Our Returns in the First Quarter of 2023
Full of big highs and lows, the first three months of 2023 were volatile for investors
The first quarter of 2023 (Q1) has been nothing short of a roller coaster.
To recap: the year opened with a bang as investor optimism about the path of growth and inflation contributed to a rally in January. Markets were pricing in interest rate cuts by the end of 2023, despite warnings from the US Federal Reserve that its job was not done and that interest rates could stay higher for longer.
Come February, market expectations came crashing back down to reality as stickier-than-expected inflation, other strong economic data, and hawkish signals from the Fed led investors to reassess the path of interest rates. Bonds, in particular, took a beating.
Then came March madness: sudden turmoil in the banking sector and fears of a potential financial crisis wiped out much of the quarter’s gains in equities. Bonds posted a comeback as investors flocked to safe haven assets. And then, equities ended the month by bouncing back, with large-cap technology stocks leading the charge.
Given this market environment, find out how our portfolios have performed in Q1, and what we’re watching in the months ahead:
- General Investing Portfolios Powered by StashAway
- Responsible Investing Portfolios
- Thematic Portfolios
- What we’re watching in 2023
Our General Investing portfolios weathered market turmoil to post positive returns
During Q1, StashAway’s General Investing (GI) portfolios from SRI 6.5% to 36% posted positive returns. They were up between +2.9% and +6.3%, or +4.5% on average in USD terms.
In December 2022, our investment framework, ERAA®, positioned our portfolios for a stagflation environment. This meant a more defensive positioning versus our benchmarks. Diving deeper into the composition of returns over the quarter shows why this positioning may still be warranted.
Broad-based equities and tech stocks were the main drivers
Despite the seemingly tough macro environment, risky assets were generally up for the quarter, supported by a temporary injection of money by central banks. As a result, ERAA®’s allocation to broad-based equity ETFs and overweight allocation to the tech sector were key contributors to our portfolios’ performance over the course of Q1. This was especially the case for our more equity-heavy, higher-risk StashAway Risk Index (SRI) portfolios. Our underweight allocations to the financials and energy sectors also helped relative portfolio performance.
In particular, large-cap technology stocks like Apple, NVIDIA, Tesla, Microsoft, and Meta were the main drivers behind that strong performance. Indeed, these five stocks contributed more than half of the Q1 return in global stocks. However, moving forward, it’s unclear whether these gains will continue, as such narrow market breadth has historically not been a sustainable trend.
Pulling in the other direction, ERAA®’s allocation to healthcare equities was a detractor to our portfolios over the quarter. In total, the sector was down 4.3% (in USD terms) during the quarter. As a defensive sector, this may be related to the liquidity-supported, “risk-on” sentiment in markets over the past quarter. That could still change in the months ahead, depending on how the macroeconomic environment evolves.
Short-duration and IG bonds were a steady source of support
On the fixed-income side, ERAA®’s allocations to short-duration bonds provided a stable source of returns amid the market turmoil over the past quarter – especially in our more bond-oriented lower-risk SRIs.
As yields are likely to remain high this year, we continue to see the benefits in maintaining overweight exposure in this low-risk asset class. (Read more here: “Why Investing in Short-Term Bonds Makes Sense”).
Exposure to longer-duration and investment-grade bonds also contributed to returns, especially later in the quarter as investors fled to safer assets amid concerns about risks to the economy. US aggregate bonds were up 3% in USD terms, while long-term US Treasuries were up more than 7% during the quarter.
This also illustrates the importance of having balancing assets like fixed income in a diversified portfolio.
Gold continued to shield our portfolios
Given the volatility over the past quarter, gold continued to provide protection to our portfolios given its low correlation with stock and bond prices. Especially in the wake of the banking turmoil in March, the asset class saw safe-haven inflows. In total, gold posted returns of 8.0% (in USD terms) during the quarter. This highlights the benefit of maintaining an allocation to gold during times of economic uncertainty, like we are seeing today.
Despite market volatility, our GI portfolios demonstrated more stability than their benchmarks
Tied to ERAA’s® defensive positioning, with equities rallying in Q1, our portfolios deviated by -0.7 to -1.1 percentage points from their same-risk benchmarks during the quarter. But as uncertainty and, therefore, market volatility persists, the data underpinning ERAA® show this positioning is still warranted.
Furthermore, our GI portfolios’ allocations resulted in lower volatility during Q1. Our portfolios posted average annualised volatility of about 7% versus more than 9% for our benchmarks. And that lower volatility also translates into higher risk-adjusted returns: in Q1, our GI portfolios posted an average Sharpe ratio of 2.35 versus 2.16 for their benchmarks (a higher ratio reflects better risk-adjusted performance).
What’s more, our portfolios have also posted lower drawdowns during longer periods of market turmoil. During last year’s steep declines in both equity and bond markets, our portfolios posted smaller maximum drawdowns versus their same-risk benchmarks, or about // SG: 3.7 percentage points less on average in SGD terms. 3.9 percentage points less on average in USD terms.
Responsible Investing portfolios also posted solid returns
Our Responsible Investing (RI) portfolios, which optimise for both long-term returns and ESG impact, were up between +3.7% and +6.7%, or +5.0% on average in USD terms. We note that our RI portfolios’ average returns appear higher than those of our GI portfolios’ as they start from a higher risk level (SRI 12%). But when compared with the same-risk GI portfolios, average returns were broadly in line.
