The figure shown relates to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Source: BlackRock with data from Refinitiv Datastream, MSCI, and Morningstar Direct as of 30 September 2024. Agg refers to the Bloomberg US Aggregate Bond Index. Past performance is not a guarantee of future results. Indexes are unmanaged, are used for illustrative purposes only and are not intended to be indicative of any fund’s performance. It is not possible to invest directly in an index.
4 questions US institutional investors can no longer afford to ignore
1. How quickly can my portfolio react?
2. Do I have the necessary resources to access & manage alternatives?
3. Am I equipped to capitalize on the five mega forces?
4. How do I choose the best investment firm for me?
1. How quickly can my portfolio react?
The decade leading up to the pandemic was marked by low inflation, historically low interest rates and generally subdued volatility. In this new regime, markets move quickly and ignoring the shorter-term market backdrop may leave investors exposed.
That said, we believe investors who can take advantage of short-term market movements may position themselves to outperform. Remaining nimble in volatile markets can oftentimes be the difference maker between hitting or missing investment, liquidity, or funding objectives.
But that can be easier said than done. Institutions’ investment strategies are often built to meet long-term objectives, making portfolios somewhat inflexible by design. Moreover, challenges may also emerge with slow-moving, committee-based governance structures that make quick action nearly impossible, especially during periods of market volatility when demands from external stakeholders are at their highest.
We have found that more and more institutional investors have opted to engage with outside investment firms, seeking to harvest alpha from nimble strategies. Even for well-resourced institutions, collaborating externally can bring new perspectives or free up time for strategic priorities.
Case studies
Click through the examples below to see how our Multi-Asset Strategies & Solutions team helps clients construct and optimize dynamic solutions in the context of the whole portfolio.
Designing a dynamic and operationally efficient solution
PROBLEM
An endowment feared they'd fall short of their spending needs during a period of uncertainty. The client came to BlackRock to conduct a risk analysis, optimize for liquidity to meet 10-year spending schedule, and design a more flexible portfolio to avoid crystalizing large losses and ensure adequate capital at payouts during times of volatility.
Integrating low-correlated, alpha-seeking strategies
PROBLEM
A pension plan was looking to enhance returns in their public markets portfolio and capture value from shorter term market dislocations.
Constructing a nimble glide path
PROBLEM
A medical organization and sponsor of a US Corporate Pension Plan was troubled by the plan’s low and volatile funding ratio (assets / liabilities) and were seeking a dynamic and operationally efficient investment solution that could put their plan on a path to fully funded while shifting investment risks according to their evolving return needs.
Incorporating diversified, tactical strategies
PROBLEM
A foundation with a strict governance structure was looking for additional ways to seek returns in their portfolio, given an extended period of underperformance and inflation pressures.
2. Do I have the necessary resources to access & manage alternatives?
In an economic landscape characterized by elevated macro uncertainties and escalating geopolitical risks, hitting investment objectives and annual spending targets may be increasingly difficult for institutional investors, prompting an evolution in traditional asset allocation.
According to BlackRock’s long-term capital markets assumptions,1 a global 70/30 portfolio is now expected to return 6.5% annually. Per our recent research on endowments and foundations, which typically target a risk-free rate plus 4%-5%, the 70/30 portfolio would underperform the target return by 100-300 basis points, depending on the organization’s investment objectives.
In parallel, the classic portfolio mix of stocks and bonds, a model historically marketed as a diversified approach to portfolio construction, has been dealt a blow in recent years. The correlation underpinning the classic 60/40 portfolio vanished at times, as stocks and bonds both declined in tandem, leaving investors few places to hide from market turmoil. And although inflation may continue to soften, the rising and positive correlation between stocks and bonds is a risk worth taking seriously.
Stocks and bonds have moved together when inflation is above target
Rolling 3-year correlation between S&P 500 and US Agg
Given these trends, we believe investors who thoughtfully complement public and private market allocations will be better positioned to participate on the upside while limiting losses during downturns, especially during such a unique time for private market investing.
Despite their potential benefits, the alternatives space is broad and characterized by a range of costs, liquidity profiles, and opportunities to generate returns. And understanding where a particular alternative investment may fit in a portfolio can present immense challenges.
We find that investing in alternatives requires a global information advantage, a wide breadth of implementation tools, and sophisticated risk technology to size positions appropriately. When done prudently, it can be an important option to target uncorrelated additional return.
Case studies
Click through the examples below to see how our Multi-Asset Strategies & Solutions team helps clients construct and optimize dynamic solutions in the context of the whole portfolio.
