- Markets have digested the higher interest rates that have come through in the first nine months of 2022, with peak rates expected by the end of the year of 4.5-4.75% if the Fed raises rates by additional 75bps each at the last two FOMC meetings of 2022.
- Both equities and fixed income were hammered in the past quarter, reflecting both the aggressive pace of rate hikes, as well as the growth and inflation concerns weighing on investors’ minds. Even commodities and gold — deemed as traditional inflation hedges — were not spared.
- Amid this volatility, a number of the Endowus advised portfolios generally performed in-line with the broad markets during the third quarter, as shown in the performance of our Flagship Portfolios. The core portfolios across the different series faced headwinds on different fronts but we continue to view the underlying funds as positioned to deliver value over the long term.
- Given the rough markets today, dollar-cost averaging (DCA) can work to your advantage during a downturn, as you ride out the lows to enjoy the recovery later.
- For more on the market outlook, click here.
Endowus core portfolios — Q3 2022 performance comparison
Endowus Flagship Portfolio — Cash/SRS
The Amundi Prime USA Fund and Amundi Index Global Agg 500m Fund were added to the Flagship Portfolios at the end of July.
Key performance highlights: The Flagship Cash/SRS Portfolios posted negative returns in the third quarter, alongside the global equity and fixed income markets.
The 100% Equity Portfolio, in the third quarter, faced headwinds with its value tilt and the slight overweight to emerging markets (EM) as growth outpaced value and EM underperformed the rest of the world. Most of the underlying funds in the Flagship equity portfolio performed in line with their benchmarks, except for the Dimensional EM Large Cap Core Equity Fund, which underperformed its benchmark, MSCI EM Index, by a slight margin. The tilt to value was a major detractor for the Dimensional fund’s relative performance.
The Flagship Cash/SRS 100% Fixed Income Portfolio underperformed the broad global fixed income market, as represented by the Bloomberg Global Aggregate Index. The two worst performers in the portfolio were the Dimensional Global Core Fixed Income Fund and the PIMCO EM Bond fund. The Dimensional fund tends to have an overweight to corporate bonds relative to the Bloomberg Global Aggregate Index. As for the PIMCO fund, some of the major detractors from relative performance in the quarter were overweight allocations to Egyptian and Sri Lankan debt.
Endowus Flagship Portfolio — CPF
Key performance highlights: The Endowus Flagship CPF Portfolios also posted negative returns in the third quarter of 2022. The 100% Equity Portfolio underperformed the MSCI All Country World Index (ACWI) by about 0.4 percentage points while the 100% Fixed Income Portfolio outperformed the Bloomberg Global Aggregate Index by 0.3 percentage points.
The 100% Equity Portfolio tends to have a slight overweight to the emerging markets relative to the MSCI ACWI Index, and this had a negative impact in the third quarter. Another major detractor was the FSSA Dividend Advantage Fund. The FSSA fund faced headwinds in the brief July rally and underperformed the broad equity market this past quarter.
The 100% Fixed Income Portfolio has slightly less than a third allocated to the more conservatively positioned and lower-duration (i.e. less sensitive to interest-rate movements) UOB United SGD Fund, and this proved beneficial as longer-duration bonds sold off more in the third quarter in the face of rising interest rates.
Endowus ESG Portfolio
Key performance highlights: The ESG 100% Equity Portfolio underperformed the MSCI ACWI Index in the third quarter, returning -5.1%. Both the Schroder ISF Global Sustainable Growth Fund and Schroder ISF Global Climate Change Fund contributed significantly to relative performance, but the positive impact was not able to offset the underperformance from the Mirova Global Sustainable Equity Fund. The main reason for Mirova’s underperformance was stock selection, particularly allocations to a US computer software company and a European renewable energy company. Mirova, as a long-term equity investor, maintains its investment thesis on both companies.
The ESG 100% Fixed Income Portfolio outperformed the Bloomberg Global Aggregate Index, returning -3.2%. The primary contributor to relative performance was the duration positioning of the portfolio, which is shorter than the benchmark. The best-performing fund in the portfolio was the JPM Global Bond Opportunities Sustainable Fund, which outperformed the benchmark by 2.3% over the quarter.