Similar dynamics were at play in our RI portfolios as our GI portfolios. Exposure to broad-based equities provided the main boost, driven by those indexes’ high weightings to large-cap tech companies. Our RI portfolios’ slightly higher exposure to tech via the future mobility sector also aided their performance.
On the balancing asset side, exposure to gold (as described above in the GI section) was also a key contributor to portfolio returns, especially in the latter part of the quarter. Green bonds and long-term US Treasuries also helped. Our allocations to short-duration bonds also provided steady returns during the period.
As with our GI portfolios, our RI portfolios’ more defensive tilt similarly led to smaller drawdowns during last year’s market turmoil. It also resulted in a small deviation versus their same-risk benchmarks, or -0.8 percentage point on average.
Our Thematic portfolios posted positive returns with tech providing buoyancy
Our tech-focused Thematic portfolios posted mostly double-digit positive returns in Q1, benefitting from the bounce in the sector during the period. Healthcare saw flattish performance, while clean energy posted modest returns.
Looking ahead, the near-term trajectory of these portfolios may be volatile given the uncertain macro environment. But we expect their “balancing assets” to help protect against downside risks – especially during economic downturns, which tend to drag on companies’ earning potential. And looking even further ahead, we continue to believe that the longer-term structural trends underpinning these portfolios still have room to run.
Our Technology Enablers portfolios posted strong gains of +13.0% on average in USD terms during Q1.
Their thematic assets posted robust returns across the board, but their allocations to cloud-computing, autonomous-tech-focused companies, and the semiconductor sector in particular – which saw significant declines last year – were the main drivers this quarter. These are sectors that are poised to benefit from breakthroughs in artificial intelligence, like ChatGPT, for example. The next generation internet sub-sector was up nearly 40% over the quarter, while semiconductor manufacturers were up nearly 30%. Balancing assets in the portfolios – like bonds and gold – also posted modest, positive returns.
Future of Consumer Tech
Similarly, our Future of Consumer Tech portfolios gained +13.0% on average in USD terms during Q1.
Here, the fintech, and e-sports sectors were the largest contributors to the portfolios’ returns, with both returning about 20% or more during the quarter. We note that better growth prospects in the fintech sector may have helped to cushion some of the concerns in the broader financials sector in recent months. E-sports were aided by their exposure to semiconductor stocks like NVIDIA and other large-cap technology names. Balancing assets also posted modest, positive returns.
Our Healthcare Innovation portfolios saw an average increase of +1.3% in USD terms during Q1. The portfolios’ underlying thematic assets posted mixed performance, with allocations to medical device companies the main contributors during the quarter. Exposure to other healthcare sub-sectors – such as biotechnology and pharmaceuticals – were net drags. Here, balancing assets added significant support to portfolio performance, especially in our lower-risk SRIs, where they accounted for about half of total returns.
Environment and Cleantech
Our Environment and Cleantech portfolios were up +4.5% on average in USD terms during Q1. The environmental services, smart-grid infrastructure and water sectors accounted for the bulk of returns during the quarter. The portfolios’ allocations to green and inflation-protected bonds also added support.
Here’s what we’re watching as we head into the second quarter of 2023
Heading into the second quarter of the year, the big question now is the sustainability of the latest equity market rally. As we described above, given the high level of uncertainty about the macroeconomic environment, we believe a cautious approach is still warranted.
We’ll be digging deeper into the outlook for the months ahead in our April CIO Insights, but a big picture perspective of the last quarter illustrates two important things. First, there is a high level of uncertainty about the trajectory of the economy. Secondly, given that high level of uncertainty, investors are hanging on to every data point. That means market sentiments can turn on a dime.
In December, ERAA® positioned our portfolios more defensively to ride out the current market environment. (Read more about our latest portfolio re-optimisation here.)
We are closely monitoring any changes in the situation, but regardless of the macroeconomic climate, a long-term investing strategy built on a diversified portfolio of bonds and equities can help you to ride out market volatility and reduce drawdowns.
Our same-risk benchmarks are proxied by MSCI AC World Index (for equities) and FTSE World Government Bond Index (for bonds). The benchmarks we use have the same 10-years realised volatility as our portfolios.
These same-risk benchmarks only apply to our General Investing powered by StashAway, General Investing powered by BlackRock, and Responsible Investing portfolios. Due to the specialised nature of their underlying assets, our other portfolios do not have comparable same-risk benchmarks.
Model portfolio returns are expressed in gross terms before fees, withholding taxes, and reclaims on dividends. They are provided only as a gauge of pure performance before other items.
Actual account returns may deviate from the model portfolios due to differences in the timing of trade execution (e.g. during the day vs close), timing differences and intraday volatility of reoptimisation and re-balancing, fees, dividend taxes and reclaims, etc. All returns are in SGD terms.
Past performance is not a guarantee for future returns. Before investing, investors should carefully consider investment objectives, risks, charges and expenses, and if need be, seek independent professional advice.
This communication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to purchase any financial product or subscribe or enter any transaction.
This communication does not take into account your personal circumstances, e.g. investment objectives, financial situation or particular needs, and shall not constitute financial advice. You should consult your own independent financial, accounting, tax, legal or other competent professional advisors.
We thought you might.
Join the hundreds of thousands of people who are taking control of their personal finances and investments with tips and market insights delivered straight to their inboxes.