- Endowus curates best-in-class funds as building blocks for all portfolios. These funds are selected through a strict, institutional-grade screening process called SMART+.
- We take an evidence-based approach to investing for the highest probability of success, bringing together strategic passive asset allocation and global diversification at a low cost.
- When there is market turmoil, the best investors and fund managers would often focus on their core competencies and continue to invest in a consistent manner.
2022 has been a painful year so far for investors. Returns from both equities and bonds have plunged in lockstep — a rare moment in history — on aggressive action taken by the US Federal Reserve to tame record high inflation through raising rates.
The S&P 500 index has declined for three quarters in a row this year — the longest streak of quarterly losses since the Global Financial Crisis (GFC) in 2008.
Raging inflation this year is, in itself, a result of the complex interplay of many factors. It combines the result of a strong labour market, years of market liquidity unleashed after the GFC, the impact of energy supplies from the Russia-Ukraine war that has stretched into its 10th month, and supply-chain constraints brought on by Covid-19.
Higher interest rates unleashed by central banks — that is, policymakers taking a hawkish monetary stance — mean a higher cost of capital. The sharp jump in the cost to access liquidity (i.e. money) has also set off a chain of repricing of risk assets and income-yielding investments such as real estate investment trusts (Reits) and bonds. It has challenged the sustainability of Big Tech firms that rode on cheap debt to fund what seemed like breathless growth.
And as the Fed looks to cool demand to bring down consumer prices, higher rates are meant to engineer a slowdown in economic growth. It can go so far as to trigger an economic contraction. By conventional measures, two straight quarters of a contraction mean a recession, which can be associated with job losses and poorer sentiment overall.
Read more: An explainer on inflation and rates this year
Given the current state of the markets and the impact on portfolio performance, we conducted a Q4 consumer sentiment survey to check in with clients. We’ve heard from you, and would like to dive into what Endowus does to manage portfolios in these volatile times.
Endowus Investment Office: committed to due diligence and client experience
The mission of the Endowus Investment Office (IO) is to unlock institutional-quality research, investment products, and portfolios that were previously only available to private banks, and to provide the same experience to all our clients. Endowus is driven by the belief that everyone deserves to invest well to prepare for their best life.
IO is made up of 10 investment professionals, including our Chairman and Chief Investment Officer (CIO), Samuel Rhee. We have over 92 years of total industry experience, spanning across equity research, portfolio management, and investment research.
Endowus takes a unique path in curating best-in-class funds as building blocks for all portfolios. We select these funds by implementing a strict, institutional-grade screening process that is rigorous, thorough, and continuous — we call this framework SMART+.
After we have identified the list of best-in-class funds, IO uses a portfolio construction framework developed by the team, incorporating these key elements:
- Risk assessment
- Return optimisation
- Cost optimisation
The work doesn’t stop after the portfolios have been constructed. We actively track the performance of the funds, and have been doing so rigorously in 2022 amid the market meltdown. To ensure that we communicate actively with our clients, IO engages with investors through regular webinars and monthly (as well as quarterly) performance reports to keep investors updated on how our portfolios are doing.
Such engagements are part of our efforts to report our performance in a transparent way. With our mission focused on broadening access to institutional-quality research and investment solutions to a bigger base of retail clients, we are committed to providing as much information as we can to investors in these difficult times.
These forms of monitoring and engagement by IO come on top of the the different layers of monitoring for the investment products that are already executed on a regular basis:
- Monthly — Every fund on the Fund Smart platform is monitored to make sure that thresholds for risk and return are still being met. Every fund is put on the Fund Smart platform with certain performance expectations, and the team is tasked with making sure those expectations continue to be met within certain thresholds.
- Quarterly — Even with the monthly monitoring for every fund, we believe it is important to ensure that the advised portfolios continue to have the best of our ideas packaged into them. We analyse the sector allocations, country allocations, factor exposures, and tilts of each portfolio to ensure diversification is maintained on all fronts. We review the available funds in each asset class to make sure we continue to allocate to the most appropriate funds for each portfolio.
- Annually — We keep an open dialogue with our fund management partners to make sure we are kept abreast of all the important developments in their organisations and changes in the funds that we have on the platform. We conduct due-diligence calls at least once a year to make sure the funds are being managed in a consistent manner.
Sticking to our asset allocation
Let’s also step back to dive into the basics of asset allocation.
Digital wealth platforms such as Endowus can help their customers grow their wealth by providing advice, and allocating them into risk-appropriate and goal-appropriate portfolios made up of funds.
If you have a higher risk tolerance and a longer investment horizon, a bigger share of your investment would likely be allocated into equity (stock) funds. If you have a lower risk tolerance, your portfolio would likely be mostly made up of fixed income (bond) funds.
