We are in the midst of a merger boom: on the heels of 2015’s record levels, over $3.8 trillion of merger and acquisition (M&A) volume was announced globally in 2016, making it the second highest year of activity since the financial crisis. The underpinnings that have been driving this merger boom for the past eighteen months remain solidly intact. Continued focus on growth has increasingly driven CEOs to pursue strategic imperatives to create shareholder value.
Chief executives have three primary levers with which they can drive their share prices higher.
- They can expand their price to earnings multiple, though this is quite difficult at a time when multiples are already at historic highs.
- They can cut costs to improve margins, though this is similarly impractical as margins are already at peak levels following post-2008 cost cutting.
- Finally, they can drive topline growth, though organic growth has been muted by the current economy.
As a result, the primary near-term option is to drive top-line growth inorganically, through M&A.
Further, the Trump Administration’s commitment to a pro-business economy will be a strong tailwind for the Event Driven opportunity set. The deregulation agenda and proposed tax reform are expected to ease antitrust reviews of mergers and increase cash on companies’ balance sheets to further spur inorganic growth activity.
The BlackRock Strategic Funds Global Event Driven fund is built on the premise that these transformative corporate events can create mispricing and therefore opportunities to generate alpha. Event Driven investing focuses on capturing the value gap created when companies undergo these transformative events or “catalysts”. We invest in companies that have announced a material change or expect to undergo a material change that is likely to impact shareholder value.
We find these transactions particularly compelling as they typically correlate less with day-to-day market movements and rather are driven by the outcome of each event. Due to this idiosyncratic nature, Event Driven strategies are designed to generate absolute returns irrespective of overall market moves. In addition, the fund’s low net, hedged approach defensively protects portfolios against much of the uncertainty we’re seeing in today’s precarious landscape. The current realized beta to the S&P 500 is just 0.171.
Currently, the opportunity set in merger arbitrage is particularly attractive. To offensively capitalize on this timely opportunity, the fund is predominately (~90%) skewed to M&A and well diversified across sectors and market capitalizations. Looking ahead, we expect these market conditions to persist for the foreseeable future and remain incredibly excited about the robust opportunity set available to us.
1Realized beta to S&P 500 as of 28 February 2017
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Fund Specific risks
Exchange rate risk –BSF Global Event Driven Fund, invests a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment.
Emerging market risk – Compared to more established economies, the value of investments in developing Emerging Markets may be subject to greater volatility due to differences in generally accepted accounting principles or from economic or political instability.
Credit risk – The BSF Global Event Driven Fund invests in fixed interest securities issued by companies which, compared to bonds issued or guaranteed by governments, are exposed to greater risk of default in the repayment of the capital provided to the company or interest payments due to the fund.
Liquidity risk – The BSF Global Event Driven Fund investments may be subject to liquidity constraints, which means that shares may trade less frequently and in small volumes, for instance smaller companies. As a result, changes in the value of investments may be more unpredictable. In certain cases, it may not be possible to sell the security at the last market price quoted or at a value considered to be fairest.
Long/Short fund – The value of the BSF Global Event Driven 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. Regardless of market conditions, the fund aims to deliver a positive absolute return for clients, rather than tracking or seeking to outperform a benchmark or index. Investors in these funds should understand that the funds are 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 Managers employ a risk management process to oversee and manage derivative exposure within the funds.
Complex Derivative Techniques – The strategies utilised by all of the funds in this document 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 funds. Investors in these funds should understand that the funds are not guaranteed to produce a positive return and as an absolute return product, performance may not move in line with general stock market trends as both positive and negative share movements affect the overall value of the funds. The Managers employ a risk management process to oversee and manage derivative exposure within the funds.
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