- In a reversal from the previous quarter, amidst growing uneasiness from investors, growth stocks took a beating in the third quarter. The outperformance of value stocks created a tailwind for the Endowus Flagship 100% Equity Portfolio.
- Although fixed income continues to underdeliver on performance, the Endowus Flagship 100% Fixed Income Portfolio outpaced the benchmark. With its larger allocations to corporate bonds creating a positive impact on performance. Its larger allocations to corporate bonds created a positive impact on performance.
- The Endowus Income Portfolios experienced a difficult third quarter however the Stable and Higher Income Portfolios managed to outperform their respective benchmarks. This quarter, Endowus Cash Smart continued to generate positive returns on its portfolios.
- For more on the market outlook, click here.
Endowus core portfolios — Q3 2023 performance comparison
Endowus Flagship Portfolios — Cash/SRS
Key performance highlights: The Flagship Cash/SRS Portfolios generated negative returns but outperformed their respective equity and fixed income benchmarks in the third quarter of 2023. The 100% Equity Portfolio beat the MSCI All-Country World Index (ACWI) by about 0.4 percentage point while the 100% Fixed Income Portfolio bested the Bloomberg Global Aggregate Index by a larger 0.7 percentage point.
In a reversal from the first half of 2023, value stocks outpaced growth stocks in the third quarter. In the same period, emerging markets (EM) was also one of the best performing regions. The 100% Equity Portfolio benefitted from its structural biases — being value focused, and with a slight overweight to emerging markets -- and managed to outperform its benchmark as a result. In the equity line-up, the Dimensional EM Large Cap Core Equity Fund emerged as the best performer.
The 100% Fixed Income Portfolio outperformed the global fixed income market, helped primarily by its larger allocation to corporate bonds relative to the index. Corporate bonds outperformed sovereign debt in the third quarter. The PIMCO GIS Income Fund was the best performing fund in the fixed income line-up, benefiting from its current shorter duration positioning.
Endowus Flagship Portfolios — CPF
Key performance highlights: The Flagship CPF Portfolios posted negative returns for the third quarter of 2023, trending similarly to its benchmarks. The 100% Equity Portfolio underperformed the broad global equity market while the 100% Fixed Income portfolio outperformed the global fixed income market by about 0.3%.
The 100% Equity Portfolio’s weaker performance was largely due to the FSSA Dividend Advantage Fund and the Schroder Global Emerging Market Opportunities Fund. The FSSA Dividend Advantage returned -6.7% for the quarter and the relative underperformance was mainly driven by its holdings in China, which had been pummelled by weaker investor sentiment. The primary detractor from relative performance for the Schroder fund was the team’s stock selection, particularly in Brazil and China.
During the third quarter, we added the Amundi IS Global Aggregate 500 MM Index fund to the 100% Fixed Income Portfolio at a significant weight. While this has brought the overall duration of the Portfolio closer to that of the benchmark, Bloomberg Global Aggregate Index, it still tends to have a slightly shorter duration relative to the benchmark. This helped, as longer-dated bonds underperformed shorter-maturity bonds. The United SGD fund, with its short duration and more conservative positioning, was the best performer in the line-up.
Endowus ESG Portfolios
Key performance highlights: The ESG 100% Equity Portfolio underperformed the MSCI ACWI Index in Q3. The portfolio’s security selection, in particular in the financials and utilities sectors, was the main detractor. Additionally, the portfolio’s lack of exposure to the energy sector hurt as energy was the best-performing sector during the quarter.
The ESG 100% Fixed Income Portfolio outperformed the Bloomberg Global Aggregate Index in Q3. The portfolio’s underweight position in duration contributed to relative performance. Additionally, its allocation to investment grade credit and high yield bonds contributed as both asset classes outperformed the global aggregate fixed income index during Q3.
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 environmental, social, and governance (ESG) data as these metrics become more available and reliable.
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. The companies in the portfolio have, on average, lower greenhouse gas emissions and a better board gender diversity profile.
