MULTI-ASSET INCOME INSIGHT

Spikes of volatility don't tarnish
our view on growth

Jun 13, 2018

Fundamentals look strong and are supportive of high yield bonds.

Uncertainty around Italian politics riled both equity and bond markets in May. However, this episode of volatility does not derail our positive outlook for a sustained global economic expansion, and the threat of a Eurozone break up remains muted, in our view.

In the past month, many key economic indicators have begun to recover from a first-quarter slowdown. Notably, in the United States, we’ve seen above-trend wage growth and strong manufacturing data, while in Europe, inflation has picked up modestly.

Given this relatively positive fundamental backdrop, we recently made a number of adjustments in the BlackRock Multi-Asset Income Fund. We added markedly to equity covered calls at attractive yield levels and wrote them far enough “out-of-the-money” to allow a generous amount of room for upside over the term of the option. In addition, after the turmoil in Italy drove U.S. rates lower, we reduced duration (interest rate risk) by selling Treasury futures we had previously bought at much higher yield levels.

In the credit fixed income space, we implemented our optimistic view on growth by adding selectively to the fund’s high yield allocation. Positives for the asset class include strong revenue growth and interest coverage, manageable levels of leverage, and the small amount of debt coming due within the next few years. Additionally, default rates are expected to remain below their long-term averages. We generally prefer higher quality names, but we are also currently looking for unique opportunities to invest in securities that we expect to be upgraded from lower-rated tranches.

Outside of high yield, the fund continues to be highly diversified across credit markets. We prefer areas with floating rate exposures, such as collateralized loan obligations, fixed-to-floating rate preferred stocks and commercial mortgages.

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