Incorporating bespoke satellite credit strategies
PROBLEM
A sovereign wealth fund client sought to evolve their private credit allocation. Help was needed to source, select, and construct a portfolio of managers that could potentially provide complementary, uncorrelated exposure to their broader portfolio and core credit exposure, as well as access to opportunities that offered idiosyncratic returns.
Designing a diversified, private markets solution
PROBLEM
A Family Office was struggling to capture enough excess return to meet their clients’ unique liquidity needs, time horizon, and risk and return objectives through public markets alone. The client sought to build a cost-efficient, dynamic portfolio across public and private markets.
Introducing complementary sources of active risk
PROBLEM
Despite a strong balance sheet and operating performance, a prominent healthcare system with a static, all-public markets portfolio sought to increase their expected returns through more diversified risk premiums to adequately support planned capital projects.
Implementing a liquid alternative strategy
PROBLEM
In building an active target date fund suite, a BlackRock portfolio management team sought to improve diversification beyond traditional stock and bond exposures. The team was looking for a strategy that could target absolute return in all market environments and increase portfolio resilience in an environment of elevated stock/bond correlations
3. Am I equipped to capitalize on the five mega forces?
Before we explore a few investment applications on the five ‘mega forces,’ a simpler question comes first: What do we mean by ‘mega forces?’
We define mega forces as big, structural influences that affect investing today and in the future, creating major opportunities – and risks – for investors. In other words, each mega force represents change: A key driver of change.
That said, as economies grow and markets evolve, we believe the following five mega forces are poised to create shifts in profitability across economies and sectors:
1. Digital disruption and artificial intelligence
Generative AI-based solutions could streamline operations, improve customer experience, and enable new capabilities. Tech firms are already pivoting their businesses around generative AI. We see opportunities across other sectors and a potentially transformative impact on profitability and productivity. Managing data privacy and cybersecurity risks will likely become increasingly important.
An application from one of our investors.
Starring Lisa O’Connor
1. How can investors complement quantitative signals with AI?
2. At what stage of the investment process does human judgement come into play?
3. What are some mistakes to look out for?
2. The future of finance
A fast-evolving investment landscape is changing how households and companies use cash, borrow, transact, and seek returns. We see these shifts benefiting savers, diversifying finance for borrowers, creating a more stable system, and opening up potential investment opportunities.
An application from one of our investors.
Starring Staten Hudson
1. What is a "core-satellite" approach to private credit?
2. What are some key, potential benefits of a core-satellite approach?
3. What are some key portfolio characteristics we consider before structuring a core-satellite strategy?
3. Geopolitical fragmentation
Geopolitical fragmentation and mounting competition between countries are rewiring globalization. We see companies reconfiguring their supply chains to adapt to growing regulation and mitigate risk in their operations, often increasing costs. At the same time, we also see them capitalizing on industrial policy to spur innovation and diversify their business models.
An application from one of our investors.
Starring Michael Pensky
1. How will geopolitical fragmentation continue to affect the macro environment?
2. How will this shift create investment dispersion?
3. What does this mean for portfolios?
4. Demographic divergence
The world is split between aging and younger economies. Aging populations in major economies are poised to limit how much countries can produce and grow. By contrast, selected emerging market economies can benefit from younger populations and growing middle classes. This demographic divergence creates potential investment opportunities and risks, in our view.
An application from one of our investors.
Starring Nick Nefouse
1. What is the retirement crisis?
2. What are some problems and consequences?
3. How can we seek to overcome these issues?
5. Transition to a low-carbon economy
We see the transition to a low-carbon economy having implications for macroeconomic trends and portfolios, involving a massive reallocation of resources, as supply chains, production processes, and energy systems are re-wired. Technological innovation, consumer and investor preferences for lower-carbon products, and shifts in government policies are reshaping production and consumption and spurring capital investment.
An application from one of our investors.
Starring Yasmin Meissner
1. Why are investors interested in transition investing?
2. What are the advantages of a multi-asset approach?
3. What are some of the challenges in relation to transition investing?
4. How do I choose the best investment firm for me?
Choosing an investment firm is by no means an easy task. Investment firms come in all shapes and sizes, and oftentimes it isn’t exactly clear what differentiates them. To help you navigate the overwhelming array of options, we've identified 2 key items to consider when choosing an investment firm: Accountability and benefits of scale.
Additional resources
Sourcing alpha in the new regime
The new regime presents better opportunities for active managers and greater separation between top performers and the rest, making manager selection critical.
Multi-asset Strategies and Solutions (MASS)
MASS draws on the toolkit of BlackRock's index, factor and alpha-seeking capabilities to deliver cutting-edge insights and target precise investment outcomes.