This relationship exists because equities carry a higher risk, greater short-term volatility, and higher long-term expected return than fixed income.
Deciding your risk level should determine the percentage weight of your portfolio to the major asset classes of equities and fixed income. This is because the majority of long-term returns are driven by this process known as asset allocation. It is the asset allocation that should collectively lead to the decision of what funds should be in your portfolio to give you a diversified exposure to the global stock and bond markets.
From day one, Endowus has been committed to selecting, managing, and maintaining a portfolio of funds to generate the best possible returns for their clients. What sets a good wealth platform apart from the rest is how the platforms and teams design their portfolios so that every dollar you put in is worked harder through investments, and you are compensated with returns for the level of risk that you’re comfortable taking to reach your financial goals.
Strategic and broadly passive, not tactical
Endowus’ approach to portfolio construction is selecting best-in-class fund managers that avoid large sudden changes to their asset allocation, and not try to chase short-term gains. The short-term gain chasing is more akin to gambling than investing as it is tactical, opportunistic, and driven by short-term punts.
Taking a tactical approach would mean that the fund manager is not disciplined about the risk of loss, and may be taking on more risk than is necessary. Instead, Endowus takes an evidence-based approach to investing for the highest probability of success, which brings together strategic passive asset allocation and global diversification, expressed through best-in-class funds, at a low cost. We use these building blocks to design portfolios customised to your goals and preferences.
Endowus uses a framework that we call strategic passive asset allocation (SPAA).
- Strategic top-down: The allocations to different asset classes such as equities, fixed income, geography, style or factors, are set based on the goal of the portfolio.
- Passive in implementation: Endowus does not believe in tactically or actively changing your allocations based on market conditions or economic indicators.
- Curation of portfolio design bottom-up: Endowus carefully selects best-in-class funds to best represent your goal’s SPAA. We access leading global fund managers with the expertise, scale, and a low-cost structure. They have real, proven track records in implementing their strategies with tens and hundreds of billions in assets successfully over time. These strategies can be passive, systematic or active, depending on the asset class they try to represent, and the investment objective.
Given our investment philosophy, Endowus’ Flagship Portfolios — which are designed to make up the core of your investment — are therefore the best representation of the SPAA process. The underlying funds chosen for the Flagship Portfolios are optimised to give you the broadest possible exposure to diversified global markets, and to track in line with the index in a faithful, steadfast way.
While none of us can predict what the markets will do in the short term, we are confident in the long-term resilience of our investment philosophy. At Endowus, many of our portfolios hold thousands of individual securities, mitigating the idiosyncratic risks associated with investing in individual stocks or bonds.
Portfolio changes that are recommended periodically are not to change the SPAA, but to recommend potentially more efficient and better funds to represent the SPAA. They must be approved by our clients — the only exception being the Endowus Factor Portfolios by Dimensional, which has the Endowus Investment Office (IO) automatically rebalancing and optimising the funds and weights. Any automated rebalancing (an opt-in selection) is solely done to bring the portfolio back to its strategic target equities / fixed income allocations that was pre-agreed with you before implementation. It is not to take tactical or active market bets.
Read more: Why Endowus doesn’t take trailer fees
How best-in-class fund managers have managed through past volatile times
The market environment has been challenging for clients and our partners. We continue to maintain a strong line of communication with our fund managers to understand how they are managing their funds through this difficult environment.
In this section, we spotlight two fund managers, Dimensional and PIMCO, that have stood the test of time. Their funds are part of Endowus’ core offering, the Flagship Portfolios.
How Dimensional Fund Advisors outperforms the market
Amid market turmoil, the best investors and fund managers would often focus on their core competencies and continue to invest in a consistent manner.
For example, Dimensional Fund Advisors specialises in systematic investing — constructing equity portfolios that tilt towards long-term factors such as value, size, and profitability. They have done so through the growth bull run when value stocks were significantly underperforming growth stocks. They stayed consistent and true to their investment philosophy throughout the GFC and through the tech boom of the early 2000s. Its investment philosophy is guided by extensive research.
Trying to time the market? Dimensional has argued that investors trying to nail the right points in market cycles to switch in and out of investment styles are no different from an insect heading straight for a Venus flytrap.
Multi-year returns expressed over overlapping periods often appear cyclical, which may, on the surface of it, imply that prior returns are useful indicators of future returns. However, making investment decisions just on rolling performance merely obscures the volatility in stock returns that is actually making it difficult for markets to be predictable. Dimensional’s paper essentially shows that most rolling returns look cyclical in part because of autocorrelation in returns. The past or current period’s return is likely to give you very little information about the next period’s return.
