20 May 2015

Each year I speak to hundreds of advisers.  And, whether they’re in Boston or Birmingham, they ask me some tough questions.

I’ve decided to share some of these with you because after I write this blog I’ll be boarding a flight to the UK and preparing for my next BlackRock Global Multi Asset Income Fund grilling.

Here goes….

1.How are you handling today’s challenges?

This is a popular question.  Some of the world’s major central banks are heading down different paths and advisers are under no illusion about the uncertainty and volatility this will bring.  But they also know their investors can’t sit on the sidelines if they want to achieve their long-term goals. That means they’re looking for ways to stay in markets without taking excessive risk.

In our fund, we’ve been preparing for 2015’s challenges for some time. Stronger economic growth and declining labour market slack means interest rates are likely to begin rising later this year generating headwinds for bonds.

Additionally, after years of strong returns, equity valuations look less compelling.  As a result, we have reduced risk in our strategy recently to put us into a position of strength to take advantage of future volatility.

Our offshore fund – very similar to our UK offering – has delivered an average annual yield of 5.5% since inception while taking less risk than a balanced portfolio1.  In today’s world that’s really attractive, because alongside diverging monetary policy in the US, UK, Europe and Japan, advisers have to be mindful markets are pretty expensive, and that means capital appreciation will be harder to come by and a greater proportion of your total return is likely to come from the income you can generate.

2. Is your income sustainable?

Almost every yield-seeking investor should ask this question.  We believe our income is sustainable, but how we deliver it will undoubtedly change over time.  This isn't a drawback – we believe our flexibility is a key advantage. It lets us adapt our portfolio as markets shift, so for example, if high yield bond prices go up we’d likely book profits and look elsewhere, perhaps to our equity holdings or to covered call overwriting.

3. How do you manage risk?

We go way beyond the usual measures of volatility or standard deviation.  With the help of Aladdin, BlackRock’s world-renowned risk analysis platform, we stress test our portfolio each and every day and examine what would happen in different scenarios.  We look at what could happen to our portfolio if interest rates rise by 1% or more, or at the impact of a sudden stock market sell-off.  This approach helps us gain a deeper understanding of the potential risks to our portfolio.  We don’t chase yield at any cost, so we’re always asking ‘what is the margin of safety if things go wrong or if the world changes unexpectedly?’  In short, we think about risk the way our clients do only in much more detail.  We think about it in terms of the potential for capital loss, and to what extent.

Hear my answers to more questions advisers typically ask.

Sources:
[1] This is the performance of the BGF Global Multi-Asset Income Fund, a $1.5 billion Luxembourg-domiciled UCITS fund.  The performance of the BGF Global Multi-Asset Income Fund is included for illustrative purposes only, as the fund employs a similar investment strategy and was launched in June 2012.The inclusion of this material is presented by way of example only and is included to demonstrate the potential of the investment strategy to be employed by the BlackRock Global Multi Asset Income Fund. However please note that the actual asset allocation and investment selection of these funds could differ which in turn could lead to differences in their performance. Fund launch date 28 June 2012. Average of all A6 share class monthly dividends annualised since Fund inception.  A balanced portfolio is one comprising 50% equities and 50% bonds.  The BGF Fund’s risk has been below this reference level, based on data sourced from Bloomberg, from 1 Nov 2013 to 31 January 2015. Based on Bloomberg 30 day volatility calculations of accumulating share classes net of fees (BGF GMAI: A2 USD). Specifically, the reference risk benchmark comprises: 50% MSCI World/.50% Barclays Capital Global Aggregate Bond Index USD Hedged. Maximum drawdown of BGF GMAI: A2 USD, net, Global equities: MSCI World, Global Bonds: Barclays Capital Global Aggregate Bond Index USD Hedged. Max drawdown measured from peak to trough from 1 Nov 2013 to 28 February 2015.

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With the help of Aladdin, BlackRock’s world-renowned risk analysis platform, we stress test our portfolio each and every day and examine what would happen in different scenarios.