Introducing the new Ultra Defensive Portfolio
The Endowus Ultra Defensive Portfolio (UDP) was built by curating a portfolio of four high-quality bond allocations to enhance the downside protection of the fixed income portfolio while still maintaining stable market returns. The outcome is a safer lower volatility fixed income portfolio, that sits right in between our existing 100% fixed income Advised Portfolio and our Cash Smart Enhanced cash management product. This portfolio includes a new Low Duration Income Fund, a sister fund to the flagship PIMCO Income Fund. The new fund was launched in Singapore as an SGD-hedged Institutional share class exclusively for Endowus customers by PIMCO. PIMCO is the largest fixed income manager globally with $2 trillion of assets under management. This portfolio can be invested using Cash and SRS monies.
Fund Components of the Ultra Defensive Portfolio
The genesis of this portfolio was to offer a portfolio that was still 100% allocated to fixed-income funds but has a lower volatility characteristic. In other words, make it safer and less volatile, and therefore less risky than the current Endowus 100% fixed income Advised Portfolio in the general investing (general wealth accumulation) goals. The rationale being that while the Endowus Advised Portfolio is still a safe and solid investment with very strong returns in the past, in the worst disruptions to the global fixed income markets in March 2020 for example or in 2008, even that portfolio saw considerable volatility. Of course most of our investors rode it out as they should and ultimately gained from the exposure to 100% fixed income markets as the market quickly recovered with our portfolio outperforming this year just as it did in 2018 versus the benchmark and other asset classes.
The current Endowus Advised Fixed Income Portfolio
However, there was a certain group of investors who were surprised and concerned by the volatility of what was considered a “safe” 100% bond investment being down by double digits from peak to trough. The reason this was a problem was because the emotions associated with the volatility and not understanding the nature of target risk portfolios. This meant that investors could make the wrong choice - either panic and sell down when the portfolio is in negative territory or switch to a more conservative portfolio at the wrong time. In order to meet the needs of our clients and investors, we felt that introducing an Ultra Defensive Portfolio would suit a client base that wants a more secure long term fixed income portfolio than our Advised 100% fixed income portfolio but higher long term returns than the Cash Smart products - hence the birth of the UDP.
Comparison of the three portfolios: UDP vs 100% Advised Fixed Income vs Cash Smart Enhanced
Long term performance and growth of wealth of the 3 portfolios
How Endowus creates target-risk portfolios and what does risk tolerance mean?
Target risk-based portfolios use a concept similar to value-at-risk (VAR). This is meant to show you how much money you can lose in a certain time period in a worst-case scenario. Endowus uses this concept of target risk to provide a worst-case lifetime outcome to gauge the risk appetite of our clients and guide you to the right asset allocation that is suitable to your risk appetite.
The traditional VAR concept tends to understate the probability of occurrence of the worst outcome and also its magnitude hence from a behavioral perspective, showing our clients the worst historical outcome provides a better understanding of the actual risk associated with historical worst-case outcomes. The probability of a once in a lifetime worst-case outcome repeating itself is obviously extremely low. But at the same time, there is nothing to say that it cannot be repeated or an even worse outcome can never happen. This is why we want to make clear to our clients the potential risks associated with investing in financial markets while understanding the low probability of such an outcome especially with a longer investing horizon.
This is also why diversification is so important as diversifying across asset classes, sub-asset classes, styles of investment, and also geography allows for these worst-case outcomes to be limited in the overall impact on the portfolio. This is a very simple concept that is not appreciated
Risk Tolerance bar for General Investing (General Wealth Accumulation) goal
Based on our risk scale, in the past, the safest investment option on our general investing (general wealth accumulation) goal was the 100% fixed income product. But the “safest” Advised Portfolio might have higher volatility than what our clients expect from a 100% fixed income portfolio. The Advised Portfolio allows for a potential worst-case historical outcome of approximately -15%. This occurred between July-Oct 2008. This year, amidst the pandemonium in March 2020, the portfolio fell by -11.3%. Compared to this, in the worst outcome in 2008, the UDP fell by -10.4%. In a 12 month rolling period, the UDP’s worst performance was only -8.3% compared to the -11.3% for the advised portfolio.
