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 | +1.2% |
| Moderate | +0.9% |
| Aggressive | +1.1% |
Market overview
The summer of 2019, and much of the third quarter for that matter, was a difficult time for markets, which were broadly characterised by raised levels of volatility and investor uncertainty. Global economic data continued to disappoint and indicate a global slowdown. Geopolitical tensions remained at elevated levels. The ongoing trade negotiations between the US and China and uncertainty about Brexit were joined by escalations in the Middle East.
As a result of these developments, central banks introduced further monetary easing. There were two rate cuts introduced by the Federal Reserve in the US, while the European Central Bank also responded with rate cuts and restarted quantitative easing. All this led to a rollercoaster of asset class returns. Equities sold off at the beginning of the quarter while Treasuries posted record returns, but this was followed by more bullish sentiment in September.
On the equity side, Japanese equities delivered the highest returns in the third quarter. This was despite a consumption tax hike and declining consumer confidence. European (ex UK) equities came in second, most likely driven by policy easing to counter weakening growth. The US S&P 500 experienced strongly positive returns, which BlackRock believe were also linked to additional rate cuts as well as a relatively strong economic outlook (at least compared to Europe). EM and Asian equities concluded the quarter with negative returns. China’s economic picture seems to be slowly deteriorating, while the trade dispute is certainly not helping.
On the fixed income side, we saw overall positive performance across the risk spectrum. Clearly leading was European government debt, closely followed by US Treasuries. Additional easing by central banks and rising doubts about the global economy has certainly helped performance. Global investment grade and high yield debt also posted positive returns
Portfolio performance
| Returns net of fees | Defensive | Moderate | Aggressive |
| Jul | +0.4% | +0.9% | +1.2% |
| Aug | +0.7% | –1.3% | –1.9% |
| Sep | +0.1% | +1.3% | +1.8% |
| 1 year | +5.9% | +3.8% | +3.2% |
| Since Inception (January 2017) | +11% | +11% | +20% |
The Balanced USD ETF portfolios ended Q3 with positive returns.
Broadly speaking, most allocations contributed positively to portfolio performance on the equity side. The overweight investment exposure to US equity was certainly of help given its performance.
Looking at the fixed income side, total performance contribution was muted. The overweight exposure to short-date US Treasuries helped, whilst the overweight exposure to Emerging Market debt was a slight detractor.
Finally, the increased allocation to gold has helped in terms of diversification of returns.
Outlook
Entering Q4, BlackRock believes the equity market will encounter raised levels of volatility because of sliding fundamentals as well as uncertain macro development globally. Therefore, the portfolios enter Q4 with a reduced allocation to equity, whilst the allocation to gold is maintained and fixed income sees increased exposure to longer dated government bonds, which should offer more resilience given the current market.
Within equity, BlackRock is holding the previous underweight in emerging market equities but cutting the allocation to Pacific ex Japan. The underweight in European equities is maintained, as growth in the region remains challenging even with quantitative easing in place. BlackRock are also keeping the overweight in US equities as fundamentals remain better than the other countries.
Within fixed income, the portfolio enters Q4 with greater exposure to longer dated US Treasuries, with the assumption that the negative growth implications of political tensions will continue to keep yields at lower levels.