As for the ESG 100% Fixed Income Portfolio, the PIMCO GIS Climate Bond Fund currently has about 70% allocation in green bonds, with the remainder in issuers that lead in mitigating both carbon emissions and broader environmental externalities. The UOBAM United Sustainable Credit Income Fund invests in companies that contribute to the UN SDGs, in particular SDGs 1, 8, 9, and 11 — no poverty; decent work and economic growth; industry, innovation, and infrastructure; and sustainable cities and communities. The JP Morgan Global Bond Opportunities Sustainable Fund tilts towards companies or issuers with positive ESG characteristics.
Endowus Factor by Dimensional Portfolios
Key performance highlights: The Factor 100% Equity Portfolio outperformed its benchmark, the MSCI ACWI Index. The Portfolio’s allocation to the Emerging Markets Sustainability Core Equities Fund and the Pacific Basin Small Companies Fund were the primary drivers of its relative outperformance. The underweight to Europe and a slight overweight to emerging markets contributed from a geographical standpoint. The fund benefited also from its value bias.
The Factor 100% Fixed Income outperformed its benchmark, the Bloomberg Global Aggregate Index. The portfolio’s allocation to the shorter duration funds, the Global Short-Term Investment Grade Fixed Income Fund and the Global Short Fixed Income Fund, contributed to the portfolio's outperformance, as bond yields rose and the longer duration bonds suffered.
Endowus Satellite Portfolios
Launched in November 2021, the 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 Portfolios
Key performance highlights:
In August, Chinese stocks, particularly in the real estate sector, declined significantly as investors questioned the sufficiency of economic stimulus. Additionally, China's official PMI manufacturing index, while showing a slight increase in August, continued to signal the fifth consecutive month of contraction.
Greater China Markets such as Hong Kong and Taiwan posted weak performance as well. Hong Kong saw the suspension of trading for Evergrande following a sharp fall in prices, and Taiwan stocks fell over concerns over contagion effects pertaining to China’s property debacle.
Against this backdrop, the Endowus China Equity Portfolio underperformed over the third quarter of 2023. While positive stock selection and an underweight to communication services added the most to performance, this was offset by an overweight to, and negative stock selection within the information technology sector. On a fund level, the JPMorgan China A-Share Opportunities Fund continues to be the biggest drag on performance.
Within the China Fixed Income market, weak investor sentiment, dwindling liquidity and dashed hopes for broad-based easing has led to a rise in bond yields despite rate cuts by the PBOC. The Endowus China Fixed Income Portfolio declined over the quarter, with the Neuberger Berman China Bond Fund detracting the most from relative performance.
Low Volatility Fixed Income Portfolio
Key performance highlights: The Low Volatility Fixed Income Portfolio underperformed its reference benchmarks during the third quarter. The fund’s main allocations to the flexible strategies, the Legg Mason Brandywine Global Income Optimiser Fund and the PIMCO GIS Total Return Bond Fund, were the main detractors due to the funds’ relatively longer durations. This quarter was challenging for the strategies with the U.S. 10y yield rising as much as 46 bps in September alone.
Key performance highlights: The Megatrends Portfolio declined in the third quarter, as market sentiment soured in August and September on the back of the US Fed’s hardening stance. While the Portfolio was largely able to keep pace with the MSCI ACWI Index in July, its higher market beta/growth tilt led to larger losses in August and September.
In particular, the renewable energy sector fell out of favour as investors continued to shift their attention and capital into trendier themes such as artificial intelligence. The sector is also more susceptible to rising interest rates and increasing material costs, due to the shrinking in value of future cash flows and squeezing of profit margins.
The BGF Nutrition Fund continues to be a drag on performance, with the Fund ending the quarter with a negative year-to-date return. Stock-specific issues resulted in the Fund having an outsized decline in September. On a more positive note, the AB Healthcare Fund was resilient across the quarter and managed to generate positive returns.
Key performance highlights: The IT sector witnessed significant fluctuations during the third quarter of 2023.The Technology Portfolio underperformed the broad equity market (as represented by the MSCI ACWI Index) by about 2.4%.
In July, an initial wave of optimism swept the sector as positive investor sentiments were buoyed by encouraging economic data, demonstrating robust growth and falling inflation. The Technology Portfolio outperformed the MSCI ACWI IT Index during this month, benefiting from its exposure to less-represented names in the broader benchmark.
