Balanced ETF portfolios CHF Q1 2020 commentary
| Asset classes | Stocks, bonds, non-traditional |
| Instruments | ETFs |
| Investment style | Macro, diversified investment focus |
| Quarterly return (net of fees) | |
| Defensive | -10.4% |
| Moderate | -14.9% |
| Aggressive | -18.2% |
Market overview
While 2019 proved to be a year of positive returns for most asset classes, the tide has turned dramatically since the beginning of 2020. January started with optimism as the phase one trade deal was signed between the US and China, but turned negative thereafter as concerns over the outbreak of the coronavirus started to control the markets. The fear of its negative effects on the global economy overshadowed the signs of an improving economy in January, and later resulted in deteriorating economic data in February and March. Volatility has since risen to levels not seen in a long while and led to a sell-off of risky assets. This, in addition to monetary stimulus from central banks across the globe, drove money into safe haven assets such as treasuries and brought the US Treasury yield to an all-time low.
In line with these developments, a strong sell-off of risky assets ensued. Within equity, developed market equities suffered with a delay compared to emerging markets as investors did not factor in the rapid spread of infections beyond Asia. US equity, which makes up a large part of BlackRock portfolios, as reflected by the S&P 500 for example, has dropped close to 30% since the beginning of this year. Japan has held up the best in US Dollar terms.
Looking at fixed income, sovereign debt of developed economies benefitted from this risk-off sentiment and monetary stimulus. This drove yields back deep into negative territory for most European exposures, while the 10Y US Treasury yield hit an all -time low in the middle of March. The riskier spectrum, however, suffered in line with equities. Emerging market debt and corporate bonds both suffered, particularly the high yield exposures.
Portfolio performance
| Returns net of fees | Defensive | Moderate | Aggressive |
| Jan | -0.18% | -0.18% | -0.55% |
| Feb | -3.42% | -5.75% | -7.16% |
| Mar | -7.06% | -9.56% | -11.4% |
| 2019 | +9.45% | +14.1% | +18.6% |
| Since Inception (August 2015) | -3.57% | -2.73% | -1.02% |
The Multi-Asset portfolios ended the first quarter with negative returns. The portfolios’ performance suffered because the strategies were moderately risk-on while risky assets sold off.
Broadly speaking, on the equity side, all allocations contributed negatively to portfolio performance. In absolute terms, US equity was the largest performance detractor followed by European and EM equity. From a relative perspective, our overweight to European equity and UK equity hurt performance while the underweight to Pacific ex Japan was supportive. Overall, allocations to minimum volatility names helped.
Looking at the fixed income side, absolute contribution was positive for US Treasuries but negative for credit. Considering the portfolios’ relative positioning, the underweight to long-dated US Treasuries was detrimental. However, an overweight to EM debt and an underweight to US credit supported performance.
The gold allocation helped in terms of diversification and supported performance.
Rebalance commentary
Following significant market swings caused by the coronavirus spreading globally, there has been a significant deviation in the equity/fixed income split of the index benchmarks compared to their long-term equilibrium. The extreme market moves have significantly reduced equity allocations. Therefore, BlackRock’s investment team is buying equity to come back to that equilibrium. Within equity, there is a preference for emerging market equities as locations including China, Korea and Taiwan are likely to recover from the coronavirus. This is currently supported by decelerating infection numbers. Allocation to Japan equities is increased because of their yen exposure but also because uncertainties about the Tokyo Olympics are gone. The US minimum volatility exposure is trimmed slightly and moved to US equities. The remaining allocations are moved closer to benchmark weight.
The BlackRock investment team is adding to its allocation of Treasury bonds, mortgage-backed securities and US credit as the Federal Reserves promised to buy unlimited amounts of the first two and is setting up programs to ensure credit flows to corporations, state and local governments. The team is also adding the ultrashort bond to the models as the program is supportive for short-term credits.
Allocations to emerging market bonds and credit, as well as US high yield, are maintained at a level close to benchmark. The overall duration of the models remains close to benchmark. Within the non-traditional sleeve, the team cut allocations to developed markets property yield and added allocation to gold for resilience.
Outlook
The pledged policy response to the coronavirus outbreak has been swift, and many initiatives signal an intention to do more if needed. Central banks are focused on the plumbing of the financial system, alleviating the dysfunction of market pricing and tightening of financial conditions; frontline fiscal policy, in coordination with monetary measures, is bolstering public health and helping to bridge cash flows to the businesses and households that need them. If such bridging policies are effective, the propagation of the coronavirus shock will depend on how long the activity shutdown lasts –and how long it takes to ramp back up.
With the pre-coronavirus financial system in relatively good shape, the economy appears better positioned for a sharp growth rebound on the other side of the shock –but it will take a bold, coordinated response from global policymakers to contain the virus, bridge cash flow pressures, and limit its propagation. The longer the stoppages last, the higher the risk of persistent damage to the economy. Amid heightened market volatility, it is important to keep a long-term perspective.