Fixed Income

BlackRock Sterling Strategic Bond Fund…1-year on, have
we delivered?

BlackRock |19-May-2017

The BlackRock Sterling Strategic Bond Fund delivered 10.6% (net of fees) in its first year - a period when global government bond yields moved higher.

The BlackRock Sterling Strategic Bond Fund has reached its 1-year anniversary, delivering 10.6% (net of fees) since launched on 17 May 2016, in a period when global government bond yields moved higher1. Have we delivered on what we set out to do? Yes, we believe so.

Selecting the right Strategic Bond Fund can be difficult, in a sector made up of 86 funds totalling £39.3bn assets2. There is a significant difference between the performances of individual funds within the sector. With managers given full flexibility to invest across the fixed income universe, funds can vary considerably in terms of their strategy, credit exposures, interest rate risk and the types of assets they invest in. This can make it hard for investors to have clear visibility on what they are actually buying.

Our motivation for launching the fund twelve months ago, in this highly competitive sector, was to deliver a transparent, risk disciplined approach to portfolio construction by focusing on three core strategies: Core Income (+/- 70%), High Conviction (+/- 15%) and Asset Allocation (+/- 15%).

Global yields have moved higher but the fund has delivered +10% return

Fund Net Performance vs. Global Government Bond Yield

Fund Net Performance vs. Global Government Bond Yield

Source: Morningstar, BlackRock as at 10 May 2017. Primary share class used for all MorningStar rated funds in the IA Sterling Strategic Bond Sector. BlackRock Sterling Strategic Bond Fund was launched on 17 May 2016. Performance D class, calculated on a bid to bid price basis, with income reinvested, net of fees.

Unconstrained income generation

Exposure to income-generating corporate bonds remains an attractive proposition in a world of low returns and slow policy normalisation. The Fund has distributed a competitive level of income sourced from UK, US and Euro denominated assets. We invest in quality income generators, with our sweet spot focused on BBB and BB rated securities. We do not lend to low-quality companies just to boost income. We lend to companies we believe in, with proven businesses and strong management teams whose debt we are comfortable owning for the long term.

High conviction alpha

Fixed income markets remain incredibly inefficient and our proven track record of generating alpha through fundamental credit selection combined with tactical macro trades has driven the strong performance since launch. Thematic positioning such as our “reflation” trades, contributed 0.45% to total returns in markets that were broadly falling through a combination of traditional and inflation exposures in both the UK and US3.

The Fund remains relatively defensive in terms of interest rate (duration) and overall credit risk positioning. As well as an uncertain political and economic backdrop, this partly reflects our preference for alpha and individual credit selection rather than top down beta trades (duration and top down credit risk).

Strategic asset allocation

We have used the full flexibility of the fund by allocating to Global High Yield and Emerging Markets, implemented using iShares ETFs and derivatives. This pure beta approach has distinct advantages: achieving efficient, liquid and dynamic asset allocation at no additional cost to clients.

How does this fund sit within your portfolio?

The Fund has delivered top quartile (net) performance since launch, ranked 10th out of 86 funds in the IA Sterling Strategic Bond Sector4. The Fund has performed in both falling and rising yield environments, with returns driven by high conviction views rather than duration alone.

Picking the right manager is key in this sector. It is also important to consider your existing bond exposure and what you are trying to achieve. We believe this fund will be less correlated to equities than more aggressive peers; providing diversification benefits to riskier assets and quality income. Financial markets are increasingly diverse and complex, demanding a flexible and risk disciplined approach. We will remain committed to this approach, continuing to deliver what we believe are the best opportunities in global fixed income markets.

1Source: Morningstar, Performance for 1 -year since launch on 17 May 2016 to 18 May 2017.
2Source: Investment Association, IA Sterling Strategic Bond Sector as at 31 March 2017.
3Source: BlackRock, 18 May 2017.
4Source: Morningstar, 18 May 2017.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. 

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