This makes predicting stock market movements quite tricky. Dimensional has chosen to overcome this by staying invested consistently in stocks that offer additional returns through value, size, and profitability factors. This has proven to be rewarding this year. The Dimensional Global Core Equity Fund (SGD, Acc) outperformed its benchmark, the MSCI World Index, by nearly 1% in the one-year period ending 30 Sep 2022.
How PIMCO manages bonds actively, and well
As an active fixed-income manager, PIMCO has a different investment philosophy from Dimensional. PIMCO draws on its large stable of well-known, expert economists, and highly experienced fixed-income analysts to develop short-term forecasts and long-term views on the global economy and the markets.
PIMCO does so because according to its research, active fixed-income managers historically have had a greater likelihood of outperforming their benchmarks and their passive peer groups — even after fees — than active equity managers. Over the last decade, the median active bond manager delivered 0.75% more per year of excess return (after fees) than its passive counterpart. Over time, this outperformance is significant for fixed-income investors. Over the last five years, the percentage of PIMCO assets outperforming benchmarks (after fees) is 66%.
One recent example of its active management this year is that leading up to this year, PIMCO had been reducing their credit exposure and improving liquidity in the PIMCO GIS Income Fund and focusing on sectors that they think would be resilient in a challenging market environment. Currently, the Income Fund portfolio management team remains cautious in the interest-rate sensitive areas because of potential downgrades or defaults. They have also reduced their exposure to emerging markets, holding only small exposures in higher-quality sovereign or quasi-sovereign debt.
The best way to ride through market volatility
Regular, disciplined investments make sense in a downturn
When markets are down, investing a small amount regularly is better than doing nothing at all. Dollar-cost averaging (DCA) — which refers to periodic, recurring investments of a fixed amount into your portfolios — helps to minimise the impact of volatility. This is because you buy more when market prices are low and less when prices are high. DCA can work to your advantage during a downturn, as you ride out the lows to enjoy the recovery later.
Let’s take a look at the stock market crash in the early 2000s, when the dotcom bubble burst. If you had followed a DCA schedule to invest in global equities, by investing $1,000 every month over the 70-month period between 31 Mar 2000 and 31 Dec 2005, your return would have steadily accumulated to about 28% by the end of the period.
Under the best possible case, if you were lucky enough to buy global equities when they were at their cheapest on 30 Sep 2002, your return would amount to 80% by the end of 2005. But the reality is that it is incredibly difficult to time the market and enter at the absolute lowest point. Even so-called experts have been proven to be bad at it. In practice, some individuals who try to time the market may also flee and sell at smaller, short-term price dips. Doing so would lose them a bigger chunk of their investments.
Don’t miss out when the market recovers
Throughout market history, declines have been common and temporary.
For instance, the S&P 500 Composite Index – a key benchmark of the US equity market, as it tracks 500 large-cap American companies – has seen a 15% drop roughly once every three and a half years, with an average length of 262 days for each decline. But recoveries – and often strong ones – have followed all of these downturns.
In a hypothetical scenario, an investor sold off US stocks during the 2008-2009 downturn, and then tried to time the market by jumping back in again when he spotted signs of improvement. If he had remained invested from 2010 to 2019, a US$1,000 investment in the S&P 500 stocks would have grown to US$2,897, excluding dividends, at the end of the period.
Missing even the 10 best days of market recovery would shave 33% off the value. The more missed “good” days, the greater his loss.
Read more: Why you should invest regularly amid a downturn
Endowus is here with you
It is a painful time for all of us who invest in markets. As financial advisors who want to journey with our clients over the long term to build wealth the right way, we do not shy away in times of volatility to address our client’s concerns. We are here for you.
The advice from Endowus in these times remains the same, in spite — and because — of the current volatility.
- Focus on your goals and not the movement of markets;
- Stick to your regular investment plans to improve your probability of success;
- Stay diversified to make sure that your eggs are not all in one basket, and avoid trying to time the market.
As investors, we must be disciplined and invest systematically through the fluctuations, as difficult as they may be.
Thank you for your trust and support for the Endowus team. We remain committed to doing what is always in the best interest of our clients, and to help you achieve better investing outcomes. We are confident we can get there together.
This article is for information purposes only and should not be considered as an offer, solicitation or advice for the purchase or sale of any investment products. It is recommended that you seek financial advice as to the suitability of any investment. Whilst Endow.us Pte. Ltd. (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.
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 or group of persons. Opinions expressed herein are subject to change without notice.
Investment involves risk. 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. Past performance is not an indicator nor a guarantee of future performance.
Please note that the above information does not purport to be all-inclusive or to contain all the information that you may need in order to make an informed decision. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory, accounting or financial advice.