MULTI-ASSET INCOME MODELS PORTFOLIO INSIGHTS

Investing for income: Putting the selloff into perspective

Jun 10, 2022

April was a terrible month for risk assets, and volatility remained elevated in May. U.S. stocks, represented by the S&P 500 Index, have flirted with bear market territory, defined by a 20% drop from their recent peaks¹. Meanwhile, negative returns across everything from high quality to high yield bonds has investors feeling there are few places to hide. With investors facing no shortage of concern from higher interest rates, decades-high inflation, Russia’s invasion of Ukraine, and slowing growth, it is no wonder we are being inundated with questions about recession risks and exiting the market.

While periods like this can be difficult to stomach, the selloff has created some potentially attractive entry points for income investors. In addition, we recognize that many income-oriented asset classes have historically produced positive returns over medium- to longer-term time horizons and therefore provide support for maintaining a longer-term perspective.

First, higher interest rates and market weakness year-to-date have led to a meaningful back-up in yields across virtually all major fixed income asset classes, as shown in the chart below. For income investors taking the cash flow off their investments, this has helped to offset some of the pain experienced from the negative market movement. And for income investors who re-invest their cash flows, this weakness provides a potentially attractive opportunity to use “dollar-cost averaging” to invest at lower prices and seek to capitalize upon future higher yields.

Figure 1: Yield of major fixed income asset classes, June 2021 vs. April 2022

Chart for Yield of major fixed income asset classes, June 2021 vs. April 2022

Source: BlackRock, with data from Bloomberg as of April 2022. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Yields represented by yield to worst. Investment grade bonds represented by Bloomberg US Corporate Index. Floating Rate Loans represented by JPM CLO Index. Preferred Stocks represented by ICE BofA U.S. Corp All Capital Securities. EM Debt represented JPM EMBI Global Index, High Yield Bonds represented by Bloomberg US High Yield Index.. Inflation represented by the U.S. 5-year breakeven inflation rate. Breakeven rates are calculated by subtracting the real yield of the inflation linked maturity curve from the yield of the closest nominal Treasury maturity.

Second—and possibly even more important—is the focus on longer-term returns. Even higher yields may not fully guard portfolio returns from shorter-term drawdowns. However, many income-oriented asset classes have strong histories of delivering positive returns over rolling periods, which offers investors another way to monitor success.

As shown in figure 2, the frequency of negative returns in any one asset class over rolling 1-, 3-, and 5-year periods during the last decade are low, with the exception of Master Limited Partnerships (MLPs), which have been subject to outsized losses and have been a riskier area of the income market. Also with the exception of MLPs, the frequency of negative returns generally declines as the time periods increase. We recognize that only looking at long-term returns misses a lot of the shorter-term pain investors face like they’re going through today. But looking at returns over rolling 3- and 5-year periods should provide some confidence that negative periods tend to be short-lived and may further support the idea that now may be an attractive buying opportunity for longer-term investors.

Figure 2: % of time total return is negative over any 1-, 3-, and 5-year rolling period since 2006*

% of time total return is negative over any 1-, 3-, and 5-year rolling period since 2006* chart

Source: BlackRock, with data from Morningstar Direct, Bloomberg as of April 2022 Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Data covers the period from February 2006 – April 2022. February 2006 is the earliest common date available across the indices used in the chart. Core Bonds represented by Bloomberg US Aggregate Bond Index; Inv Grade Debt represented by Bloomberg US Corp Bond Index; High Yield represented by Bloomberg US HY 2% Issuer Cap Index; Bank Loans represented by S&P/LSTA Leverage Loan Index; MLPs represented by Alerian MLP Index; Preferred Stock represented by S&P Preferred Stock Index; US Dividend Stocks represented by Morningstar Dividend Yield Focus Index; International Dividend Stocks represented by DJ EPAC Select Dividend Index; 50/50 Risk Budget represented by 50% MSCI World Index and 50% Bloomberg US Aggregate Bond Index; Cash represented by Bloomberg US Treasury Bill 1-3 Mo Index.

Of course, staying focused on the longer-term amid short-term volatility and losses is difficult, and making decisions across individual income asset classes—many of which may be less familiar to investors—is easier said than done. Using a multi-asset strategy is one way to navigate this landscape.

In our multi-asset income models, we have recently taken advantage of some of the weakness we’ve seen in 2022. In particular, we’ve added to intermediate-term investment grade bonds which carry significantly higher yields today than last year (as highlighted in the first chart) and may offer attractive risk/reward characteristics for longer-term investors.

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Michael Fredericks
Head of Income Investing for BlackRock Multi-Asset Strategies & Solutions
Michael Fredericks, Managing Director, is head of Income Investing for the BlackRock Multi-Asset Strategies & Solutions group and lead portfolio manager for a global ...
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Justin Christofel, CFA
Portfolio Manager, Multi-Asset Income Team
Justin Christofel, CFA, CAIA, Managing Director, is a portfolio manager on the Multi Asset Income team within BlackRock Multi-Asset Strategies & Solutions group. He ...
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