Launch of Endowus Income Portfolios
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Launch of Endowus Income Portfolios

Feb 2023
Dec 2021
income investing, passive income, dividends, and bonds

Note: The Endowus Investment Office reviews the payout targets regularly. For the latest payout targets, please refer to the Income Portfolios' main page. The data in this article was accurate as of 30 Nov 2021, given that the article was first published in December 2021 to announce the launch of the Income Portfolios.

  • Income portfolios made for everyone: Endowus has launched three life stage-based income portfolios created with specific client demographics in mind. These portfolios are designed to meet the real-world needs of our clients for different types of passive income, and have been created with eleven of the best-in-class fund management companies who are the global leaders in the income investing space.
  • Passive income today, while also planning for tomorrow: These portfolios incorporate the basic needs of passive income distribution with potential for capital preservation. However, the varying personal financial circumstances of investors require different income portfolios, with some providing potential capital appreciation of principal invested to enhance income potential in the future.
  • Capital preservation with stable payouts: The Stable Income portfolio is for those nearing or in retirement or those that require a regular passive income stream from their pot of savings. It invests in 100% fixed income that aims to provide capital preservation, mostly in higher quality and broadly diversified fixed income products. It is designed to prevent the distribution payout from eating into the capital of your long term savings as much as possible and maintain stable, long term payout targets of 4~5% p.a., with limited or no capital appreciation.
  • Establishing a sustained, higher cash inflow: The Higher Income portfolio is for working adults, such as the sandwich generation, who have high monthly spending needs. With the ability to stomach a slightly higher risk threshold, the portfolio is  predominantly in fixed income with a skew towards higher risk and higher yielding fixed income products to increase the current payout target of 5~6% p.a. The portfolio also has a 20% allocation to dividend paying equities funds to continue to build wealth with some potential moderate capital appreciation and possible increase in future payouts.
  • Laying a foundation for the future: The Future Income portfolio is for the younger generation mostly in their late 20s and 30s, who would like some regular income with a 3~4% current payout target that can contribute to their monthly spending habits. With time on their side, they can also continue to grow their pot of savings to increase the potential payout amounts over time. The portfolio has 60% allocated to core and higher yielding fixed income funds and 40% allocated to dividend paying and globally diversified equities to potentially grow the invested capital over the long term, so they can achieve a potentially higher amount of future payouts.

Read more: Endowus Income Portfolios: Higher payout targets, outlook, and 2022 review

endowus income summary characteristics

Endowus clients have been asking for income portfolios

A survey of our clients earlier this year showed near-unanimous demand for an income distributing investment portfolio that went beyond the basic features found with existing providers. This is consistent with historical market demand for income-focused funds and products here in Singapore and across Asia.

With an ageing population and the growth of popular investing concepts such as Financial Independence, Retire Early (FIRE), there is a clear preference for monthly payouts and income portfolios to support investors’ goals.

With the perennial demand for income, there have been many income funds (unit trusts or mutual funds) established in the markets. Some even delve into annuity, endowment or insurance-linked products from insurance companies.

However, as highlighted by The Business Times, historical returns have not been great for some of the insurance brokered-products with high fees embedded in them.

Our clients recognise that Endowus’ approach of building multi-manager and multi-fund advised portfolios with diversified sources of income, similar to the institutional investor’s approach, is how an income portfolio should be constructed.

As a result, Endowus has created three income portfolios specially for the various life stages of an investor, so that optimal income investing can be available for people with differing needs and financial circumstances.

There were several salient points we took to heart from the client survey and also designed and optimised through the various due diligence and screening work, both quantitative and qualitative, from the Endowus Investment Office.

  1. Clients requested an independent, multi-manager, best-in-class income solution that has been designed by the Endowus Investment Office.
  2. They wanted Endowus to deliver a portfolio that will meet the different needs of clients at different life stages, cash flow needs, and risk appetite.
  3. They expect Endowus and the Investment Office to actively monitor and update the portfolios, sometimes recommending portfolio changes that are appropriate to either improve risk-adjusted returns or lower costs in a meaningful way. This leaves them to get on with life as they invest passively and seamlessly on the Endowus online platform, always knowing it is advised, managed and with the lowest negotiated costs possible.

Balancing between income and growth

The investment strategy and asset allocation is focused on delivering the needs of the three life-stage based distributing income portfolios.

