Webinar: Ask Your CIO: What to do with Cash Smart

2:30 - Why are my Cash Smart returns negative?

‍Sam: We are all about transparency, and we do not hide away from anything, whether it’s negative returns, volatility, and how our portfolios have been doing. We want to share the pains that some clients have been experiencing, and it’s across the board. Markets are volatile, choppy, and generally negative for the year. We experienced it last year amid the ongoing Covid pandemic and also again in 2018. While there are some similarities, there are also unique differences to what we’re experiencing right now. It’s painful, but markets are doing what they do.

But let’s first understand and revisit the underlying structure of what Cash Smart really is

We launched the Secure and Enhanced first because that's what that's what most people wanted — an alternative to a bank deposit. So we have a secure product that is a competitor to a bank deposit, built with secure institutional bank deposit funds that include the Fullerton Cash Fund and the Enhanced Liquidity Fund from Lion Global (which amortises its pricing and performance, and therefore there's little or no volatility).

Throughout the whole period, you can see that it's very steadily higher yielding than bank deposits but lower yielding than other short-term traditional bonds or money market funds. The whole idea of secure is that it's secure. You put funds in there for the short term and you can still generate some yield. Enhanced is something slightly better in terms of target yield but in order to get that yield, you have to take more risk.

We launched Cash Smart Ultra as a product because clients demanded or asked of us: Is there any way we can enhance yield even further from Enhanced? Remember this was a period when yields in banks and money market funds and fixed income were all falling because interest rates were falling, and so people were chasing yield. ‍

Why are my Cash Smart Ultra returns negative?

Sam: Ultra did really well for a while, but when interest rates are rising and when there are unprecedented shocks like Covid, China real estate crackdowns, or now the invasion of Ukraine by Russia, it will hit the performance of overall fixed income markets. Overall, the three portfolios have done exactly what we said — Secure has not had a single negative yield, held pretty steady in terms of even the yield, and had reached the annualised targets. Enhance surprisingly had a negative period in April of last year but it bounced back very quickly (see also 7:15 - Cash Smart Ultra woes). Ultra actually held up relatively better initially, but fell and rebounded through recent months. When it seemed like things were stabilising in December, we had another hike in Fed expectations being priced in, and then we also have the Russia issue now.

Risk and returns are correlated with each other. You need to understand your risk appetite

So, as you can see, risk and return, and risk and expected return or yield, are always going to be correlated. So as you take more risk, the return expectations rise but when they fall then they will fall more disproportionately. There's a wide range of Endowus portfolios to play different areas of risk so that you can target the appropriate risk. It's important for each client to understand their own risk appetite, and to understand what is the most appropriate product for them.

Sam: This chart is the best way to understand the spectrum of products and how they've performed. Cash Smart Secure has actually been positive in all five of these scenarios, whether markets are up or down. So when the markets are down, it goes up slightly. When the markets go up, it goes up much less than everybody else. When the markets fall again, it goes up a little bit. So Cash Smart Secure is the most defensive and stable. But as you take on more risk with Enhanced and then Ultra, volatility increases.

32:22 - Why hasn't Ultra recovered even after 3 months?‍

Sam: As a wealth advisor and a manager of client assets, we do try our best and pride ourselves in being much more transparent. When we thought about how to language this Cash Smart guidance, it was really to guide investors in the right way in terms of the purpose of the money, and how long people should hold the money. Secure is for money you need in one month, Enhance for one to three months, and Ultra is for three or more months onwards. Because we clearly want to tell people that there is a risk element to this. It’s ultimately not a bank deposit.

Why has my Cash Smart Ultra still not recovered after 3 months?

Sam: The guideline of 3 months was initially based on the worst possible scenario we faced most recently, which was during the March 2020 crisis, when we first came face-to-face with Covid. It took about three months after trough to recover. We were even more conservative and said 3 to 6 months instead. We cannot always talk about the worst or best case scenarios, we have to talk about steady-state scenarios. For example, Ultra was annualising 3-4% returns for a while but we still kept the number at 2%. Ultra is now -1-1.8%, but we still have to talk about the 2%. It took about 2 and a half to 3 months after trough to recover, so we wanted to be even more conservative and put that as 3 to 6 months instead.

47:10 - What should I do with Endowus Cash Smart?

