Alternative Thinking

BSF UK Equity Absolute
Return Fund

Uncorrelated returns and less volatility, for today’s uncertain world


The past few months have seen stock markets rise while bond yields have narrowed in the wake of further monetary easing from the Bank of England. This higher correlation between bond and equity markets is not isolated, but has been a recurrent phenomenon since the financial crisis of 2008. As such, the ability to invest differently to the broader market and achieve real diversification has become increasingly critical.

The BSF UK Equity Absolute Return Fund is a recent addition to the BSF range. It mirrors a long-standing and well-established strategy in our UK onshore range: The Fund aims to dampen risk for investors and reduce the overall vulnerability of a client’s portfolio to swings in the stock market. The Fund invests in 70-90 of our strongest long and short ideas. Although the market exposure will vary, the portfolio typically has only a modest net market exposure and a gross exposure of up to 150% depending on the number of ideas in the Fund and our level of conviction. As such, it shows relatively low correlation to the wider equity market and that is valuable for clients who worry about the current economic picture.

The Fund aims to generate returns solely from picking the right shares, rather than being dependent on the direction of markets. This means that the portfolio is much more agnostic in terms of the market falling or rising. We concentrate on stock-specific opportunities and use a more qualitative approach to identify under or overvalued companies through in depth analysis of company fundamentals. Our independent risk analytics team also helps us analyse risk across four main categories, which enables us to better understand and assess any biases in our overall portfolio.

From our bottom-up approach, we identify individual long and short positions that offer attractive absolute returns but additionally, combine positions into pair trades to isolate the relative attraction between companies, so as to reduce any unwanted sector (or market) risks. In a hypothetical example, we may be positive on one mining company and more cautious on the outlook for another. In taking a long position in our preferred pick and a short position in the other, we can neutralise the sector performance and are only exposed to the performance difference between the two stocks. This highlights our focus on individual stocks, not the wider market – allowing us to target alpha over beta. We believe this has never been more important given the current economic environment and precarious nature of financial markets.

The UK will eventually experience another recession. That is inevitable. What is not quite as clear-cut, is whether the negative impact of re-negotiating terms of trade with the EU will push the UK into its first recession since 2008. While many within financial markets have concentrated on the uncertainty clouding the UK since the referendum, we are focusing on the opportunity.

That is because the UK Equity Absolute Return Fund is able to generate returns from falling as well as rising share prices. ‘Brexit’ potentially opens up many questions about the UK’s economic landscape so that there is a likelihood of even greater dispersion between winners and losers. This could be a welcome opportunity for active stock pickers. For clients, this means potential for a very different performance experience – returns that are independent of wider market moves. Instead, returns are dependent up on our fund managers’ ability to choose the right stocks. Our chances of stock picking successfully are enhanced by the size and experience of our research platform looking at our universe of more than 300 shares. Just as importantly, we have more than a decade of experience in long/short investing which is a record matched by few others.

We believe that absolute return strategies are not just useful when heightened risks are present across mainstream equity and bond markets as we see today. Proven absolute return strategies such as the UK Equity Absolute Return Fund should be viewed as complementary, rather than an alternative, to traditional funds.

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BlackRock Strategic Funds (‘BSF’) is a UCITS (icbe) as defined in section 1:1 Financial Markets Supervision Act (Wet op het nancieel toezicht; ‘FMSA’). BSF and its sub funds are listed in the register as defined in section 1:107 FMSA. Please refer to the Key Investor Information Document (essentiële beleggersinformatie; ‘EBI’) for further information about BSF and its sub funds. The prospectus and EBI of BSF and its sub funds are available on BlackRock’s website blackrock.com/nl. All financial investments contain a certain risk. The value of the assets managed by BSF and its sub funds may greatly fluctuate as a result of the investment policy and your initial investment is not guaranteed. Past performance is not a guide to current or future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. BlackRock Strategic Funds (BSF) is an open-ended investment company established and domiciled in Luxembourg which is available for sale in certain jurisdictions only. BSF is not available for sale in the US or to US persons. Product information concerning BSF should not be published in the US. It is recognised under Section 264 of the Financial Services and Markets Act 2000. BlackRock Investment Management (UK) Limited is the UK distributor of BSF. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. A limited range of BSF sub-funds have a reporting fund status A sterling share class that seeks to comply with UK Reporting Fund Status requirements. Subscriptions in BSF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Key Investor Information Document, which are available on our website. Prospectuses, Key Investor Information Documents and application forms may not be available to investors in certain jurisdictions where the Fund in question has not been authorised. All financial investments involve an element of risk.Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events. The Fund uses derivatives as part of its investment strategy including the establishment of both ‘long’ and ‘synthetic short’ positions and the creation of market leverage for the purposes of increasing the economic exposure of a Fund beyond the value of its net assets. This use of derivatives may increase the overall risk profile of the Fund. The value of this Fund does not typically move in line with general market trends and is not expected to reap the full benefits of a rising stock market. Investment strategies employed by the manager may affect the risk profile of the fund, as both positive and negative share movements affect the overall value of the Fund. The Fund utilises derivatives as part of its investment strategy.Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk and volatility. The strategies utilised by the Fund involve the use of derivatives to facilitate certain investment management techniques including the establishment of both ‘long’ and ‘synthetic short’ positions and creation of market leverage for the purposes of increasing the economic exposure of a Fund beyond the value of its net assets. The use of derivatives in this manner may have the effect of increasing the overall risk profile of the Fund. Investors in this Fund should understand that the Fund is not guaranteed to produce a positive return and as an absolute return product, performance may not move in line with general market trends or fully benefit from a positive market environment. The Manager employs a risk management process to oversee and manage derivative exposure within the Fund. The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

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