We varied the risk level by setting the asset allocation — the percentage of fixed income and equities in a portfolio — and then choosing the appropriate underlying assets and funds — such as high-yield fixed or quality fixed income fund — in the asset allocation to meet the income and growth objectives.

comparing income and growth endowus income

Each portfolio has a dominant fixed-income allocation. For Stable Income, the fixed-income allocation is 100% and focused on lower-risk and higher-quality fixed income instruments at one end of the spectrum. Higher Income and Future Income both take on more exposure to higher-yielding (higher risk) fixed income instruments, with Future Income having greater diversification in the source of the quality and high-yield products.

The differing asset allocation and risk parameters allows us to differentiate the products in terms of the level of current payout target, which is maximised at the optimal risk-adjusted level for Higher Income, whereas a more stable and consistent payout was optimised for Stable Income.

Finally, the capital appreciation potential of the initial invested capital into the portfolio will be different across the three portfolios, with limited upside and the aim of capital preservation being the utmost priority for Stable Income, compared to Future Income.

Future Income prioritises higher probability of success over the long term, as the greater exposure to equities, both core and dividend-paying equities, enables potential growth of the invested capital over the long term through the compounding of potential returns.

Who are the Endowus Income Portfolios for?

Our survey showed that the needs were vastly different and could be divided into three groups, mostly along demographics and family structure.

The slightly older generation and those nearing retirement or planning for an early retirement, were primarily focused on having a very stable source of income. They had saved up a decent amount of money across their working lives and now wanted to use that pot of money to provide a source of passive and stable income. As a result, their need for capital preservation is very high. This first group has historically been the main target for income products.

payout frequency and asset allocation endowus income

The second group is the sandwich generation, with both parents and kids to support, and still with a long career runway. They have some savings, but need to balance between heavy and regular expenditures for family, a mortgage, as well as trying to save for the future. They are able to take on risk as they still have time on their side — but capital growth is essential. This balancing act means they need both a higher income now and savings that will still potentially grow over the long term.

The third and final group are a younger generation of investors who want to get started early. They want to build wealth over the long term with some savings. They also want to build a regular passive income stream immediately. While this stream may not cover all their expenses, it would still supplement their monthly needs in addition to providing long-term wealth accumulation and growth. Growing their invested capital means that as time passes they will enjoy potential higher payouts from their growing pool of savings.

Understanding current payout target, estimated capital appreciation

The Income Portfolios are different from the other Endowus Core or Satellite portfolios because they have a specific goal in mind — to pay out a regular and passive income stream for investors.

This primary objective overrides other objectives in investing such as maximising returns. It is entirely possible that if you do not need or want income distributed from your investment, which probably means that you do not even need to have an Income portfolio.

The Endowus Core portfolios, comprising Flagship and ESG sustainable portfolios, are broadly diversified, low cost and passive, strategic asset allocation portfolios that are also non-distributive and reinvests any dividend and payouts so that the amounts compound at a faster rate and build wealth over the long term. If payout is not something you need or are looking for, then our clients should be happy to remain invested in the Core portfolios.

For the Income Portfolios, while the different life-stage based personas provide a better understanding of who and why the income portfolios were created for, we also provide the explicit breakdown of the current payout target — the money you receive in your pocket every month — and the estimated capital appreciation — for Higher Income and Future Income especially as the capital appreciation is expected over the long term to be higher than Stable Income. These two components of returns add up to provide you with an expectation of long-term estimated total returns.

The payout is mostly monthly and fixed in terms of percentage or dollar value paid out. The actual monthly amount an investor receives may vary, but we have a good idea how much it would be, and that's why we call it a target payout and a current payout target.

However, capital appreciation is totally dependent on market movements in both equities and fixed income, and also how the fund manager chooses the underlying securities and what risks are taken to achieve the income payout target.

That is why it is at best an estimate, and we also provide a range rather than a single number to imply that there is uncertainty in outcomes. The range is a lower and higher end of the long term average returns — it is not the worst or best outcome range, but a typical average range over more than 10 years, as income portfolios are expected to be held over the long term.

The underlying invested capital amount may move depending on market movements meaningfully in a best or worst outcome, with a maximum drawdown (peak to trough falls) of double digits at times. However, when you are investing in an income portfolio, what matters most is the payout remains steady or within the range of expectations. This is more important than the fluctuations in the underlying value of the invested amount.

