fixed income markets declined further in October as central banks continued to raise interest rates, although with a slightly more dovish tone. The UK market was one of the best-performing bond markets as investors reacted positively to the new incoming prime minister. Credit spreads tightened in October, and credit generally outperformed government and sovereign bonds. 
• The Flagship 100% Fixed Income Portfolio’s relative overweight in credit was beneficial to its relative performance. Its outperformance over the Bloomberg Global Aggregate Index was primarily driven by the portfolio’s 35% allocation to the Dimensional Core Fixed Income Fund and the PIMCO GIS Income Fund — these two funds generated positive returns.

Endowus ESG Portfolio

The ESG 100% Equity Portfolio outperformed the benchmark in October

• The ESG 100% Equity Portfolio outperformed the MSCI ACWI in October. The strongest performer was the Mirova Global Sustainable Equity Fund. It was able to turn around the previous month’s sluggish performance, rebounding strongly in October and outpacing the global equity benchmark. 

The ESG 100% Fixed Income Portfolio outperformed the broader fixed income market

• All three underlying funds outperformed the benchmark. The shorter duration and higher credit exposure of the portfolio helped as yields rose and credit spreads tightened in October. 
• The strongest performer was the JPMorgan Global Bond Opportunities Sustainable Fund, which outpaced the global fixed income benchmark by almost 1%.

Endowus Income Portfolios

The Stable Income Portfolio delivered negative returns in October 

• The portfolio’s allocation to the Asian fixed income market detracted, as China saw an increased outflow of foreign capital during the month. 
• In terms of fund selection, selection in the Asian fixed income market detracted as the Fidelity Asian Bond Fund underperformed the broad Asian fixed income market in October. To a smaller extent, our fund selection in US fixed income contributed positively to relative performance, with both the PIMCO GIS Income Fund and the AllianceBernstein American Income Fund outperforming the broad US fixed income market. 

The Higher Income Portfolio was flat in October

• On the fixed income side, similar to Stable Income, the Higher Income Portfolio’s allocation to and fund selection in the Asian fixed income market detracted from relative performance. This was partially offset by allocation to and fund selection in the global and US high yield markets. 
• While developed-market equities rallied in October, emerging-market equities delivered negative returns; real estate and infrastructure stocks also lagged the broad equity market. As a result, the portfolio’s allocations to emerging markets and real estate detracted from performance. That said, the portfolio’s fund selection in the developed-market equities space helped, as the Abrdn Global Dynamic Dividend Fund outperformed the broad developed equities market index by 1%. 

The Future Income Portfolio detracted mildly in October

• On the fixed income side, similar to the other two income portfolios, the Future Income Portfolio’s allocation to and fund selection in the Asian fixed income space were the primary detractors. This was partially offset by positive fund selection in US fixed income through the PIMCO GIS Income Fund, and allocation to the US high-yield markets that did well in October. 
• The allocation to emerging-market equities had a negative impact, but that was partially offset by the allocation to the European equities market, which outperformed the broad market. Our fund selection in emerging-market equities, however, was positive, as the Schroder Global Emerging Markets Opportunities Fund outperformed the emerging-market index by 3.9% in the month of October. 

All three Income Portfolios are achieving their payout targets 

• All three portfolios have been achieving their payout targets consistently despite posting negative returns. Negative price returns are the result of a mark-to-market valuation for fixed income securities and do not impact the actual coupon payments or dividend payout from the underlying funds. 
• As the first chart below shows, the actual payout from each Endowus Income Portfolio — assuming an initial investment of S$100,000 — has been relatively stable, in particular for Stable Income. 
• The recent dip in the monthly payout for Higher Income was a result of 1) increasing hedging cost in the USD/SGD market in October for one underlying fund and 2) another underlying fund maintaining a stable distribution yield, which results in a smaller payout (in dollar terms) when the fund’s net asset value (NAV) goes down. Once the market conditions revert to normal, we expect the payout to pick up. 
• Meanwhile, as the second chart shows, the annualised payout yields for the portfolios have been rising as a function of relatively stable monthly payouts and lower NAVs. This suggests higher forward-looking income if investors enter the market at this price point.

Endowus Cash Smart Portfolios

‍Cash Smart Secure continues to generate positive, stable returns

• The Secure solution generated good, strong returns amid market volatility. The underlying funds — the Fullerton SGD Cash Fund and the Lion Global SGD Enhanced Liquidity Fund — continue to capture opportunities in this rising rate environment via their very short-duration approach.
• The portfolio posted two days of marginally negative returns in October (-0.00017% and -0.000625%). It immediately recovered in the following days. This unusual movement was caused by very small valuation adjustments in foreign exchange (FX) forwards held by the Lion Global SGD Enhanced Liquidity Fund.

Cash Smart Enhanced detracted slightly in October

• The Enhanced portfolio’s primary detractor from performance for the month was the United SGD Fund, which was affected by its exposure to the Asian credit market. 
• The negative impact was somewhat mitigated by the allocation to the Lion Global SGD Enhanced Liquidity Fund, given its short duration and lower sensitivity to rising interest rates.

Cash Smart Ultra posted negative returns in October

• The Nikko AM Shenton Income Fund was the primary detractor, as its allocations to Asian and Chinese bonds continue to hurt performance. As per the latest update from the Nikko Shenton investment team, the fund does not hold any distressed Chinese property names and continues to find opportunities in various Asian markets. While the performance has been disappointing on an absolute basis, its relative performance versus similar peers is more encouraging. It ranks as one of the best performers in the Asian fixed income space in the current environment.
• There were two funds that contributed positively to the Ultra solution’s performance — the PIMCO GIS Low Duration Income Fund and the Lion Global SGD Enhanced Liquidity Fund.

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

• The fall in bond prices has a negative mark-to-market impact, but this results in a higher yield-to-maturity of the bonds that are in the portfolios.
• 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 managers of the underlying funds will continue to take advantage of this environment as they reposition their funds for the next few months.

With digital wealth platform Endowus, you can plan and manage your money — whether held in cash, CPF, or SRS — by investing in globally diversified, intelligent, low-cost portfolios seamlessly. To get started, click here.

Read more: How Endowus manages your portfolios amid market volatility

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