Embracing volatility

Apr 17, 2018

How we're generating income in markets today.

The volatility seen in the first quarter of 2018 was a stark change from the benign environment of last year. A combination of rising inflation and interest rates, global trade tensions and emerging skepticism toward the tech sector pushed most asset classes into negative territory year-to-date. However, fundamentals continue to look solid as global economic activity, albeit softer in recent weeks, has remained strong overall.

While financial markets continue to present upside opportunities, investors are faced with the difficulty of effectively managing risk in a more volatile environment where the diversification benefit that bonds have historically provided against equity risk is somewhat diminished. We still believe there is potential for positive performance in certain fixed income sectors this year, although returns are likely to be comprised of coupon income more than price appreciation.

Short-term Treasuries now offer compelling income for the first time since the financial crisis and, as such, we have shifted a portion of the BlackRock Multi-Asset Income Fund’s duration into the front end of the yield curve. Higher quality high yield bonds and dividend-paying stocks have underperformed year-to-date given their perceived interest rate sensitivity, while floating rate loans and non-agency mortgages have helped the fund’s performance, underscoring the importance of looking beyond traditional asset classes. The uptick in volatility created opportunities to generate income by writing covered calls. The combination of market dynamics and our tactical trades resulted in higher portfolio yield over the first quarter as compared to last year.

Even though the fundamental backdrop is strong, we believe it is prudent to keep overall risk low given more muted return prospects and marginally rising macro risks. That said, higher market volatility will likely create more attractive entry points for tactical investors.

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