And that’s precisely the mindset behind outcome-oriented investing strategies. They focus on a specific goal, and are not limited to a single broad-market benchmark in targeting it. That means they can employ more tools in pursuit of their underlying objective—your underlying objective.
SEEKING OUTCOMES WITHOUT CONSTRAINTS
Because of their flexibility and benchmark-agnostic approach, outcome-oriented strategies are often called “unconstrained.” That affords some clear advantages in the current environment. To illustrate, consider today’s leading fixed income index, the Barclays U.S. Aggregate Bond Index (the Agg)—the likely target of an income-oriented investor. By construction, the index replicates the investment-grade debt sold in the U.S. market. Hence, it is heavily weighted (roughly 75%) toward U.S. Treasuries and other government-related securities.
The problem is that these are the very investments most affected by changes in interest rates. And after falling for some 30 years, the consensus outlook is for rates to rise. (And when rates rise, bond prices fall.) Bottom line: Investing in a portfolio based on the Agg not only presents a possible shortfall on the income front given today’s low government bond yields, but it also could lose value as rates rise.
Unconstrained income strategies, such as the BlackRock Strategic Income Opportunities Fund, seek to solve for this. They take a tactical approach to duration (a measure of interest rate sensitivity) and invest without limitation across the broad universe of income opportunities, says Rick Rieder, fund manager and Chief Investment Officer of Fundamental Fixed Income at BlackRock.
“With an unconstrained approach, the majority of the bond world, much of it off limits to the traditional core bond investor, becomes available,” Mr. Rieder explains.
Investors seem to be taking a liking to outcome-oriented strategies, Mr. Porcelli observes. In fact, the management consulting firm McKinsey & Company suggested in a 2012 report that individual investors’ assets in such strategies would more than double in five years, to $2 trillion.
Mr. Porcelli is encouraged by this trend. “We’re focused on providing solutions that meet our clients’ needs, and outcome-oriented strategies that are directly aligned with investors’ objectives are just that,” he says. “Ultimately, as an investment manager and a fiduciary, our success is measured by our clients’ success—our goal is to get them to their goals.”