Endowus Income Portfolios : Robo Advisor & Yield Seeker

Endowus has recently launched it’s Income Portfolios, meant for those looking for cash-flows at varying stages in life. Another goal of these portfolios is to maintain or even achieve some capital appreciation over the long term.

A investment product with a payout of 4 to 6%, diversification, and also capital appreciation? Definitely sign me up. If these claims are true, they might even be more appealing than some REITs.

Through Endowus, we can view the 3 products available, and their features. Nonetheless, we should still do our due diligence to run through the portfolio’s allocation, and how it actually invests our money.

Stable Income

Stable Income is touted as the ideal portfolio for retirees, the risk-averse, or whom are just looking for a stream of income. This portfolio invests principally in safer fixed income instruments, i.e investment grade bonds.

It’s holdings are spread out across 4 funds, which contain a noticeable portion of high-yield (riskier) bonds. Combined, the product boasts a average bond duration of 4.08 years, a credit rating of BBB+, and a yield of 4.48% at the moment.

Holdings are relatively diversified globally, with corporate debt taking up half it’s portfolio. To be expected, since such high yields don’t come without risk. Securitised credits are basically bundled, asset-backed loans which pay out interest to investors.

Endowus emphasizes that investors should be aware that in the shorter term, the Portfolio can experience volatility and marked-to-market losses which will recover over time as their bonds reach maturity.

Below are some of the worst performances of the Stable portfolio in 2008 and March 2020. However, such sizable losses are rare, and do not represent the general performance of the product.

Potential investors should be prepared. An average duration of 4 years for it’s debt instruments combined with rising interest rates will likely cause some of it’s assets to lose it’s luster as rates rise. This will result in lower valuations until capital is returned.

Generally, we feel that the product does provide good value to investors looking for diversified fixed income funds. Furthermore, it comes with a lower expense ratio (0.65% less trailer fees), than if you were to buy it elsewhere.

It’s current yield of 4.48% is also quite attractive, and should allow it to maintain some degree of attractiveness even in a higher rate environment. A focus on investment grade fixed income instruments minimizes risk as well.

Higher Income

Stable Income’s riskier cousin, Higher Income is supposedly meant for working adults who desire higher payouts for living expenses. Notably, this group is assumed to have the runway to bear higher risk and volatility in order to receive some capital appreciation.

Higher Income chooses to invest 20% of it’s assets in dividend focused equities, while also pursuing a equal allocation to both investment grade and high-yield bonds. It’s thus able to generate a impressive yield of 5 to 6%.

The 8 funds which it invests in give it a average bond duration of 4.59 years, considered relatively lengthy. Average credit ratings rounds off at just below investment grade, putting it’s fixed income instruments at higher risk.

The equity component focuses on solid dividend counters which should also provide some appreciation over the longer term. As mentioned, investment grade and high yield debt instruments form the fixed income component of the product.

In a smooth-sailing scenario, this product would be an impressive cash cow. However it’s flaws will start surfacing during rough seas.

Higher Income does come with higher volatility historically, due to it’s equity and high-yield components. This product is probably more suited to investors who don’t mind more risk and volatility, both of which will definitely be present in this portfolio.

Personally, i’m not very keen on the increased high-yield bonds exposure in this product. Like the Stable portfolio, exposure to rising interest rates is present as well. It’s not really my cup of tea and i don’t recommend it to newer investors.

The product has a total expense ratio of 0.78%, which is a more favorable rate compared to buying the funds through other platforms.

Future Income

The last product is meant for younger investors who don’t urgently require payouts but could use some extra cash to spend. Future Income fulfills this demand by offering a 3 to 4% payout, while also investing in equities for future appreciation.

9 Funds make up this product’s allocation, five of which are equity funds. Of these five, three of them focus on dividend stocks which pay out to investors. DWEF and SGEMOF do not pay out dividends, but instead focus solely on capital appreciation and accumulation.

The combined equity and fixed income yield of the product stands at 3.38% currently, lower than the previous two but still comfortably beating the bank’s savings accounts. Average credit rating is conservative, at investment grade.

An added bonus is that it has a lower average bond maturity period. This should provide a slight buffer against rising interest rates

Like Stable income, the fixed income component of this product also has some exposure to riskier bonds. It’s also leans more towards income instruments in the US, which tends to be more transparent.

With a substantial 40% allocation to equity, investors can also expect good capital appreciation over time. This takes into account the split between dividend-focused and growth stocks in it’s equity component.

Safe to say that the product will likely meet it’s aim of both capital appreciation and income payouts to investors.

It’s worst performances and overall volatility are on par with the Higher Income portfolio. Similar risk profiles but with more equity components and better fixed income quality.

This 40/60 setup is like a more conservative variant of the standard 60/40 equity to bond portfolio. I like that the bond component aims to produce higher yields through investment grade debt, while the decent equity portion provides diversified capital growth.

In fact, Future Income could be a great fundamental product for younger, more risk-averse investors. A 3 to 4% yield also provides a level of certainty in terms of risk-to-reward.

For Those Who Seek Payouts

Endowus’s solution to investors who have been clamoring for income-distributing products comes in the form of these portfolios. This is in tune with the demand for dividend investments in Singapore especially.

The three products bridge the risk-to-reward ratio between the Cash Smart and Core portfolios, providing more options to retail investors.

We feel that these products can value-add to a investor’s portfolio in a few ways;

  • Stable Income can serve as the main income component for investors who are already heavily invested in stocks and other equity instruments.
  • It can also provide some diversification for REIT investors who rely solely on REITs for income.
  • Future Income can act as the core portfolio for younger, risk averse investors. The combination of income and appreciation should provide good total returns over the long run.

Do note that the initial investment requires a lump sum of at least $10,000. Subsequent investments can go as low as $100.

We’re pretty thrilled about these product offerings, and will be looking to include some of these in our own portfolios soon enough.



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