
To reach a different BlackRock site directly, please update your user type.
Indexing has helped clients to solve for some of the most common challenges they face when constructing and managing their portfolios. We review some examples of index strategies in action to showcase the tools available for building the best portfolios for your clients.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
Dive into our client case studies and see how indexing could help you maximise the efficiency of risk and fee budget, reduce portfolio costs and focus on finding true alpha in select areas of your portfolio.
BlackRock Portfolio Analysis and Solutions (BPAS) are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Portfolio managers are increasingly realising that ‘active in x, passive in y’ is too simplistic and recognise the benefits of blending across investment tools to achieve stronger portfolio outcomes.
This means investors are re-thinking of product choices to maximise the efficiency of their risk and fee budget allocation.
Investors need to know what they are buying and identify the main drivers behind their portfolio returns.
In this instance, whilst each of the below alpha-seeking managers had generated alpha; when combined their active bets had negated each other.
The portfolio was overdiversified, resulting in a portfolio where a large portion of portfolio risk was driven by broad market exposures, and therefore potentially replicable with an index solution.
Source: BlackRock, as at August 2019. Chart assesses ex-ante active risk of three active mutual funds with the same benchmark. Combined exposure (ABC) is an equal weighted combination of the three funds.
Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Consolidation of the number of managers used to express the market view helped drive improved efficiencies.
By recognising different drivers of returns, the required benchmark expected return can be generated through low-cost indexing with the remainder of the fee and risk budget allocated to selective alpha-seeking strategies that demonstrate ‘true alpha’.
Moving beyond an asset class siloed approach between ‘active vs passive’ and instead determining the optimal index and alpha split at a portfolio level, resulted in a greater allocation to indexing across exposures.
Taking a blended approach, and using indexing as an efficient way to express broad market views, increase the portfolio information ratio, and enable the client to maximise the efficiency of risk and fee budget allocations.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Expressing differentiated views across countries, sectors, factors, durations or credit qualities is often a key value proposition across portfolio managers in an attempt to differentiate both from the benchmark and from their peers.
In heightened market volatility, the importance of tactical portfolio overlays is ever more in focus as investors attempt to harness short-term gains as well as limit potential drawdowns.
Stress testing portfolio outcomes can help to identify ways to improve portfolio outcomes. BlackRock’s range of scenarios, based on simulations of future possible outcomes of macro and geopolitical events can help managers to conceptualise resultant economic, market and portfolio alpha impacts.
Hypothetical stress test analysis:
Source: BlackRock, as at August 2019. Equity Volatility Increase represented by a move in the VIX index by 16.5%. EM Rebound based on MSCI Emerging Markets Index up 10%. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client re-evaluated the instruments that they were using to express differentiated, tactical views. The incorporation of ETFs in their portfolio construction process enabled them to become more nimble with their tactical asset allocation views.
The liquidity of the ETF market, helping to minimise costs of accessing these exposures, led the client to increasingly utilise these tools to dynamically tilt the portfolio in accordance with market events.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Whether it is to finance derivatives, de-risk, or simply waiting for the right investment opportunity, cash is commonly held across portfolios.
When liquidity is not required on a T+0 basis, holding cash can result in an unnecessary cash drag on performance.
With the ability to take on slightly more credit and/or duration risk, blending across investment tools and looking beyond money market funds, can help to bring portfolios closer to their yield requirements.
Cash and equivalents allocations:
Source: BlackRock, as at December 2018. Currency = GBP. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client invested some money in short-duration fixed income ETFs, to help increase net yield without significantly changing their overall risk or liquidity profile.
The growth in the liquidity of the ETF market provided assurance that the client would be able to quickly execute large trade orders when required, without paying a large spread or risking not being able to liquidate.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
We witness investments in private markets becoming an increasingly core component of asset allocations for investors. With this comes the need to manage cash more efficiently to prevent cash drag on performance as asset managers deal with capital calls, expiring vintages, or due diligence before an investment is made.
ETFs can act as an interim vehicle to holding cash, whilst allowing investors to gain access to the broad economic exposures of the asset class before the capital calls are made.
Macro
Exposures
Style
Exposures
Source: BlackRock, as at August 2019. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Whilst risk-return profiles and idiosyncratic nature of private markets differs from public markets, macroeconomic and style exposures driving these investments may be more similar.
By using ETFs as an interim vehicle for their private market investments, the client could gain earlier access to the targeted exposure, with a beta of 0.77.*
*Source: BlackRock, Morningstar, Cambridge Associates. Beta measured against the Cambridge Associates Global Buyout Index, calculated using quarterly returns from 01/07/2009 to 31/12/2018.
The liquidity of the ETF market enabled them to be used as tactical investments solutions to help manage cash flows and allow the portfolio to remain more closely aligned to their strategic asset allocation.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
It is important to differentiate between active returns and alpha returns. Active return, or excess return above a benchmark, is not just driven by alpha (security selection and factor timing of the manager) but also by factor exposures.
What you see is not what you get, and it is important to understand the sources of returns to ensure that the high fees are associated with “pure alpha” that cannot be replicated with a low-cost solution.