When you add the payout and the capital appreciation you get the total return of the portfolio — a concept unique to the Endowus Income Portfolios.

how total returns are calculated

Note: The Endowus Investment Office reviews the payout targets regularly. For the latest payout targets, please refer to the Income Portfolios' main page. The data in this article was accurate as of 30 Nov 2021, given that the article was first published in December 2021 to announce the launch of the Income Portfolios.

Where do the Income Portfolios sit among the Endowus Advised Portfolios?

risk return metrics income portfolio

The Endowus Stable Income Portfolio is a 100% fixed income solution that sits between the Cash Smart and Core 100% fixed income solutions in terms of the level of risk and expected total returns. The Cash Smart solutions have a primary objective of capital preservation while generating yields above cash deposits. By managing duration, interest rate risk and credit risk, Cash Smart solutions are considered much lower risk than the 100% fixed income portfolios.

The Higher Income Portfolio combines both income and growth by taking a higher level of risk in two ways. One is with a higher exposure to riskier fixed income assets such as high-yield funds and emerging-market and Asian bonds, which provides higher yield and therefore a higher payout but with the risk of higher volatility and temporary periods where prices can be negative. The other is a 20% exposure to the global equities market, primarily in high dividend paying funds invested in equities and real assets. The latter exposure not only tends to have lower volatility than traditional core equities, it is also buffered somewhat by the higher dividend payouts, which contributes to the Higher Income’s strong yield payout.

The Future Income Portfolio again combines both income and growth by taking a higher level of risk in the same way as the Higher Income Portfolio. However, the emphasis here is on long-term compounding growth of returns through a higher equity market exposure to not only high-dividend and high-yielding real asset exposure, but also core, globally diversified equities via the Dimensional World Equity Fund. The Endowus-exclusive fund gives direct exposure to the broadest global equities markets through over 12,000 securities in one fund, systematically with higher exposure to value, profitable, and smaller companies when compared to a typical market cap weighted index. Similar to the Higher Income portfolio, Future Income takes marginally higher risk in fixed-income markets through some exposure to high yield, emerging market and Asian bonds.

Income Portfolios custom-built with global fund managers

The Income Portfolios invest in income-generating assets through a basket of carefully-selected funds. Such assets include global high yield bonds, global investment grade bonds, global government bonds, securitised assets, emerging-market bonds and dividend-paying stocks.

Everybody has their unique strengths and weaknesses, and this is also true for fund managers. A fund manager that’s excellent at managing European dividend equity might not be good at the US high-yield market.

Unlike some other solution providers that tie up with a single fund manager for their income products, Endowus is fund manager-agnostic and is simply single-minded in finding the highest-quality income funds as fundamental building blocks of the portfolios.

We have worked with fund managers who individually specialise in the different income niches — whether higher-yielding fixed income or real asset funds, or high-dividend equity funds. For the three Income Portfolios, we have worked with specialists fund managers who are leaders in their field both globally and locally, including many familiar names such as Abrdn, Alliance Bernstein, Allianz, BlackRock, Dimensional, Fidelity, First Sentier, JP Morgan Inv Mgt, Neuberger Berman, PIMCO, and Schroders.  

Scouring the globe for best-in-class funds and working with fund managers to introduce new funds, sometimes exclusively to Endowus, is a hallmark of the work that the Endowus Investment Office does to ensure our clients can easily invest in institutional-grade portfolios.

underlying fund allocation income portfolios

How Endowus built the Income Portfolios

By seeking to provide consistent target income distribution and attractive potential returns, the Endowus Investment Office focused on working towards the most important aspects of creating income portfolios and in order to meet our client’s income investing goals.

  1. A focus on income, dividends, and stable but highest achievable target distribution by balancing higher-yielding assets and higher-quality assets, which perform differently in varying growth environments.
  2. Designed with resiliency in mind, working with the world’s leading fund managers to manage risk of market volatility and changing macro environments to achieve the client’s desired level of payout target.
  3. All-weather approach. No matter which way the markets and interest rates move, our income investing strategies managed by the Endowus Investment Office can access opportunities around the world – thanks to its globally diversified, multi-asset, multi-manager, flexible approach.
  4. Efficient asset allocation between fixed income and equities to balance between the primary objectives of each portfolio between income and growth, and between capital preservation and appreciation.

The Endowus Income Portfolios are distinctive because they are independently constructed by Endowus employing a robust and holistic investment process.

