Balanced ETF portfolios GBP Q3 2020 commentary
| Asset classes | Stocks, Bonds, non-traditional |
| Instruments | ETFs |
| Investment style | Macro, diversified investment focus |
| Quarterly return (net of fees) | |
| Defensive | 0.64% |
| Moderate | 1.96% |
| Aggressive | 2.52% |
Market overview
It is probably fair to say that the year 2020, so far, has been a challenging one. The first quarter was particularly difficult as the outbreak of Covid-19 started to control the markets. At that time, the global economy was already in the late stage of the economic cycle while the pandemic led to an almost abrupt halt. Governments across the globe passed unprecedented monetary and fiscal measures and launched significant stimulus programs that supported a strong rebound in the second quarter in most of the economies. While volatility has declined since, it remains on elevated levels as concerns of new waves prevail.
The third quarter was characterized by a stronger deviation of returns across geographies and asset classes. In this context, Asia’s performance as a region could be labelled as one of the strongest. The BlackRock portfolio management team (the “Team”) believes that this was partly supported by China’s success in containing the virus.
On the equity side, the emerging markets performed the best, returning close to 10% in Q3. Asia ex Japan was the key driver and supported by China’s economic rebound. US equities followed closely in terms of returns due to their continued rally. However, the Team recognized some pressure in September as valuations reached very high levels and the US election started to heat up. Europe managed to post low single-digit positive returns although performance was widely different across the region. Countries that had a better handle of the pandemic were rewarded. The UK is one of the worst performers – most likely linked to high infection rates and renewed uncertainties around Brexit.
Looking at fixed income, return variation was driven by credit quality rather than geography. There was a clear preference for riskier assets such as high yield and corporate credit. US Treasuries were at the bottom in terms of total return - most likely owed to the Federal Reserve’s shift to an average inflation targeting. The consensus here is that rates will remain at lower levels for even longer. US high yield and global credit were amongst the best performing assets, followed by European high yield and emerging market debt. European government bonds, in aggregate, returned positively with some level of deviation on the country level.
Portfolio performance
| Returns net of fees | Defensive | Moderate | Aggressive |
|---|---|---|---|
| Jul | 0.14% | 0.49% | 0.20% |
| Aug | 0.35% | 1.68% | 2.46% |
| Sep | 0.15% | -0.21% | -0.14% |
| Since Inception (September 2015) | 27.4% | 40.0% | 42.8% |
The multi asset portfolios produced positive returns in Q3 2020. In March, following the market decline, risk was added to the portfolios and this resulted in the portfolios having a good third quarter.
Regarding stock markets, in total the asset class contributed positively to performance, with US equity the largest contributor. From a relative perspective, the overweight to US equity was a key driver; while a slight underweight to Europe was also helpful.
Within the fixed income (corporate and government bonds) allocation, global high yield and corporate bonds were additive.
Asset Allocation (%) as of 8 October 2020
| Defensive | Moderate | Aggressive | |
|---|---|---|---|
| Fixed Income | 75 | 52 | 32 |
| Equity | 20 | 43 | 63 |
| Non-Traditional | 5 | 5 | 5 |
Outlook
The risk-on positioning of the March 2020 rebalance and the subsequent reduction of risk in the June 2020 rebalance, helped all profiles to materially benefit from the market recovery. As such, in this rebalance the Team further focus on profit-taking through a reduction in equity risk and duration across the board. The Team continues to monitor the geo-political risks of the U.S. elections, Brexit negotiations and Covid-19 vaccine development for long-term positioning.
Within the equity sleeve, risk is reduced in the lower risk profiles. This is implemented by cutting exposure to the GBP hedged European (ex-UK) and U.S. equity positions in the conservative profile. Further, ESG versions of U.S equities is reduced in the conservative and ESG versions of EMU and UK and U.S. equities is reduced in the moderate, aggressive and aggressive growth profiles. Finally, in the aggressive growth profile, exposure to the European (ex-UK) in GBP hedged and U.S. equities is increased. As part of the move towards more ESG focused positioning, allocation to the ESG enhanced Japanese and EM equities in the aggressive growth profile is also increased.
Within the fixed income sleeve, duration is broadly reduced across all profiles. The Team rotates out of long-dated U.S. treasuries in the conservative and aggressive profiles, while exposure to UK gilts is cut in the moderate and aggressive profiles. In the aggressive growth profile, the Team rotates out of short-dated and index linked UK gilts in favor of core GBP government bonds. Finally, allocation to the GBP denominated ultrashort ESG bonds is increased across the board.
Within the non-traditional sleeve, the position in Gold is maintained at 5% across the conservative, moderate, aggressive and aggressive growth profiles.
Whilst cautiously monitoring Brexit trade deal negotiations, the Team reduced the non-GBP FX weights across all profiles.