Balanced ETF portfolios USD Q3 2020 commentary
| Asset classes | Stocks, bonds, non-traditional |
| Instruments | ETFs |
| Investment style | Macro, diversified investment focus |
| Quarterly return (net of fees) | |
| Defensive | 2.17% |
| Moderate | 5.13% |
| Aggressive | 6.58% |
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 “Management Team” or 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 | 2.39% | 3.30% | 3.71% |
| Aug | 0.53% | 3.51% | 4.99% |
| Sep | -0.74% | -1.68% | -2.12% |
| Since Inception (September 2015) | 16.1% | 19.4% | 25.9% |
The multi asset portfolios continued to produce positive returns in Q3 2020 and outperformed their respective index benchmarks. This was a result of a moderately risk-on positioning as most risky assets had a good quarter. The performance of the Moderate model was ranked in the first quartile among its peers, while the Conservative and Aggressive came in at the third and second quartile.
On the equity side, with the exception of the UK, all allocations contributed positively to performance. In absolute terms, US equity continues to be the largest contributor and is followed by emerging market and Japan equity. From a relative perspective, the overweight to US equity was the key driver; while a slight underweight to Europe was also helpful.
Looking at the fixed income side, absolute contribution was generally positive for credit. In particular global high yield and corporate bonds were additive, while long duration US Treasuries and US mortgage backed securities were detracting.
The allocation to gold and TIPS (Treasury Inflation-Protected Securities), which were funded out of the fixed income sleeve, also contributed to positive absolute return and relative to the fixed income sleeve.
Outlook
The positive view on equity is maintained but there are concerns about the uncertainty and market volatility leading up to the US Presidential Election. Therefore, the overweight in the equity sleeve is reduced.
Within equity, the Team continues to overweight the US which is driven by strong earnings growth forecast and an accommodative Fed policy. The Team also overweighs emerging markets because of decent earnings growth and recoveries from COVID-19, especially in China. Allocation to Japanese equities is increased as valuation has improved. On the other hand, the Team is cutting European equities as earnings growth forecast remained weak and there are second waves of COVID-19 in many countries, leading to new lockdowns. UK allocation is also reduced on the back of concerns about the Brexit deal negotiation.
Within fixed income, the overall model duration is maintained. The credit risk premium and spread momentum are positive for high yield and, therefore, the allocation is increased. The Team also increases the allocation to emerging market debt and credit which is driven by the signals. These increases are mainly funded out of mortgages and, in the case of the Aggressive model, out of US investment grade bonds.
Within the alternative sleeve, the Team is adding to REITS. The YTD underperformance of REITS compared to the board equity market has been driven by highly negative returns across sectors such as Retail & Lodging which were most impacted by social distancing rules. As the globe is slowly recovering from COVID-19, the Management Team is positioning for a rebound of this sector.