Endowus, as an independent financial adviser, is at a unique position to select and provide access to some of the best-in-class income generating funds to its clients.

When building the income portfolios, Endowus is not biased to any single fund manager, and simply treats each asset class as a building block of the portfolio and searches for the best product offering in its respective space.

This is because Endowus is only paid by our clients, unlike most other distributors of income products or funds who get paid by the fund managers to push certain products and build hidden fees into their structure. Any trailer fees paid to Endowus by the fund managers is rebated 100% back to the clients in the case of Endowus.

Endowus Income Portfolio versus other passive income products

There are many ways to invest with income in mind, so the question naturally arises — why use the Endowus Income Portfolios as opposed to buying a single income fund? Why use the Endowus Income Portfolio over other companies’ income portfolios or passive income products from insurance companies?

The Endowus Income Portfolios were created to meet the requests of our clients whose needs are not met by the market today, and who trust Endowus to build a sophisticated institutional quality portfolio that can serve the needs of a diverse spectrum of investors with a differentiated approach.

One of the key areas that clients have meaningful concern is income distribution at the expense and erosion of their invested capital. Funds dip into the principal amount to offer distributions as high as 8%, but are effectively eating away at the investor’s life savings. This is an area that we focused on to develop products that either prioritise capital preservation or actually aim to increase capital through asset allocation to sustain or improve the future payouts from the invested amount.

All three of the Endowus Income Portfolios are not intended to be decumulating. While the underlying funds may at times utilise capital to alleviate distribution shortfall or smooth out payout stability during times of volatility, all three portfolios are designed either for potential capital preservation (Stable Income) or potential growth (Higher Income and Future Income).

In addition to the decumulating concerns raised, many of the other passive income solutions out there — such as annuity products, endowment plans, and insurance-linked products — have delivered tepid results to investors because of high hidden costs, transaction charges, poorly designed structures or poor underlying asset choices. While they look good initially, the actual returns and performance of many of these products have been very mixed, with those involving an investment component generating well-below market returns.

What is an income portfolio?

Income portfolios have historically invested in primarily fixed-income assets but can also invest in equities in order to capture dividend yield and growth of capital.

The diverse investments in fixed income and higher quality, dividend stocks has led generally to lower volatility and better downside resilience for Income funds. Furthermore, the current regular payouts are often fixed in dollar value or percentage yield and are paid out mostly on a regular monthly basis, thus providing a good source of regular income and peace of mind.

Income funds primarily invest in various fixed-income securities, including government bonds, municipal, state or local government bonds, quasi-government bonds, asset-backed securities, convertible bonds, high-yield bonds, and emerging-market bonds.

Most income funds invest in secure government or investment-grade bonds, but many also have an allocation to high yielding fixed income securities such as emerging-market bonds or high-yield bonds that are sometimes below investment grade. Some income funds, especially blended ones with both fixed income and equities, as well as pure equity income funds, invest in stocks, Reits and listed real asset securities that have high dividend yield or payouts.

Income funds, in general, involve a lower level of risk as compared to a typical fixed income portfolio with regular, stable, passive distributing income to offset the volatility of returns.

However, by utilising a distribution fund and not accumulating the coupons and dividends of the fund to be reinvested in the fund itself, it limits the growth of capital and wealth over the longer term.

The income portfolios maintain the very liquid nature of all the Endowus portfolios as compared to investing in single fixed-income instruments, which sometimes do not have liquidity when you most need it. Overall, while the portfolio is exposed to the credit and interest rates risks of other fixed-income instruments, it would also limit the volatility, as income portfolios tend to be invested for a longer period of time generally than other typical portfolios.

For more details of all three Endowus Income Portfolios, click here. To get started, follow this link.

Next on the Endowus Fin.Lit Academy

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Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person. Opinions expressed herein are subject to change without notice.

Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

For details of the funds, their related fees, charges and risk factors, please refer to respective funds’ prospectuses. The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations which are available. Please note that the prospectus, profile statement, product highlight sheet, fund factsheet or other offer or product documents may contain references about the expected risk tolerance of their target investors. These are in no way indicative of how we at Endowus have assessed your risk tolerance based on your stated objectives and financial situation. Endowus accepts no responsibility for investment decisions made in response to the expected risk tolerance levels mentioned in the product or offer documents.

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income investing, passive income, dividends, and bonds

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