Performance Review: September 2020

September turned out to be a weak one. The equity market dropped for the first time after five straight months of positive returns. A slew of negative headlines hit across all markets, specifically at the beginning of September. Politics and rising COVID-19 infections were the major causes for the weaker performance across all asset classes.

The Growth portfolio dipped by 2.35% whilst the Income and Inflation Hedge portfolios dropped by 0.45% and 3.15% respectively.

Chart 1: Functional Portfolios' Performances for the month of September 2020

Performance Review September 2020

Source: Gax MD Sdn Bhd, October 2020

It must be noted that, the actual portfolio returns to the investors is the combined weighted return from the allocation to each functional portfolio. For example, if an investor allocates the investment equally: 33.3% in Growth, 33.3% in Income and 33.3% in Inflation Hedge, the actual portfolio return is (33.3% x -2.35%) + (33.3% x –0.45%) + (33.3% x -3.15%) = -1.98%.

The GROWTH portfolio dropped by 2.35% in MYR

The equity market dropped for the first time after five months. US Technology stocks (QQQ) was the worst performer after a 5.78% decline. As QQQ has been performing well over the past two years, investors who were sitting on significant gains would have had quickly sold-off some of their holdings to realize some profits.

The rising tension between the US and China has also dragged China large-cap stocks (FXI) and Hong Kong stocks (EWH) down by 4.46% and 3.44% respectively. At the same time, UK stocks dropped by 4.32% after a further disagreement between Boris Johnson and the EU representatives.

However, it wasn’t all negative within the Growth portfolio. Taiwan stocks (EWT) and Japan stocks (EWJ) trended higher during this period after share prices rose by 2.16% and 1.81% respectively. Taiwan is home to many independent technology companies, and many view the country as a clear beneficiary whenever the trade dispute between the US and China escalates.

Meanwhile, Japan stocks performed positively, in line with better economic outlook after the country's Leading Economic Index climbed further to 86.9 points after registering 83.8 points and 78.4 points in August and July, respectively.

The INCOME portfolio dipped by 0.45% in MYR

The bond market had a quiet month. After a significant spike in August, the US 10-year bond yield had a small drop to 0.686% at the end of September compared to 0.706% in the previous month.

A decline in bond yield supported Treasury bonds to trade higher in September, in particular, the longer-dated bonds that are highly sensitive to changes in the interest rate. As a result, the US government bonds with more than 20 years to maturity (TLT) rose by 0.66%, and the US government bonds with 7-10 years to maturity (IEF) added 0.26%.

Naturally, in a volatile market, investors tend to have very little interest in riskier assets. Hence, riskier bonds such as Emerging Market bonds (EMLC) and High Yield corporate bonds (JNK) were the top losers with the declines of 2.10% and 1.33% respectively.

The INFLATION HEDGE portfolio dropped by 3.15% in MYR

The Inflation Hedge portfolio dropped the most among the three functional portfolios in September. Almost all asset classes including real estate, infrastructure, inflation-hedged bonds and commodities registered losses during this period.

Silver (SLV), Oil (DBO) and Gold (IAU) were the worst performers after drops of 17.50%, 6.50% and 4.16% in share prices respectively.

The negative performance of SLV and IAU were more likely due to investors taking profits after hefty gains this year. After the drop in September, SLV and IAU remain among the best-performing asset classes all year round, with total returns of 29.74% and 24.07% respectively.

Meanwhile, DBO fell by 6.50% on the prospect of weaker demand for oil after the spike of coronavirus infections in Europe.

Our thoughts

The tension between the US and China escalated once again after President Trump dished out more policies against China to get support from the voters. This situation is likely to be temporary, as the Anti-China rhetoric will gradually unwind after the election, regardless of the election's result.

Brexit continues to stay tricky as it has since it first started. Brexit may affect the market sentiment at least until January 2021, which is the timeline that the UK has agreed to start the transition with or without the EU. Our take is that Brexit is a country-specific issue that only affects the UK economy and market, and we can expect little impact on other countries.

COVID-19 has been a threat all year. While it is reasonable to be concerned of the recent spike of COVID-19 infections, many countries today have more experience and resources at hand to handle the new wave of infections. Hence, a lockdown is no longer the ultimate option to contain the spread of the virus. Instead, many of these countries would opt for alternatives that have a lesser impact on the economy.

The stock market is volatile. There will be a lot of ups and downs. Hence, it is impossible to have a month without a negative return. That's why our algorithms are designed to ignore short-term changes in the asset prices but instead to continue monitoring and taking a long-term view on our investment.

MYTHEO algorithms’ key focus is to optimize the portfolio by maximizing returns while taking the least risk possible. For these purposes, our algorithms run on two layers of automated processes - REBALANCING and RE-ALLOCATION. As the value of assets changes all the time, the portfolio allocation tends to deviate from the target allocation. Rebalancing is the process to bring the portfolio allocation back to the target allocation. Re-allocation is the process of changing the weightage of an individual ETF within the functional portfolio, which includes adding a new or deleting an existing position. Rebalancing is run every month, while re-allocation is also run every month for the Inflation Hedge portfolio and quarterly for the Growth and Income portfolios.