Balanced ETF portfolios CHF Q2 2020 commentary
| Asset classes | Stocks, bonds, non-traditional |
| Instruments | ETFs |
| Investment style | Macro, diversified investment focus |
| Quarterly return (net of fees) | |
| Defensive | +5.70% |
| Moderate | +8.95% |
| Aggressive | +10.9% |
Market overview
While 2019 has been proven to be a year of positive returns for most asset classes, the tide has turned dramatically since the beginning of 2020. The first quarter was a particularly difficult one as concerns over the outbreak of the coronavirus started to control the markets. While the global economy was already in the late stage of the economic cycle, the pandemic caused an almost abrupt halt of the economy. The conversation has since shifted drastically towards debating a global recession, its impact on markets and the duration of it. While volatility had declined since, it remains on elevated levels. Noteworthy is the unprecedented monetary action from central banks and significant stimulus measures by governments across the globe. We believe these actions, along with declining infection rates, contributed to the strong rebound in April and May.
In line with these developments, we saw a strong rally of risky assets and those benefiting from monetary stimulus. Within equity, US equity as seen the strongest rebound with almost 13% in April alone. The US market was closely followed by Emerging Markets as well as Asia – most likely driven by a perceived speedy improvement of the situation in China. Europe, the United Kingdom and Japan also rallied but to a lesser extent.
Looking at fixed income, BlackRock have observed a preference for riskier assets including corporate credit and Emerging Market debt. This strong reversal has put pressure on fixed income yields, which declined substantially. European and US high yield were amongst the best performing asset classes, followed by global investment grade credit and emerging market debt. Global government bonds, in aggregate, performed positively although with some level of deviation on the country level.
Portfolio performance
| Defensive | Moderate | Aggressive | |
|---|---|---|---|
| Second quarter 2020 | 5.70% | 8.95% | 10.9% |
| Year to date 2020 | -5.30% | -7.30% | -9.30% |
| 2019 | 9.45% | 14.1% | 18.6% |
| 2018 | 6.00% | -7.70% | -9.20% |
| 2017 | 4.65% | 8.60% | 12.4% |
| 2016 | -0.40% | 0.40% | 0.90% |
| 2015* | 1.90% | 3.20% | 4.70% |
| Since Inception | 1.50% | 6.40% | 10.7% |
The multi asset portfolios produced positive returns in the second quarter of 2020. The solid performance was a result of a moderately risk-on positioning as risky assets rallied.
Broadly speaking, on the equity side, all allocations contributed positively to portfolio performance. The US equity was the largest performance contributor followed by EM and European equity.
Looking at the fixed income side, absolute contribution was generally positive for credit. In particular, global corporates and EM corporate bonds were additive.
Outlook
The portfolios were rebalanced in Q2, with the aim of lowering the risk of each profile in the wake of the highly volatile market environment seen in the last few months. Equity exposure is reduced by 6%-13% across the profiles. Fixed income duration exposure is increased between 0.6 and 1.3 years, in response to the short end of yields curves dropping into deeply negative territory across Europe. In this rebalance, a broader transition into ESG across the portfolios was also initiated.
Within equities, consideration for the effect and spread of the Coronavirus is helping to guide decision making. This has led to a reduced allocation to Japanese, emerging market and US equity across the range. Allocation to European and Pacific ex-Japan equites remain unchanged, bar a small reduction in European equities in the conservative profile. As part of the ESG transition, ESG enhanced US, European, Japanese and emerging market equities replace their non-ESG counterparts, with the overall allocations in line with the above changes.
Within the alternatives space, developed market property is reduced in the moderate-aggressive and aggressive profiles.
In the fixed-income space, capital was redeployed with allocation to European government bonds increasing across the range, with an additional focus on German government bonds in the defensive risk profile. With the exception of the highest risk profile, allocation to European corporate bonds is increased across the range.