- A rally in the markets in the fourth quarter, especially for growth and mega cap stocks, created headwinds for the Endowus Core Portfolios.
- With the fixed income rebound, the Endowus Fixed Income Portfolios largely outpaced their benchmark. The larger allocations to corporate bonds and emerging market debt delivered a positive impact on performance.
- Albeit a relatively difficult fourth quarter, the Endowus Income Portfolios had positive returns across the board. Endowus Cash Smart Portfolios continued to deliver positive returns in the fourth quarter with Ultra delivering the best performance amongst the three in 2023.
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Endowus core portfolios — Q4 2023 performance comparison
Endowus Flagship Portfolios — Cash/SRS
Key performance highlights: The Flagship Cash/SRS Portfolios posted positive returns in the fourth quarter, topping off a strong 2023. The 100% Equity Portfolio had a good run but trailed its benchmark, 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 0.2 percentage point.
For the one-year period, the 100% Equity Portfolio underperformed by about 1.8% while the 100% Fixed Income Portfolio beat its benchmark by 1.3%.
The 100% Equity Portfolio, again, faced headwinds from its structural biases — being value focused, and with a slight overweight to emerging markets and small caps in general -- and lagged its benchmark as a result. The Amundi Prime USA fund and the iShares US Index fund were the best performers in the equity sleeve, as they stayed close to the US indices that they were tracking. The Dimensional funds, on the other hand, were hampered by their exposure to the size and value factors. Similar detractors were in play in the one-year period as well.
The 100% Fixed Income Portfolio outperformed the global fixed income market in the fourth quarter and in the one-year period, helped primarily by its larger allocation to corporate bonds relative to the index. Corporate bonds outperformed sovereign debt in the fourth quarter. Emerging market debt, local currency issues in particular, was one of the best performing sectors in Q4. The Portfolio’s allocation to the PIMCO GIS Emerging Market Bond fund was a contributor to its fourth quarter’s relative performance as it was the best performing fund in the fixed income sleeve.
Endowus Flagship Portfolios — CPF
Key performance highlights: The Flagship CPF Portfolios generated positive returns during the final quarter of 2023, but underperformed their respective benchmarks. The 100% Equity Portfolio lagged the broad global equity market by about 0.7% while the 100% Fixed Income portfolio trailed by 0.4%
In the one-year period, the Equity Portfolio underperformed by 2.6% amidst various headwinds and the Fixed Income Portfolio did slightly better with a much narrower underperformance margin.
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 was almost flat in Q4, bogged down by its hefty exposure to China, which underperformed relative to global equity markets. The primary detractor from relative performance for the Schroder fund was the team’s stock selection in 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. The shorter duration while helpful in a rising rate environment was a major detractor for the Portfolio in the fourth quarter as yields dropped and fixed income rallied broadly across various sectors.
Endowus ESG Portfolios
Key performance highlights:The ESG Portfolios outperformed their respective benchmarks during the fourth quarter. While that outperformance spilled into the one-year period for the Fixed Income Portfolio, the Equity Portfolio had a much tougher time, underperforming the MSCI ACWI by about 3.7% for the year.
The Equity Portfolio’s zero exposure to the energy sector contributed to relative performance as the energy sector was the worst-performing in Q4. In addition, the Portfolio did well in stock selection in the industrials and healthcare sectors.
The relative outperformance of the Fixed Income Portfolio was largely due to its credit exposure as credit spread tightened further in Q4. However, this positive impact was partially offset by the shorter duration positioning of the portfolio as fixed income rallied and yields declined.
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 75% 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 Portfolios underperformed their respective benchmarks during the final quarter of 2023. In the one-year period, While the Factor 100% Equity Portfolio underperformed its benchmark, the Factor 100% Fixed Income Portfolio had a solid year, outperforming the index by about 1 percentage point.
The Equity 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 underperformance. The Portfolio’s bias towards smaller caps and value detracted this quarter and more broadly over 2023.
The Fixed Income Portfolio underperformed the Bloomberg Global Aggregate Index by a slight margin. 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, detracted as those funds did not fully participate in the strong year end rally that favoured longer duration bonds. This was, however, offset by the strong performance of the Dimensional Global Core Fixed Income Fund. Over the entire year, the portfolio outperformed the Bloomberg Global Aggregate Index.
Factor premia are long-term in nature and investors that maintain exposure to them over a longer-term horizon are generally rewarded. However, this does mean that there may be short term periods of underperformance from time to time.
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:
Q4 2023 presented formidable challenges for China, marked by renewed regulatory concerns following a crackdown on the video gaming sector, and unfavourable manufacturing reports. In the Greater China region, Taiwan showcased more favourable returns, boosted by the Federal Reserve's dovish sentiments that revived investor confidence in growthier and technology-related sectors.
Conversely, Hong Kong faced greater pressure, concluding the year as one of the world's worst-performing markets. Geopolitical tensions, regulatory pressures, aversion from Chinese markets, and overhang from COVID restrictions all contributed to Hong Kong's tumultuous year.
This challenging environment influenced the performance of the China Equity Portfolio, which struggled against market headwinds throughout the year. The portfolio’s exposure to Taiwanese equities had provided a buoy in the later part of 2023, but was insufficient to pull the portfolio out of the water.
Despite these headwinds, the China Fixed Income Portfolio experienced a rally in the Investment Grade segment during November and December. This upswing helped the portfolio end the year on a slightly positive note, showcasing resilience in the face of market uncertainties.