Through decomposing the drivers of return, we identified that a large portion of the excess returns generated by some alpha-seeking managers could be tied to static exposures from factors, and not from “pure alpha”.
Example of manager return decomposition
Source: BlackRock, as at August 2019. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client opted to reduce reliance on some alpha-seeking managers, and instead take control of their own tactical views by using indexing to intentionally target specific factor and market exposures.
Recognising that the outperformance was frequently tied to static factor tilts, the client realised that they were potentially overpaying for returns.
By taking a more balanced allocation across index, factors and alpha, the client was able to maximise the efficiency of their risk and fee budget.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
In a lower for longer environment with considerably lower yields compared to the historical average, pension funds and insurers are increasingly becoming cash flow negative. The ability to meet liabilities is becoming increasingly challenged.
Liquid beta sleeves, constructed using ETF building blocks, helps investors avoid holding excess cash, and enables them to stay invested and closer to their strategic asset allocation (SAA) without compromising on liquidity.
Option 1 - Money market fund
Money Market Fund - 100%
Total Expense Ratio: 10 bps
Resulting Tracking Error to SAA: 7.3%
Option 2 - 5 ETFs designed to replicate the SAA below
Total Expense Ratio: 16 bps - Resulting Tracking Error to SAA: 1.1%
Source: BlackRock, as at August 2019. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client replaced a portion of their cash, with a combination of ETFs which were designed to closely replicate their strategic asset allocation (SAA).
By keeping the portfolio in line with the SAA, the portfolio was able to better match their liability profile and reduce cash drag.
Understanding that not all liquidity was needed on a T+0 basis, the client was able to take on additional risk to help reduce the funding gap between their liabilities.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
We witness investments in private markets becoming an increasingly core component of asset allocations for investors. At the same time, pension funds and insurers need to balance the desire to harvest illiquidity premia with the need to retain sufficient liquidity to meet their liabilities.
To help manage cash flows stemming from uncalled capital and expiring vintages, ETFs can act as an alternative to holding cash that allow investors to gain access to the broad economic exposures of the asset class before the capital calls are made.
Macro
Exposures
Style
Exposures
Source: BlackRock, as at August 2019. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Whilst risk-return profiles and idiosyncratic nature of private markets differs from public markets, macroeconomic and style exposures driving these investments may be more similar.
By using ETFs as an interim vehicle for their private market investments, the client could gain earlier access to the targeted exposure, with a beta of 0.77.*
*Source: BlackRock, Morningstar, Cambridge Associates. Beta measured against the Cambridge Associates Global Buyout Index, calculated using quarterly returns from 01/07/2009 to 31/12/2018.
The liquidity of the ETF market made ETFs a valuable tool as tactical investments solutions to help manage cash flows in a more targeted manner whilst reducing the risk of a funding shortfall.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Regulatory pressures and continuing low yields has increased pressure on pension funds and insurers alike to manage fees and build cost-efficient solutions.
BlackRock can help by assessing portfolio efficiency and identify the main drivers of risk and returns.
Identifying where returns are largely driven from broad market exposures and static exposures to factors, can help to ascertain where similar outcomes may be potentially replicable more cost-effectively through an index solution.
In this example whilst the alpha-seeking manager generated excess returns, much of this was attributed to static factor tilts.
Example of manager return decomposition
Source: BlackRock, as at August 2019. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client opted to reducing reliance on alpha-seeking managers, and instead intentionally targeting specific factors and index exposures through low-cost index solutions.
Recognising that the manager outperformance was tied to static factor tilts, the client realised that they were potentially overpaying for returns.
By taking a more balanced allocation across index, factors and alpha-seeking managers, the client was able to maximise the efficiency of their risk and fee.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Sustainable investing has come to the fore, with heightened pressure fro m regulators to ensure that pension funds and insurers incorporate sustainability into investment decision-making.
Pension funds and insurers increasingly need to show that they cannot only meet their liabilities, but that they are making a positive contribution to society.
The growth of index building blocks screened for ESG criteria can help clients to easily implement sustainable decisions into their investment process, whilst keeping aligned to their strategic asset allocation.
BlackRock can help in decomposing ESG portfolio scores and in identifying ways to enhance sustainability ratings.
Source: BlackRock, MSCI ESG Research as at December 2018. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Implementing the strategic asset allocation through ESG building blocks, the client identified that they were able to enhance their ESG score by 36%, without necessarily resulting in a trade-off in returns nor sacrificing their ability to meet their liabilities.
The rules-based approach to defining the universe and standards for ESG characteristics within indexing enabled the client to incorporate substantially criteria in a transparent and low-cost manner whilst remaining aligned to their investment policy benchmarks.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Recent market uncertainty and stretched valuations have caused many investors to opt to de-risk by increasing their cash allocation.
However for long term investors, who are better placed to weather short-term volatility and downside, the risk of holding excess levels of cash can mean losing out on meaningful performance.
BlackRock can help build customised solutions that manage portfolio risk whilst achieving a positive yield, and avoiding cash drag.
Cash and equivalents allocations:
Source: BlackRock, as at December 2018. Currency = GBP. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Blending across product types helped demonstrate that by taking on slightly more credit and/or duration risk, different yield requirements can be met.
