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Sterling Strategic Bond Fund
3 Year Anniversary

We are delighted to celebrate the three-year anniversary of the BlackRock Sterling Strategic Bond Fund, managed by Ben Edwards and Simon Blundell. The fund was launched on 17 May 2016 and has grown to over £126m over the past three years.

In the decade leading up to the fund’s 2016 launch, strategic bond funds grew hugely in popularity, with investors attracted, largely, by the promise of higher yields and global asset allocation. When launching the fund in May 2016, we benefitted from being able to evaluate which strategies had worked best and which of the sector’s initial promises had been fulfilled. To this day, with vastly disparate strategies in place within the sector, the key question for investors and managers alike, is “What is a Strategic Bond Fund?”

With the benefit of this hindsight, we set out to offer a differentiated strategic bond fund with the primary aim of generating unconstrained alpha with a risk disciplined approach. Whilst the fund is managed solely for a sterling investor base, it can allocate broadly across a global fixed income universe that includes investment grade, high yield and hard currency emerging market debt.

BlackRock Sterling Strategic Bond Fund: Investment philosophy. An unconstrained, UK focused, total return strategy

Sterling Strategic Bond Fund

BlackRock, May 2019. For illustrative purposes only.

The fund comprises three distinct components working to build a cohesive risk-controlled bond portfolio.

Within the Income component of the fund, we lend to high quality (largely BBB & BB-rated) corporates that combine attractive yields with historically low default risk. We typically expect low turnover here.

In the Alpha component of the fund we seek to take advantage of inefficiencies in global fixed income markets, generating returns beyond those simply implied by the yield or those available from broad markets.

Within the Beta component of the fund we allocate efficiently to the most attractive areas of global bond markets (including high yield and emerging markets) through a pure beta approach (via passives & ETFs).

With a novel approach that emphasises extracting market inefficiencies and long-term risk management over short-term return seeking and binary risk taking, the obvious question after three years is – Has it worked?

The Fund has delivered 17.3% since inception (5.5% annualised) with low relative volatility

The BlackRock Sterling Strategic Bond Fund is a top-quartile performing fund, delivering a 5.5% annualised return, net of fees, since inception. The fund is ranked 10th out of 76 funds in the Investment Association (IA) Sterling Strategic Bond Sector. It’s managed by an award-winning team with Ben and Simon both highly rated by Citywire. Ben also won the FE Alpha Manager of the Year for Best Sterling Fixed Income and the Morningstar Award for the GBP Bond category in 2019. Past performance is not a reliable indicator of current or future results.

We see global corporate bond markets as inherently inefficient and the fund benefits not when we attempt to predict the future and take one large bet (be it on duration or a specific sector), but when we continually take advantage of valuations that are at odds with fundamental fair value – these anomalies allow us to generate returns/alpha above those on offer in the generic market without exposing investors to additional risk.

Whilst the team has delivered top-quartile performance, the focus on low risk has resulted in the BlackRock Sterling Strategic Bond Fund being in the bottom quartile of risk within its peer group. We believe that fixed income funds that exhibit low volatility and minimise drawdowns ultimately build strong long-term performance profiles.

net performance vs strategic bond sector

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

*Partial return for 2016 since the launch of the Sterling Strategic Bond Fund in May 2016. MorningStar and FE TrustNet at end April 2019. Since inception numbers from 17th May 2016 to 17th May 2019. Performance calculated on a bid to bid price basis, income reinvested, net of fees in GBP for a representative investment in the D share class accumulating. FE Risk Scores measure weekly volatility, relative to the FTSE100, over three years. Recent behaviour counting more heavily than earlier behaviour. As at 23rd May 2019 the BFM Sterling Strategic Bond Fund scored 18/100 and ranked 56/80 funds, with the 80th fund having the lowest risk score. Source for right chart: BlackRock, Bloomberg. Cumulative returns of primary share class (D share class accumulating), bid-to-bid net of fees to May 2019.

The Fund has outperformed all rated peers within the IA Sterling Strategic Bond Sector

Obviously, investors have many choices within the Strategic Bond Sector. Our fund’s structure, process and performance must compare well with peers in order to offer compelling value. The chart below shows the performance of the BlackRock Sterling Strategic Bond Fund versus the best rated peers in the IA Sterling Strategic Bond sector since inception. The IA Sterling Strategic bond sector is very diverse, including funds with different targets and benchmarks, some with high exposures to high yield, emerging markets and even equities. The BlackRock Sterling Strategic Bond Fund has outperformed all of the best Morningstar rated funds in the sector while taking minimal risk to deliver a consistent performance profile.

Strong performance relative to all Morningstar rated peers since inception. High conviction credit & macro positions

morningstar performance

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

BlackRock, Bloomberg. Cumulative returns of primary share class, net of fees since inception to end April 2019.

The Fund has outperformed all major fixed income asset classes (hedged to sterling)

One of the original promises of the sector, was to position investors in the best fixed income asset class at any point in time. The chart below shows the performance of the fund versus the major fixed income asset classes (hedged back to sterling). The BlackRock Sterling Strategic Bond Fund has outperformed all of these alternatives including US High Yield – the best performing. In keeping with our risk disciplined approach, the fund has done so with a materially lower allocation to lower rated (more risky) bonds, having had an average of 12% (maximum of 20%) invested in high yield over the three-year period.

Sterling Fixed Income Funds v major fixed income asset classes (hedged back to GBP)

sterling fixed income funds vs major fixed income asset classes

The figures shown relate to past performance. Past Performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Source: BlackRock. Total returns (including FX costs) are since the inception of the Sterling Strategic Bond Fund on 18 May 2016, X share class. Gross returns until 10 May 2019. Results do not reflect the deduction of management/advisory fees and other expenses; management / advisory fees and other expenses will reduce a client’s return. Indices above as follows: iBoxx USD Liquid High Yield Index for $ HY, iBoxx EUR Liquid High Yield Index for EUR HY, JP Morgan EMBI Global Total Return Index for $EM, iBoxx Sterling Corporates Overall Total Return Index for £IG, iBoxx Euro Corporates Overall Total Return Index for EUR IG, iBoxx USD Corporates Total Return Index for $IG. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

Conclusion

With the first three years behind us and a demonstrable track record of having generated strong and consistent performance now in place, we feel the fund is well positioned to meet the varying needs of investors within the sterling unconstrained fixed income space and welcome the opportunity to speak with investors about how the strategy may work as part of their clients’ portfolios.

Risks

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Fund Specific Risks

BlackRock Sterling Strategic Bond Fund

Changes to interest rates, credit risk and/or issuer defaults will have a significant impact on the performance of fixed income securities. Non-investment grade fixed income securities can be more sensitive to changes in these risks than higher rated fixed income securities. Potential or actual credit rating downgrades may increase the level of risk.

The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

Derivatives are highly sensitive to changes in the value of the asset on which they are based and can increase the size of losses and gains, resulting in greater fluctuations in the value of the Fund. The impact to the Fund can be greater where derivatives are used in an extensive or complex way.

Particular risks not adequately captured by the risk indicator include:

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Credit Risk: The issuer of a financial asset held within the Fund may not pay income or repay capital to the Fund when due. If a financial institution is unable to meet its financial obligations, its financial assets may be subject to a write down in value or converted (i.e. “bail-in”) by relevant authorities to rescue the institution.

Liquidity Risk: Lower liquidity means there are insufficient buyers or sellers to allow the Fund to sell or buy investments readily.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

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