INVESTORS' TOP 3 FIXED INCOME CHALLENGES

Fixed income investors are facing new market realties, as the global economy is moving away from a period of steady growth, stable inflation and supportive central banks. Instead, we are braving a new world of heightened macro volatility, expectations of higher inflation and tighter monetary policies signalling the end of the great period of monetary easing and announcing multiple interest rates rises in the near future. 

Along with the macro and structural fixed income market changes, we are also in the midst of a tectonic shift to sustainable investing and investors are increasingly shifting their portfolio to transition to a low-carbon economy.

What is clear is that the role of fixed income needs to evolve. Investors should incorporate new implementation approaches to address the new markets challenges and make their fixed income allocations work harder in their portfolios.

We recognise the need for investors to incorporate new implementation ideas, and we believe investors could make fixed income work harder in their portfolios through indexing. We identified 3 market challenges and investor needs:

• PORTFOLIO CONSTRUCTION: Accelerated macro and structural trends have changed the investment environment. Investors need to take a holistic view to build efficient portfolios and take a flexible, nimble asset allocation approach.
• PRODUCT SELECTION: Building real portfolio resilience today requires a broader range of tools and implementation ideas. Investors need a more granular approach to fixed income allocations while also ensuring diversification and liquidity.
• SUSTAINABLE TRANSITION: The adoption of sustainable fixed income rose from 17% in 2020 to around 24% in 2021, continuing the exponential growth trend seen since 2018. Many investors are now seeking efficient building blocks to transition to more sustainable fixed income portfolios.¹

¹ Source: BlackRock Portfolio Analysis & Solutions (BPAS) as of 31/10/2021.

Investors need to take a holistic view when building portfolios and make fixed income work harder by utilising indexing.

iShares fixed income indexing provides an efficient, liquid and transparent way to access different sources of return and manage risk in your portfolio.

When you invest with iShares, you get access to the broader added value, experience and expertise of BlackRock to help shape your whole portfolio.

Using iShares fixed income indexing as efficient building blocks to implement a more granular approach ensures investors maintain diversification and liquidity in their portfolio.

iShares gives you choice, with the broadest range of Europe-domiciled fixed income UCITS ETFs and index funds, with over 95 funds offering access to almost all parts of the fixed income markets across countries, sectors, credit rating and duration.²

² Source: BlackRock as of 31/10/2021.

Investors need quality products, built to evolve with changing fixed income markets, investors’ portfolios and regulation. When you invest with iShares, you get access to expertise, rigour and high standards along with the broader added value and experience of BlackRock.

iShares fixed income funds are managed by a team of over 70³ fixed income portfolio managers globally.

This means that local exposures are managed by teams with local expertise in local markets, and trading activities are managed continuously. Our portfolio managers efficiently minimise transaction costs by sampling the benchmark index while matching risk characteristics.⁴

Across these regions, the funds are consistently managed on Aladdin®, BlackRock’s global risk management platform, to analyse funds across many investment risk factors, incorporate sustainable considerations and stress-test our funds.

Risk: While proprietary technology platforms may help manage risk, risk cannot be eliminated.

³ Source: BlackRock as of 31/10/2021.
⁴ Source: ‘Index Fixed Income Capabilities’, BlackRock as of 30/06/2021.

The strength of iShares’ infrastructure and the resilience of our fixed income ETFs was tested during the 2020 Covid-19 selloff. During this period iShares ETFs offered price discovery and continued to trade more frequently than the bonds in the underlying portfolio.

During extreme market volatility, iShares ETFs were the most frequently traded ETFs, offering investors real-time pricing on underlying markets.

On 25th March, an iShares Euro-denominated corporate bond ETF saw trading volumes reach USD 512m, 6.4x the average daily volume of all other € corporate bond ETFs.⁵

⁵ Source: Bloomberg as of 25/03/2020.

iShares offers the largest, most liquid Europe-domiciled UCITS ETFs products which can make trading more frequent, efficient and cost effective.⁷ Additionally, iShares offers pre- and post-trade transparency to provide our investors with more clarity on the impact of their trading activities.

⁷ Source: Bloomberg, BlackRock as of 31/10/2021.

Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

² Source: BlackRock Portfolio Analysis & Solutions (BPAS) as of 31/10/2021.

As investors increasingly transition their fixed income allocations to become sustainable, they need a transition partner. iShares fixed income indexing, backed by BlackRock, can help investors navigate this transition.

At BlackRock, we see sustainable asset growth coming primarily from investors:

• Switching from non-sustainable to sustainable products to improve the sustainability profile of their investments, using sustainable building blocks for core holdings.
• Selecting one environmental (“E”), social (“S”) or governance (“G”) consideration and investing thematically, for example, focusing on climate change.
• Seeking an impact investment approach, such as green bonds.

iShares offers one of the largest, Europe-domiciled sustainable fixed income range of buildings blocks across all three approaches to enable you to transition with ease while still achieving your risk return objectives.

iShares’ approach combines our sustainable and fixed income expertise and is tailored to reflect the nuances of different parts of the fixed income market, whilst providing broad, diversified market exposures.

Our iShares range track sustainable fixed income indices that are built with an objective, rules-based approach, giving investors clear visibility into the sustainable criteria used for bond inclusion from independent specialist data providers.

Our detailed sustainable reporting enables investors to see full attribution and daily transparency through a rules-based methodology.

Risk: The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

iShares.com offers information for investors across all our fixed income ETFs. Investors can:

• EVALUATE: A fund based on various characteristics on iShares ETF product pages.
• BUILD: A portfolio using iShares fixed income ETFs as building blocks.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

Whether you are looking to evaluate, evolve or start building a fixed income portfolio, BlackRock can help: From providing investment strategy and consultations on portfolio construction to offering model portfolio solutions, trading strategies and transition management.

• EVALUATE: Your existing fixed income allocation to help you understand what drives risk and return in your portfolio with precision. Explore the impact of the inclusion of iShares fixed income ETFs in your portfolio through a BPAS shock-test, which analyses changes to portfolio efficiency, liquidity and risk-return profile.
• EVOLVE: Your portfolio by identifying areas to enhance overall efficiency or by incorporating new, accelerating trends such as sustainable fixed income and exploring new markets opportunities like China bonds. Construct a strategic fixed income asset allocation with flexibility, so you can be nimble, even in the face of extreme market volatility.
• BUILD: More efficient fixed income portfolios. Use all the tools in the toolbox, spanning index and alpha-seeking strategies, to introduce flexibility when moving from strategic portfolio construction to a holistic implementation approach.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.