On a much more conservative target risk level stands the Endowus cash management account (CMA) and pre-designed efficient Cash Smart solutions. Through Fund Smart you can also now build CMA portfolios with a lower risk using cash funds and money market funds. For our safer Cash Smart Core product, the potential risk of loss is less than -1%. So there’s virtually no risk of ever losing money if you invested even for a few months. The Cash Smart Enhanced solution is a higher yield product that uses short-duration bond funds to achieve a higher yield but has a slightly higher risk of -2% which means that again a very low risk of losing money if you invested for several months. We also have components in the CMA goal that have up to -3.5% risk level, and these are normally single fund short duration bond funds as you can see below for our threshold of risk tolerance.
Risk Tolerance bar for Cash Management Account (CMA) goal
We use the worst 12-month percentage loss range as the risk tolerance for GWA because we assume that GWA is a portfolio that investors would hold onto for more than 12 months and more likely several years if not tens of years. For a cash management solution, which is a short-term liquidity solution, we would have to assume that the holding period can be shorter and so the maximum drawdown (peak to trough fall in value) is a more accurate gauge of risk to the investor.
While the cash management account goes up to -3.5% potential maximum drawdown risk, if we use the same concept, our 100% fixed income portfolios would have a -15.1% potential maximum. The -15% from the 100% fixed income portfolio and the -3.5% from the riskiest cash management account is a large gap, so the UDP sits in the middle with a -10% risk.
Risk-based comparisons between the three funds
*Risk level for the highest risk cash management option on Fund Smart, which is United SGD, a short duration bond fund.
** Beginning date: May 11, 2008. Ending date: Jul 8, 2009. In March 2020, the Advised Fixed Income Portfolio experienced peak-to-trough fall of -15.1%
***Beginning date: May 9, 2008. Ending date: Jun 30, 2009. In March 2020, the UDP experienced peak-to-trough fall of -10.4%
Especially in times of market volatility, when investors want to hide or protect their savings from any losses, this new UDP solution will allow for capital preservation, while not letting it sit too idle in the form of cash with its lower yields.
It can also be a decent long term capital investment for people who can take slightly more risk than our Cash Smart Enhanced yield products to go beyond 2% and closer to 3% yield targets and also achieve capital market value appreciation at the same time.
How to build and tweak the UDP on Fund Smart
You can create this new UDP immediately on our new Fund Smart platform right now. Once you log on to the Endowus.com platform and select a new goal in the new Fund Smart solution, you can choose from the pre-selected best-in-class funds and plug in the weightings from the table above, which have been optimized by our Investment Office and you are set.
The beauty and flexibility of the Fund Smart is that you can also choose to use the current funds and weights optimised for the UDP model portfolio and tweak it to your personal circumstance, needs and goals. For now we recommend that you follow the recommended weightings but if you are a sophisticated investor and want to adjust the weightings that is possible too on Fund Smart.
You can add an additional new goal as UDP and have the funds sit between your Cash Smart liquidity management account and your longer term 100% fixed income allocation and bucket your money in terms of risk and when you will need to access the money. We hope that UDP will be another important investment solution for our current and future clients to meet their needs in building a robust personal portfolio to secure your financial future.
Performance and volatility data for UDP and underlying funds
Historical performance of the Ultra Defensive Portfolio and underlying funds
Maximum drawdown - the worst historical return from peak to trough in any given period.
Worst 12-month percentage loss - the worst performance that has happened over a rolling consecutive 12 month period.
CMA - Cash Management Account - Cash Smart solutions are a pre-designed and optimised CMA solution that investors can take off the rack and start investing. Cash Smart has two portfolios - CORE and ENHANCED with different risk and target yields. Please see more details here.
GI - General Investing (General Wealth Accumulation) is the standard goal for investing