Half-year performance scorecard of Finax portfolios

The first half-year of 2024 has clearly demonstrated the inertia that can build up in stock market growth. We saw profits in almost all months, except for a brief April decline. Continuing slow-down of inflation, economic growth, and considerable earnings of numerous companies all contributed to this phenomenon.    

As usual, we will split our portfolios among the different sections of this blog according to the European SRI indicator, which measures the risk level of investment products. In investing, higher risk should be rewarded by a higher long-term return.  

SRI can range from 1 to 7. The higher the number, the higher the risk of that strategy. This table shows the SRIs of our products calculated as to June 30^th, 2024.  

Note on the Data Quoted: All data tied to the performance of the Finax portfolios represent the actual after-fee performance (stated before taxes) achieved by sample portfolios. We have described the method for calculating this actual performance in the article How Do We Calculate the Actual Performance of Finax Portfolios? Past performance is no guarantee of future returns, and your investment may result in a loss. Inform yourself about the risks involved in investing. The currency used in the past performance calculation is EUR. The return of your investment may increase or decrease as a result of currency fluctuations if your investment is made in a currency other than EUR.

Tax liability disclaimer: The stated performance figures are before taxes. The tax treatment of income from the sale of ETFs (which form the Finax portfolios) depends on each client's tax residence and individual circumstances and might be subject to future changes.

Dynamic Strategies 

Dynamic investments are comprised of higher-risk strategies whose value may fluctuate up and down more significantly. In return, they should offer higher long-term returns compared to more cautious portfolios. For the purposes of this blog, we will classify strategies with a risk level SRI 4 as dynamic.

As you can see in the table, all of them managed to yield very pleasant returns over the past year, with the exact value ranging from 15 to 18%. 

Since dynamic portfolios are suitable for long-term investing (at least 8-10 years, ideally even more), it does not make sense to become overfocused on performance in any given year. Anything can happen over such short periods. That is why you should be primarily interested in performance over longer horizons.

We highlight this fact in almost every blog. Different periods are dominated by different regions and sectors. Only by holding a broadly diversified portfolio you ensure that you are going to hold the winner. That’s why passive investing tends to dominate mainly over longer periods of time.

Looking at a longer period of the last 5 years, our passive portfolios maintain a very convincing result. All of them managed to earn returns of roughly 8 to 10% per year. This range is often quoted as the average long-run performance of the stock market.

Balanced Strategies 

Balanced strategies carry a medium level of risk indicated by an SRI value of 3. This is typically achieved by mixing riskier stocks with more conservative bonds.

However, during the recent cycle of interest rate hikes, the bond market fell into its longest decline in history, causing many of our bond strategies to fall into the riskier SRI 3 category.

Thanks to the variety of the strategies included, you will  find a very diverse palette of returns in this table. All of them earned a profit over the last year, with some of them yielding solid double-digit returns. Even bond strategies rose thanks to high yields and a slight interest rate cut in the Eurozone.

Strategies with higher proportions of stocks maintain very attractive results even on longer horizons. However, you can see that bond strategies have still not fully recovered from the decline they experienced due to rising interest rates, being in a slight loss over the last 3 and 5 years. Their prices might get more support if central banks manage to deliver interest rate cuts, which are expected due to a general slowdown in inflation.

Conservative Strategies 

This category contains portfolios with risk level SRI 2. From our offer, this applies only to the Intelligent Wallet, which doesn’t have performance data for 3- and 5-year horizons, as it was launched only at the end of July 2021.

It is not a secret that the Intelligent Wallet used to have an improper portfolio composition. It was originally comprised of bonds with longer maturity, thus being more vulnerable to raising interest rates. This caused it to slip into a decline during the period following its launch. You can read more on how the maturity period influences the return in this article.

In order to adjust the Wallet’s risk level to the recommended investment horizon, we changed its portfolio composition at the end of November, significantly shortening the maturities of its bonds. Thanks to these changes, its value now fluctuates much less sharply, and it delivers a more stable return.

You can see that it increased the value of its clients’ deposits by 1.5% over the last year. However, its performance was still limited (for instance compared to the Smart Deposit), as bonds remained under pressure due to the postponement of interest rate cuts in most major economies.

Smart Deposit and the European Pension 

The Smart Deposit is currently the most conservative solution in our stock, designed for depositing short-term savings, even for less than a year. You may use it as a high-interest savings account. The deposit is not term-bound, you may withdraw it anytime, and the return is paid out every day.

Thanks to virtually zero volatility (you may check it out yourself at the transparent account of Dominik Hrbatý) it belongs to the lowest risk category of SRI 1. Therefore, it is safer than any of our other products.

