Global Allocation Insight

Why security selection matters

Jul 19, 2017

With the emergence of more winners and losers in the market, investors may benefit from differentiated exposure.

Price advances in a handful of large technology companies have disproportionately contributed to U.S. stock returns in 2017. Removing the performance of Facebook, Apple, Amazon, Microsoft and Google (aka Alphabet) from the S&P 500 Index reveals that over one-third of the index performance so far this year is attributable to just those five stocks.

Buying regional or sector indexes has worked well over the past few years because in a persistent bull market, owning index exposures can usually satisfy investor goals. Nevertheless, investing in a strong-performing sector can only take you so far. More recently, as shown in the chart, the importance of differentiating between securities within an index has become more meaningful. Selecting the “most valuable players” (versus the whole winning team) can impact investment outcomes in large ways. Therefore, it’s essential to evaluate the fundamental differences in the characteristics, drivers, and outlook among these companies that will impact long-term performance.

Impact of five tech stocks on S&P 500
Index performance

Year-to-date

Impact of five tech stocks on S&P 500 Index performance

Source: Bloomberg. Data as of 6/30/17.

The investment industry tends to follow fads and rely on simplistic constructs that may ultimately under serve long-term investment goals. In contrast, the BlackRock Global Allocation Fund has taken a disciplined and sustainable approach to portfolio construction over its long history. Our rigorous, bottom-up fundamental security analysis combined with a continuous top-down review of portfolio risk is what enables the fund to position prudently around opportunities in the market, evaluating individual company’s fundamentals and outlook to build differentiated exposures, with the goal of achieving the best risk-adjusted returns.

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Portfolio highlights

  • Stocks and bonds have enjoyed meaningful gains in recent months, and certain asset classes remain expensive relative to historical prices.
  • We trimmed the fund’s equity exposure into market strength, with targeted reductions in U.S. and Canadian technology and financial stocks.
  • Despite modest headwinds for gold prices in June, we continue to hold a moderate allocation as we believe the low-growth, low-inflation regime is likely to persist.

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