Understanding that not all liquidity was needed on a T+0 basis, the client was able to invest some money in short-duration fixed income ETFs which increased yield without significantly changing the liquidity profile.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
In an environment of regulatory change and continuing low-yields, wealth managers are increasingly re-thinking their product choices to maximise the efficiency of their fee budget allocation.
Beyond the dichotomy of ‘active vs passive’, wealth managers are increasingly blending investment tools to help achieve superior portfolio outcomes.
BlackRock can help by assessing the efficiency of clients’ portfolios and identifying the main drivers of returns.
In this instance, we found that a large portion of portfolio risk was driven by broad market exposures, and therefore potentially replicable with an index solution.
Whilst each alpha seeking manager generated alpha; when combined their active bets had negated each other. The client had overdiversified their portfolio.
Source: BlackRock, as at August 2019. Chart assesses ex-ante active risk of three active mutual funds with the same benchmark. Combined exposure (ABC) is an equal weighted combination of the three funds.
Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The fee budget was optimised by expressing their long-term strategic asset allocation through indexing; and creating a ‘satellite’ of selective alpha-seeking strategies that demonstrated ‘true alpha’.
Indexing is an efficient tool for expressing broad market views.
An indexed core of the portfolio, complemented by a select group of high octane alpha-seeking managers helped increase net return and reduce portfolio costs. Due to the more selective investment approach, more time could be dedicated to research per manager leading to increased quality of alpha-seeking managers.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Recent market volatility has sparked portfolio managers to want to express a more differentiated view across potential countries, sectors and factors.
Making tactical portfolio overlays can potentially help to harness short-term gains as well as provide added protection in different market environments.
BlackRock can partner with clients to perform stress testing analysis and assess how the portfolio might perform under different scenarios.
We showcased that through the use of a tactical overlay using ETFs, the client was able to construct a portfolio that was protected in the instance of a market volatility increase, but remained invested to harness gains in the event of an EM rally.
Hypothetical stress test analysis:
Source: BlackRock, as at August 2019. Equity Volatility Increase represented by a move in the VIX index by 16.5%. EM Rebound based on MSCI Emerging Markets Index up 10%. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client re-evaluated the instruments that they were using to capture different sources of return. The incorporation of ETFs in their portfolio construction process enabled them to become more nimble with their tactical asset allocation views.
The liquidity of the ETF market, helping to minimise costs of accessing these exposures, led the client to increasingly utilise these tools to dynamically tilt the portfolio in accordance with market events.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Recent geopolitical uncertainty and market volatility has caused many wealth managers to decide to de-risk their clients’ portfolios by increasing their cash allocation, resulting in cash drag.
BlackRock can help build customised solutions to manage portfolio risk whilst achieving a positive yield, and avoiding cash drag.
Cash and equivalents allocations:
Source: BlackRock, as at December 2018. Currency = GBP. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Blending across product types helped demonstrate that by taking on slightly more credit and/or duration risk, different yield requirements can be met.
Understanding that not all liquidity was needed on a T+0 basis, the client was able to invest some money in short-duration fixed income ETFs which increased yield without significantly changing the liquidity profile.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
Sustainable investing has come to the fore, with increasing demand from end investors to ensure that their investments are also having a positive contribution to society.
Beyond the ability to prove that they can generate excess returns, wealth managers increasingly have to demonstrate their sustainable credentials in order to compete for investments.
BlackRock can help better understand ESG metrics at the portfolio level and identify ways to improve these metrics.
Through optimisation techniques that balance risk, return, cost and ESG criteria, we can help to build a sustainable portfolio where the incorporation of ‘values’ does not have to mean giving up value.
Source: BlackRock, MSCI ESG Research as at December 2018. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
Through replacing some exposures with SRI index products, the client identified that they were able to enhance their ESG score by 36%, without necessarily resulting in a trade-off in returns.
The growth of index strategies screened for ESG criteria provided the granularity and flexibility to easily implement sustainable decisions into their investment processes in a low-cost manner.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation NowCLOSE
The challenge
The evolution of factor investing has prompted wealth managers to look closer at the factor exposures within client portfolios for tilts or biases.
These exposures could be intended or accidental as a biproduct of fund and security selection. By reviewing the underlying factor exposures, investors can be more aware of what is driving returns and create a more efficient portfolio.
BlackRock can help with decomposing drivers of returns.
In this case, we identified by breaking down the excess return of some of their existing alpha-seeking managers, a large portion of that generated could be attributed to static exposures from factors, and not from “pure alpha”.
Example of manager return decomposition
Source: BlackRock, as at August 2019. Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.
The client opted to reduce reliance on alpha-seeking managers, and instead intentionally target specific factors and index exposures through low-cost solutions.
Recognising that this alpha-seeking manager’s outperformance was tied to static factor tilts, the client realised that they were potentially overpaying for returns.
By taking a more balanced allocation across index, factors and alpha, the client was able to maximise the efficiency of their risk and fee budget.
BlackRock Portfolio Analysis and Solutions are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Request a BPAS Consultation Now