Low Volatility Fixed Income Portfolio
Key performance highlights: The Low Volatility Fixed Income Portfolio performed in line with its reference benchmarks during the fourth quarter. The Legg Mason Brandywine Global Income Optimiser Fund and the PIMCO GIS Total Return Bond Fund benefited the most from the Q4 rally.
Key performance highlights: The Megatrends Portfolio benefited from the strong year-end rally, generating a return of 6.8% in the last quarter of 2023. With the US Fed adopting a more dovish stance, growth equities responded positively. In particular, both the Allianz Thematica and Schroder Climate Change funds rebounded strongly from their drawdowns.
On a full year basis, the Megatrends Portfolio underperformed the MSCI All Country World Index. The underperformance can be attributed to three main factors:
A) Lack of significant exposure to the “Magnificent Seven” stocks: The lack of significant exposure to the “Magnificent Seven” stocks is by design, part of the Megatrends Portfolio’s philosophy in identifying long-term, secular trends.
B) Macro headwinds: Both the healthcare and clean energy/energy transition sectors fell out of favour in 2023, as higher interest rates, rising material costs and the Covid overhang all had a disproportionately larger impact on these two sectors.
C) Fund underperformance: The BGF Nutrition Fund extended its underperformance with another negative calendar year performance.
Key performance highlights: December marked a significant rebound for our Technology Portfolio, posting a remarkable absolute gain of over 6%. This capped off a strong fourth quarter with outperformance over both the MSCI ACWI and the MSCI ACWI/IT sector.
The favourable momentum was primarily attributed to the “Pivot Party”, with the Federal Reserve's dovish shift fueling an equities rally. This shift was particularly beneficial for smaller, growth-oriented equities within the portfolio.
With the substantial uplift in December, the Technology Portfolio closed the year with a gain of nearly 44%.
The slight underperformance compared to the MSCI ACWI/IT index can be primarily attributed to the lower exposure to the "Magnificent Seven" stocks. This bias aligns with the portfolio's focus on not only mega-cap, established players but also smaller, underappreciated names aimed to uncover alpha opportunities and diversification benefits. While these names have faced headwinds during the year, they demonstrated their potential with a spectacular run-up in the market rally in December.
Key performance highlights:
The Global Real Estate Portfolio rebounded strongly in Q4 posting a 8.8% return spurred by the anticipated end to the Federal Reserve’s cycle of monetary policy tightening. The Global Real Estate sector rose from the middle of October coinciding with the yield on the 10-Year Treasury peaking for the year.
The Blackrock BSF Global Real Assets Securities Fund outperformed its respective benchmark for the quarter and the year as stock selection and sector allocation both contributed. The portfolio’s slight underperformance to the benchmark can be attributed to the portfolio’s geographical overweight to Asia along with the portfolio's underweight to the Office and Retail sectors.
The impressive performance of the sector from late October to the end of the year could be a signal that, as in previous periods of monetary policy adjustments, the end of the rate-rising cycle might herald a period of the sector's outperformance.
Endowus Income Portfolios
Key performance highlights:
At the end of November 2023, we released the recommended portfolio changes to the Income Portfolios. The objective was to introduce enhancements to the Income Portfolios through de-risking, further diversification and cost reduction. Target payout ranges remain the same. The performance update going forward would be for the new Income Portfolios. It would also be against revised benchmarks, using a more credit-heavy fixed income benchmark, Bloomberg Global Aggregate Credit Index, to represent the fixed income component.
The Stable Income Portfolio delivered a positive return of 5.4% in Q4 2023, despite underperforming the broader credit market. Main driver of the relative performance was the shorter duration of the portfolio versus the benchmark, as longer duration benefited more from the rally in the second half of Q4.
The Higher Income Portfolio delivered a positive return of 5.2% in Q4 2023, despite underperforming the 20-80 benchmark. The relative underperformance comes solely from the fixed income allocation, driven by the shorter duration. The equity component of the portfolio outperformed the broad global equities market. Currency hedging helped as SGD appreciated strongly against USD in Q4 2023. Additionally, the portfolio’s tilt to real assets contributed as the sector rallied on lower interest rate expectations.
The Future Income Portfolio delivered a positive return of 6% in Q4 2023, despite underperforming the 40-60 benchmark. Similar to Stable Income, the fixed income component underperformed the global credit market mainly due to its shorter duration. Its equity component underperformed the global equity market slightly, due to its allocation to the FSSA Dividend Advantage Fund. However, we believe that the Fund’s thesis and approach remain intact for the long term.
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 continue to remain high, despite lower interest rate expectations.
Endowus Cash Smart Portfolios
Key performance highlights: The Cash Smart Portfolios maintained positive returns in December 2023 and in the fourth quarter, ending the year on a positive trajectory.
Fullerton SGD Cash fund and the LionGlobal Enhanced Liquidity fund, the underlying funds for Cash Smart Secure, delivered consistent positive returns each month in 2023. The funds have been able to capitalise on the rate hike cycle to offer attractive yields with dampened volatility.
Cash Smart Enhanced ended the year on a positive note as well, offering slightly higher total gains over Cash Smart Secure. This excess return over Secure reflected the additional duration and credit risk undertaken by investors via allocation in the United SGD Fund, which performed favourably in 2023 despite headwinds in Asian credit.
Cash Smart Ultra experienced more volatility throughout the year and enduring three months of negative returns. We announced a Recommended Portfolio Change in November 2023 for this Portfolio to reduce both duration and credit risk. Despite earlier challenges, the Ultra portfolio achieved the highest total return among the Cash Smart suite in 2023, aligning with its investment objectives.
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.
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