As you can see, it grew by 3.4% over the last year, thus reflecting the high ECB interest rates in its return. You can compare this result to the interest rates offered on savings accounts or term deposits in your bank.

Above-average results have also been achieved by the European Pension (PEPP) strategies, which are used exclusively for retirement saving, being a part of an EU-wide third pillar scheme. They are subject to reduced fees (0.72% incl. VAT per year), which increases their performance.

In many countries, they were also granted attractive tax incentives available to the local third pillar products. However, they usually also have a limited liquidity – except for some emergencies, most countries will only allow you to withdraw savings from these products after reaching the official retirement age.

We would like to highlight the performance of the payout phase portfolio, where the accumulate money is stored after retiring. It rose by almost 13% during the last year.

We consider the savings handling of the III. Pillar during the payout phase one of its greatest weaknesses. The management companies tend to transfer the entire savings into bond funds with little to no return despite the fact that most people spend around 20 years in retirement.

Thanks to holding the savings in a balanced payout portfolio, the money saved in PEPP continues to appreciate even in retirement, instead of getting eroded by inflation. This allows its clients to increase the overall pension received from their PEPP accounts or to leave a larger inheritance to their kids.

Comments on the Market Development

From our point of view, this half-year has provided yet another confirmation that you should not let doubts take over when investing. One can always find plenty of reasons to justify selling in anticipation of declines.

During the inflation crisis of 2022, many skeptical voices kept preparing us for further market declines, warning that the true crisis is yet to come. Now these voices are telling us that the markets have probably peaked and that a drop is poised to come . Despite these fears, stocks managed to grow in almost every month during the last half-year.  

There is an interesting aspect to this growth. It occurred despite the fact that the optimistic expectations of interest rate cuts from the beginning of the year remained unfulfilled. For instance, back in January, investors expected the American central bank to decrease the interest rates 6 or 7 times until December. Six months later, they are still unchanged, and no more than 1 or 2 cuts are expected until December.

A lot of people would argue that such a massive disillusionment about interest rate expectations should lead to a sharp market drop. Nothing like that happened. It seems that the profitability of companies and economic growth are much more important to the stock market than low interest rates.  

Another nice feature of last year’s growth is that it has been experienced by almost every region. Although the U.S. large companies still lead the way, other markets have also delivered solid returns. 14 out of the world’s 20 major equity indices rose to new historical highs during May.

Out of the ETFs included in our portfolios, emerging market (EM) stocks posted the second highest gains over the last half-year. This happened after they experienced several years of unconvincing performance, which led many investors to avoid them when constructing their portfolios.

This all might sound nice to you without addressing the core of your worries. Many people fear that the development of global markets was just too perfect over the past months. Purely based on statistics, a significant drop has to come to move the numbers closer to the average.

If you can identify yourself with this statement, we wanted to share an interesting stat with you. It concerns the performance of the U.S. S&P 500 Index over the last 35 years. During this period, it grew by more than 10% during the first 6 months in 11 years. Pretty above average, right?

Well, the interesting thing is that its growth typically did not stop in the second half of the year. Quite the contrary, it continued to rise. The average return achieved by the index at the end of those 11 years was 29%. It is not uncommon for good months to be followed by more good months.

Of course, this doesn’t mean that the markets are guaranteed to continue growing over the next 6 months. It also doesn’t mean that a sudden drop cannot occur. Such a possibility always exists in investing. What we’re trying to show is that strong growth during the past months doesn’t automatically mean you should be afraid of the future development. 

Your safest bet is to keep money invested at all times, thus benefiting from the long-term growth of the global economy. Even if drops or crises occur (which is guaranteed to happen if you invest for longer periods), the mankind always overcomes them. The markets then continue to grow for many months or even years.  

The actual development of our portfolios since their launch provides further evidence for this point. You may look at the development of three selected strategies in the graph below. The numbers in the caption represent the ratio of stocks/bonds in each strategy.

As you can see, we have experienced two significant market drops over the last 6 years: the Covid-19 pandemic in 2020 and the inflation crisis in 2022. Both these crises were eventually resolved, and the portfolios began to grow swiftly. They actually experienced their sharpest growth during the post-crisis recoveries of 2020-21 and 2023-24. 

If you had succumbed to the panic and sold in the middle of Covid or energy crisis, you missed on the recovery that followed, losing a great portion of earnings. Likewise, if you had sold your investment at the beginning of 2021 or 2024 thinking that the markets had already reached their peak, you would have missed a long period of above-average growth in the remaining portions of those years.

Only those who held onto their investments during the entire period have utilized the power of global markets to the fullest.

Therefore, avoid speculations, set up a regular standing order, and focus on doing things that make you happy. The growth of the world economy will take care of the rest.