However, in August, as the investors were hit by more uncertainty around rate hikes and inflation, a shadow was cast on the IT sector's performance in August and September, making it one of the weakest sectors in Q3. This downturn affected not only the "Magnificent Seven" tech giants but also the relatively smaller-cap and less-established companies that the underlying funds of the Technology Portfolio tend to have a greater exposure to. Although less momentum focused funds like the Fidelity Global Technology Fund provided some resilience, the Technology Portfolio concluded Q3 on a negative note after a challenging August and September.
Key performance highlights: The Global Real Estate Portfolio performed similarly to its reference indices during the third quarter of 2023.
The Portfolio’s two largest holdings, Janus Henderson Horizon Global Property Equities Fund and the BlackRock BSF Global Real Assets Securities Fund, performed in line with their respective benchmarks. The portfolio’s modest exposure to the industrial sub sector dragged on performance for the month of September. While geographically, a slight overweight to Asia, more specifically, Japan, helped performance.
Endowus Income Portfolios
Key performance highlights: The Stable Income Portfolio outperformed the Bloomberg Global Aggregate Index in Q3 2023. Overall, the portfolio’s shorter duration relative to the benchmark, as well as its yield curve positioning contributed. Additionally, its allocation to investment grade and high yield corporates, as well as allocation and security selection in certain securitised sectors, also contributed. Its allocation to Asian bonds, however, offset the outperformance partially.
The Higher Income Portfolio outperformed the 20-80 Equity - Fixed Income Composite Index. The fixed-income portion of the portfolio outperformed the Bloomberg Global Aggregate Index, as its shorter duration positioning, and higher allocation to high yield corporates, contributed meaningfully to relative performance. The equity portion of the portfolio underperformed MSCI All Country World Index (ACWI) with the portfolio’s allocation to real assets being the biggest detractor. Currency hedging also hurt relative performance as the US dollar appreciated against the Singapore dollar during the quarter.
The Future Income Portfolio underperformed the 40-60 Equity - Fixed Income Composite Index. The underperformance of the equity portion of the portfolio was the biggest detractor, while the fixed-income portion of the portfolio contributed positively to relative performance. Within the equity portion, the emerging market equity fund and asian equity fund were the biggest detractors.
All three Income Portfolios are achieving their payout targets.
- Actual payout has remained stable despite the fluctuation of prices across the three portfolios. Volatility in price returns will result in a mark-to-market change (decrease or increase) in the portfolio value, but does not impact the actual coupon payments or dividend payout from the underlying funds.
- One recent headwind to portfolio payouts, however, has been the increase in interest rate differential between USD and SGD, which leads to increasing currency hedging cost, subsequently reducing the distributable income. Endowus investment office is closely monitoring the payout level, and will revise payout targets if necessary.
- Yields in the fixed income market have risen meaningfully following the increase in global interest rates. This should be a positive for income-seeking investors.
Endowus Cash Smart Portfolios
Key performance highlights: As we move through the third quarter of 2023, the Cash Smart Portfolios maintained positive momentum, delivering positive performance in the year-to-date period.
Cash Smart Secure, with its ultra-short duration position, continued to capitalise on the prevailing high base rate levels in the market.
Cash Smart Enhanced continued its positive trend in September and throughout the third quarter. Despite challenges in the Asian fixed income sector and tensions in the Chinese market, underlying funds like the United SGD Fund remained defensively positioned, with a focus on high-quality and short-duration bonds in the Asian region.
Cash Smart Ultra saw a slight decline in September, but managed to end the quarter on a positive note. The dip in performance can be attributed to underlying funds like the Nikko Shenton Income Fund, which continues to have a China focus and longer duration. Regardless, the portfolio received a boost from other funds, contributing to an overall positive performance for the quarter.
We have been observing signs of yield peaking and staying at the prevailing high levels, as Central Banks and policymakers around the world near the end of their rate hike cycles. Cash Smart Portfolios are largely exposed to USD and SGD market rates that are widely believed to stay elevated for longer. The Cash Smart Portfolios can capitalise on the prevailing higher levels of yield, while the active management of the underlying fund managers allows the funds and ultimately, the Portfolio, to benefit from capital appreciation opportunities when the markets enter a rate cut cycle in the upcoming months or years.
For more on the market outlook, click here. Watch our webinar on Q2 performance and market insights at this link.
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