The companies in the Endowus ESG Portfolios continue to demonstrate how businesses can also be responsible stewards and deliver positive societal and environmental impact. Endowus is actively reviewing ESG data as these metrics become more available.
For example, we find that the ESG 100% Equity Portfolio aligns better with the United Nations Sustainable Development Goals (UN SDGs) as compared to the MSCI ACWI Index. The companies in the portfolio have, on average, lower greenhouse gas emissions, a better board gender diversity profile, and lower water withdrawal intensity across their value chain.
As for the ESG 100% Fixed Income Portfolio, the PIMCO GIS Climate Bond Fund currently has more than 60% allocation in green bonds, with the remainder in issuers that lead in mitigating both carbon emissions and broader environmental externalities. The United Sustainable Credit Income Fund invests in companies that contribute to the UN SDGs, in particular, SDG 1 (No Poverty), SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation and Infrastructure), and SDG 11 (Sustainable Cities and Communities).
Endowus Factor by Dimensional Portfolio
Key performance highlights: The Factor 100% Equity Portfolio was flat against the MSCI ACWI in the third quarter. The emphasis on value stocks and the slight overweight to emerging markets were the primary detractors from relative performance. However, the small cap tilt was beneficial to portfolio performance, and that helped mitigate the negative impact.
The Factor 100% Fixed Income Portfolio performed in line with the broader fixed income market. The Dimensional Global Core Fixed Income Fund detracted from performance as it was the worst-performing fund in the line-up. The allocations to the two shorter-duration funds, which tend to be less sensitive to rising rates, aided relative performance and helped offset some of the underperformance.
Endowus Satellite Portfolios
Launched in November 2021, Endowus Satellite Portfolios are designed to supplement the core portfolios and offer clients specific exposure to opportunities in selected regions, themes, asset classes, and trends. In taking a core-satellite approach, most investors should allocate the bulk of their asset allocation to the core portfolios.
China Equity and Fixed Income Portfolio
Key performance highlights: The China Equity Portfolio registered negative returns in the third quarter. One of the major detractors from performance was the portfolio’s underweight to energy names, which have rallied over the quarter. On the positive side, strong returns from the information technology sector and an underweight to the consumer discretionary sector contributed meaningfully to performance.
The China Fixed Income Portfolio registered negative returns, impacted by the poor performance of onshore bonds against a backdrop of a weakening yuan and increasing yield differentials as US Treasury yields continued on an upward trajectory. This was cushioned by the portfolio’s offshore bond exposure, which showcased resilience over the quarter.
Low Volatility Fixed Income Portfolio
Key performance highlights: The Low Volatility Fixed Income Portfolio performed in line with expectations; it registered negative returns alongside the various fixed income sub asset classes. The two biggest holdings of the portfolio, the PIMCO GIS Total Return Bond Fund and Legg Mason Brandywine Global Income Optimiser Fund, slightly underperformed the Bloomberg Global Aggregate Credit Index as they were affected by the rate hikes in the US over the quarter. The portfolio has significant exposure to US fixed income and corporate bonds.
Key performance highlights: The Megatrends Portfolio slightly underperformed the benchmark, as inflation and recessionary fears continued to weigh on growth-oriented companies. The portfolio gained in July when markets enjoyed a brief boost, but suffered declines in the rest of the quarter as the bearish sentiment returned. Most of the portfolio’s underlying funds performed in line with the MSCI ACWI benchmark, with the exception of the BlackRock BGF Nutrition Fund, which was the main detractor. The BlackRock fund was negatively impacted by several stock-specific events in September, such as Norway’s announcement of a new 40% “resource rent” tax that affected the country’s largest salmon-farming firms.
Key performance highlights: The Technology Portfolio outperformed the MSCI ACWI IT Index by about 1.3 percentage points in the third quarter. Most of the outperformance was driven by the brief rebound in July, when all of the funds registered positive returns. The portfolio rallied harder than the index due to its greater exposure to growth and small cap stocks, which enjoyed stronger performance.