Sam: Taking a step back, let’s understand the underlying of Cash Smart, through a bond’s lifecycle. When a bond is issued by an issuer, it is an IOU and somebody buys it, for example, at $1,000. We are looking at a par value of $1,000. It is the principal value you lend at the beginning. You get it returned when the bond matures. The par value at maturity is returned in full, as long as the company or the borrower doesn’t go bankrupt (that’s credit risk). During this time, there are transactions (bright blue line) on a regular basis. The borrower promises somebody to pay a coupon, which is an interest rate (e.g. 2%) that you pay on the bond. This is $20 a month, quarter or whatever the regular period is for example. At the end of the cycle, you get $100 back, so it’s a 10% coupon for the lifetime of the bond, but on a regular basis, you get paid $20, that’s the cash flow. You also get your $1,000 back at the end.‍

But importantly, the NAV (net asset value) or the market value of the bond depends on who is buying and selling. The reason why the price of the bond fluctuates depends on a number of reasons such as interest rates. As interest rates move, the price is the inverse correlation. Credit risks, macro risks and all other risks are going to affect the price of the bond. These price movements don’t affect your par value and cash flow. Active fund managers take advantage of these mispricings in the market. For example, when the bond price is down to $950, if you buy it now and hold to maturity, you get $1,000 back and the coupons as well, making a total of $1,060. This is what active fund managers do every single day and this is the life of a bond.‍

How does Endowus manage the Cash Smart Portfolios?

Sam: The bond funds that we invest in actually are already managed by managers that have passed our screening, who are supposed to do a lot of this active management effectively, generate slightly better alpha than holding it to maturity, but generating at least the yield to maturity over time, over the duration of the fund. But the fund is an ongoing open-ended mutual fund and therefore it's always about what the managers hold now and how they manage it. Endowus’ job is to find the best ones to optimise them into a portfolio, target the yield and the risk that is appropriate for our clients, and to build the right, appropriate portfolio. ‍We have to understand where we are in this cycle. Bond prices have fallen, and interest rates are rising, but may not have peaked, and there is interest rate risk. We’re currently in one of the worst situations in terms of credit risk — Omicron resurgence, supply chain issues, and inflation. Remember we're just recovering from Covid in terms of economic activity and that's part of the reason demand is so strong, and that inflation is high. Yes, while there's a supply-side constraint, demand is relatively still good. That's why we're having this inflation problem, and the Fed is raising interest rates because we're seeing a recovery. Credit risk and economic fundamentals are not too bad. It's actually interest rate risk, specifically an event risk in the form of China, and then now Russia, that is impacting fixed income.

So when and how do returns come back? This is a chart of a short-duration bond fund which we map against. This particular fund took more than 3 months to recover. In 2021, you actually saw another drop in March and April, but it didn't recover for another 4 months even though it was a very stable environment. But it did recover. How soon it recovers depends on the duration of the fund, the credit risk that you’re taking, and the exposures.

What should you consider before investing in Cash Smart?

Sam: There's two things that you have to consider. Firstly, are you in the right product? Many people are enticed by this 2% yield or 1.5% yield that Cash Smart Enhanced offers, and goes for the product. But if you’re looking for a product that’s never going to lose money, or if you’re stressed out because it has fallen by 0.5%, then you should not be in Ultra. It’s important for you to reassess at this stage, what is the right product for you. ‍Secondly, looking at where we are in the cycle, a lot of it would depend on when the China bonds mature.

1:03:06 - Why are cash smart yields positive, but my returns negative?

Sam: Returns are based on what you've already earned. It is the realised returns right when the coupon has been paid out, or if you've sold the bond at a higher price and realised the gain, or it's matured and you get back your principal. Those numbers are locked in. Yields are the future interest rates you’re expected to receive as long as you don’t sell your investment and hold to maturity.‍

Other key excerpts covered during the webinar

7:15 - Cash Smart Ultra woes

12:08 - What affects fixed income returns?

16:06 - China exposure for Cash Smart, and diversification

22:56 - Performance of Cash Smart Ultra’s underlying funds 

25:10 - Impact of rate hike and other market events

30:55 - Relationship between interest rate and bond prices

36:49 - Cash Smart Ultra’s recommended holding period

41:34 - Is Endowus Cash Smart’s doing worse than the competition?

57:50 - Are you invested in the right Cash Smart product? When will Cash Smart Ultra recover?

1:01:07 - Time to put cash back to work from Cash Smart?

1:06:32 - Why yield to maturity is the best way to look at projected yield

Should you have any questions or need advice from one of our MAS-licensed representatives, please reach out to support@endowus.com or visit our Cash Smart page.

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Disclaimer: 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.‍

Investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors, 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.‍

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.‍

Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

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