Balanced ETF portfolios GBP Q2 2020 commentary
| Asset classes | Stocks, bonds, non-traditional |
| Instruments | ETFs |
| Investment style | Macro, diversified investment focus |
| Quarterly return (net of fees) | |
| Defensive | 6.70% |
| Moderate | 9.80% |
| Aggressive | 11.7% |
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. The first quarter was a particularly difficult one as concerns over the outbreak of 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 has seen the strongest rebound with almost 13% in April alone. The US market was closely followed by emerging markets (EM) 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 among 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 | 6.70% | 9.80% | 11.7% |
| Year to date 2020 | 3.26% | 3.06% | 1.08% |
| 2019 | 9.33% | 13.4% | 16.4% |
| 2018 | -4.08% | -5.15% | -6.21% |
| 2017 | 4.53% | 8.26% | 10.1% |
| 2016 | N/A | N/A | N/A |
| 2015 | N/A | N/A | N/A |
| Since Inception* | 26.6% | 37.3% | 39.3% |
In March, risk was purposefully increased in the portfolios, and this helped all portfolios to materially benefit from the market recovery, after hitting bottom on March 23rd.
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
Following the sharp recovery in markets, into Q3 some profits have been taken and risk has been reduced from the equity allocation of all risk profiles. The long-term focus will be positioned by closely monitoring risks of a second wave of coronavirus as well as geopolitical risks of the US elections and Brexit negotiations.
Risk has been reduced by cutting exposure to EM and GBP hedged European (ex UK) equities. Additionally, global equities (in GBP hedged) and European (ex UK) equities have bee neduced in the Moderate, Aggressive and Aggressive Growth profiles. As part of the continuing ESG transition, positions were initiated in the ESG versions of Japanese, EM and European equities, whilst increasing exposure to existing US equities position.
Within the fixed income sleeve, duration is modestly decreased across risk profiles. This was carried out by rotating out of the long-dated 20+ year US treasuries, into 7-10 year US treasuries. As part of the ESG transition, ESG versions of the short-dated GBP and USD (in GBP hedged) bonds in the Conservative, Moderate and Aggressive profiles, were added. In the Conservative profile, exposure was cut to USD denominated EM debt.
Within the non-traditional sleeve, Gold has been added across all profiles. Whilst cautiously monitoring Brexit negotiations, non-GBP FX positions were added across all risk profiles.