Global Real Estate Portfolio
Key performance highlights: The Global Real Estate Portfolio underperformed the benchmark in the third quarter. Following a strong month in July, the Global Real Estate Portfolio pared all the gains and detracted -10.5% in Q3 as the global real estate sector significantly underperformed the broader market indices in the quarter. The BlackRock BSF Global Real Assets Securities Fund was the worst-performing fund for the quarter, returning -13.8%, as its overweight to Europe, healthcare real estate investment trusts (Reits), and the digital infrastructure industry dragged on performance.
Endowus Income Portfolios
Key performance highlights: All three Endowus Income Portfolios performed in line with expectations, continuing to meet their payout targets.
The Stable Income Portfolio outperformed the Bloomberg Global Aggregate Index in the third quarter. The relatively short duration positioning of the portfolio helped to cushion the decline in fixed income assets. In addition, the portfolio’s allocation to emerging markets (EM) debt helped with performance.
The Higher Income Portfolio underperformed the 20-80 Equity-Fixed Income Composite Index by 1.1 percentage points over the third quarter. The portfolio’s fixed income sleeve with its shorter-duration positioning acted as a ballast, but the portfolio's overweight allocations to EM, real estate, and infrastructure equities led it to detract from its relative performance.
The Future Income Portfolio underperformed the 20-80 Equity-Fixed Income Composite Index by a slight margin in the third quarter. Similar to the Higher Income Portfolio, the Future Income Portfolio’s fixed income allocation outperformed the Bloomberg Global Aggregate Index because of its shorter-duration position and allocation to EM debt and high-yield corporate debt. But its equity sleeve underperformed the MSCI ACWI Index. The Aberdeen Global Dynamic Dividend Fund was a detractor from performance, as was the portfolio’s allocation to EM and Asian equities. The allocation to European equities through the BlackRock BGF European Equity Income Fund helped to offset some of the negative impact.
All three Income Portfolios are achieving their payout targets.
- Actual payout has remained stable despite the negative returns across the three portfolios. Negative price returns have resulted in a mark-to-market decline 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 stable on a monthly basis.
- Meanwhile, as the second chart shows, the annualised payout yields for the portfolios have been rising as a function of stable monthly payouts and lower net asset values.
Endowus Cash Smart Portfolios
Key performance highlights: The Cash Smart Portfolios have generally performed in line with expectations.
The Cash Smart Secure Portfolio continues to generate consistent, positive returns. The portfolio’s allocation to institutional bank deposits, as well as ultra short-duration instruments and money market funds, makes it an attractive option for investors seeking a high quality and highly conservative investment with the potential to provide relatively higher returns than a pure cash instrument. The portfolio generated the highest yield since inception in the third quarter of 2022, benefitting from the rising rate environment.
The Cash Smart Enhanced Portfolio was slightly negative for the quarter, while the Endowus Cash Smart Ultra Portfolio registered a negative return of -0.88%. The primary detractor of performance for the Enhanced portfolio was the United SGD Fund. Its longer duration resulted in greater interest-rate sensitivity, negating the positive impact from the LionGlobal SGD Enhanced Liquidity Fund’s performance. As for the Ultra portfolio, its exposure to securitised products and credit via the PIMCO GIS Low Duration Income Fund proved to be a headwind. The overweight to China via Nikko AM Shenton Income Fund was also a detractor from performance.
The Enhanced and Ultra portfolios’ allocations to bonds and other short-dated fixed income instruments have subjected these portfolios to mark-to-market adjustments of fixed income markets. They have also been impacted by the unprecedented speed at which interest rates have moved up, which triggered a repricing of bonds.
Despite the allocation to the shorter-duration and amortised performance of the LionGlobal SGD Enhanced Liquidity Fund, which anchors most of our Cash Smart solutions, the Enhanced and Ultra portfolios’ remaining allocations were negatively impacted by rising interest rates and elevated inflation. Moreover, the exposures to the Asian credit market, in particular China, hurt performance as that market continues to be challenged.
The good news is that 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, generally resulting in higher yields across the portfolios.
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.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, 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 or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.
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For Cash Smart Secure, Cash Smart Enhanced, Cash Smart Ultra: It is not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested. Investment products are not insured products under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act 2011 of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Interest rates are indicative and subject to change at any time.
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