Core bonds and municipals can be effective diversifiers to equity risk, providing ballast in your portfolio.
What you need to know:
3Q 2017
Despite diversification efforts, most portfolios are actually riskier than their benchmarks.
Uncovering your hidden risks means taking a deeper look at your investing strategy.
Investors need to carefully diversify risks to provide adequate protection when volatility spikes.
What’s happening: Your portfolio may be riskier than you think.
The cause: inadequate risk diversification.
Too much equity, credit or interest rate risk can undermine your investment goals. In order to balance risk effectively, it’s important to understand what’s on your plate. Be sure that the components of your portfolio complement each other to manage volatility and bring you closer to your goals. Find out if you have hidden risks in your bond portfolio.
Take action: Diversify risks effectively.
Your diversification needs will differ based on whether your portfolio is more heavily weighted in equity or fixed income investments.
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How can you diversify equity risk?
With high-quality bonds. Core bonds and municipals can help protect your portfolio in an equity market pullback.
Bonds delivered when stocks didn’t1
Since 1929, stocks have had 24 negative calendar years, while bonds delivered a positive return 92% of those years.
Performance data quoted represents past performance and is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
How can you diversify fixed income risk?
With flexible bond strategies. A high concentration in interest rate or credit risk leaves your portfolio vulnerable to drawdowns when rates or credit conditions change. Flexible strategies adapt to changes in the market with tactical diversification.
Flexible bond strategies can help protect portfolios as markets change2
Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. All returns assume reinvestment of dividend and capital gain distributions. For most recent standardized performance of the BlackRock Strategic Income Opportunities Fund click here.
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*Observations from BlackRock’s Portfolio Solutions Team. BlackRock’s Portfolio Solutions Team engaged with close to 1,000 advisors to analyze their portfolios from February through December, 2016. Portfolio sources are actual advisors models collected during this time period. Portfolios are deemed conservative, moderate or aggressive if they have a 20%/80%, 60%/40% or 80%/20% (+/- 5 percentage points) equity-to-fixed income allocation, respectively. Benchmarks for conservative, moderate and aggressive portfolios are represented by a 20%/80%, 60%/40% and 80%/20% blend of S&P 500 Index/Bloomberg Barclays U.S. Aggregate Bond Index, respectively. Risk for each portfolio and the benchmarks are calculated as of 6/30/2016 using estimated annualized standard deviation as measured by BlackRock’s propriety fundamental risk factor model. The risk model calculates an ex-ante estimate of volatility based on the portfolio’s current exposures to fundamental risk factors, the historical volatility of those risk factors, and the correlations across risk factors to which the portfolios are exposed. A portfolio is deemed to be riskier than the benchmark if its total estimated volatility is at least 3% greater than the benchmark. All portfolios that met this criteria were aggregated and compared to the overall number of advisor model portfolios that were collected by the BlackRock Portfolio Solutions Team. 90% of advisor model portfolios that were deemed “conservative” based on their equity-to-fixed income allocation were riskier than their benchmark. 80% of advisor model portfolios that were deemed “moderate” and 70% that were deemed “aggressive” based on the same aforementioned methodology were riskier than their benchmark. The BlackRock Portfolio Solutions Team’s observations add up to a striking conclusion: We see imbalanced portfolios with excess risk across all portfolio types relative to their respective benchmarks.
1Source: Morningstar as of 3/31/17. Bond returns represented by IA SBBI IT Govt Index from 1926 to 1975 and the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 to 2016. Stock returns are represented by IA SBBI Large Stock Index from 1929 to 1970 and the S&P 500 Index from 1971 to 2017.
2Source: Morningstar. Based on Institutional shares of the fund. Data is from 3/31/10 (when Rick Rieder was named PM of the fund and the investment strategy changed) through 3/31/17. Rate Periods: Sorts through daily 10-year treasury rates from 12/31/2010. Rising Rate Periods (10): Counts period if <= 60 day period with at least a 40 bp increase in 10-year treasury from start date to end date. Overlapping periods are eliminated by choosing the period with the highest rate increase. Flat Rate Periods (14): Ending date rate must be within +/- 2 bps of start date rate. Period must be at least 30 days and no more than 90 days (business days). Variance of rate in the periods must be +/- 15 bps from start date rate on each date over the period (ensures minimal volatility over the period as a whole). Overlapping periods are eliminated by choosing the period with the longest date range. Declining Rate Periods (12): Counts period if <=60 day period with at least a 40 bp decline in 10-year treasury rate from start date to end date. Overlapping periods are eliminated by choosing the period with the largest rate decrease.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.
Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock").
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