It's time to think beyond the traditional 60/40 portfolio. With low yields and muted expected returns, many advisors have come to BlackRock looking for a better way meet their client's goals.  Alternatives can help but many advisors we talk to don't know where to begin. That's why we built the “HDMA framework.”  to identify the four outcomes that most alternative investments look to accomplish

Not all alternatives behave the same way so it's important to match your intended outcome to the right type of alternatives for your client portfolios.

What is the HDMA framework? It stands for hedge, diversify, modify and amplify. Let's talk about what that means further.

Hedges look to reduce the risk of a drawdown on your core holdings. They are designed to increase in value when stocks fall.  But this can be a drag on your portfolio since stocks typically grind higher over time. So, you can either accept the drag or try and time the market—which is hard to do!

Alternatives that diversify have a low or moderate correlation to core holdings. These strategies invest in differentiated sources of return.

Modifiers seek to provide growth with less volatility than stocks. We believe it's possible to replicate this outcome with a mix of low-cost index investments and cash – a better value for money

Amplifiers seek higher returns or income over stocks and bonds by investing in private markets.   Recent innovations have made amplifiers more accessible to traditional investors through interval or closed-end funds.

Within this framework, two stand out. Advisors should focus on (1) diversifiers to reduce risk and add differentiated portfolio exposures and (2) amplifiers for their potential to boost returns or income.

Now let's put this framework into action. I invite you to visit our tools on Advisor Center to  see how well your portfolio is delivering.

For institutional or financial professional use only. Not to be shown or distributed to the general public.

The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will perform well under all market conditions. Outlook and strategies are subject to change without notice.

Investing involves risks, including possible loss of principal.

Alternative investments may engage in speculative investment practices which increase investment risk, can be highly illiquid, often are not required to provide periodic prices or valuation, may not be subject to the same regulatory requirements as mutual funds and often employ complex tax structures. Also, some alternative investments have experienced periods of extreme volatility.

Focus on outcomes of alternative investing

When you’re looking at alternatives, there is a broad universe to consider. We suggest you focus on strategies that seek to diversify or amplify.

Seek to diversify
Seek to diversify
Bonds are under pressure in a rising rate, inflationary environment. Lower correlation alternative funds can offer another way to diversify stocks and seek attractive returns.
Seek to amplify
Seek to amplify
Tap into private markets to seek higher returns over traditional stocks and bonds.

00:01:33

SARAH SCHACHINGER:  No, thank you, Jon.  Appreciate everyone’s time today and look forward to the conversation with Jeff, who will be joining me momentarily.  I plan to ask Jeff a few questions and we can dive into some of these questions as we think about how to navigate these markets.

 

00:01:51

 

Hey, Jeff.  How are you?

 

00:01:56

 

JEFF ROSENBERG:  Hey, Sarah.  Good.  How are you?

 

00:01:58

 

SARAH SCHACHINGER:  Hey, great.  Great to see you.  As Jon mentioned, clearly this year’s been extremely challenging, both for advisors and investors, as we think about all the various challenges, inflation, rising rates, market volatility.  I think, you know, it would be really great if we can just start, Jeff, with you sharing some broad comments and thoughts on where we are today, what BlackRock’s view is going forward, and how we can kind of think about what maybe the second half of this year will entail.

 

00:02:28

 

JEFF ROSENBERG:  Yeah.  We’ll talk a little bit about this crazy market outlook here and then pivot to the fund I help manage, the Systematic Multi Strategy Fund, which is, you know, one of the solutions we think in this environment.  But first to just talk about the market environment, I put together a couple of slides for this part of the conversation.  So, maybe we can bring the first slide up.  It really, you know, is the exactly the theme that we’re talking about, Beyond 60/40. 

 

00:02:57

 

I put this data together years ago when we were contemplating, you know, the outlook for portfolio construction.  And what each dot basically represents is the annual calendar return to stocks versus bonds.  And what you see here – oh, sorry.  And annual returns going back to 1929.  So, this is a very long history that validates 60/40 portfolio construction, bonds as a diversifier.  Most of the observations you see there are on the upper right-hand quadrant.

 

00:03:29

 

If you look on the lower left-hand quadrant, you see, you know, very clearly that’s the year that we’re facing.  Really this is a very helpful slide.  Your clients may be, you know, a little bit shocked at their performance and, most importantly, kind of shocked at their bond performance and how poorly it’s done as a diversifier to equities.  And you can see just how historically unprecedented 2022’s year-to-date returns.  There are only three other observations in a calendar year. 

 

00:04:01

 

When I wrote this piece many years ago, I called it the Summer of ’69.  You can see there you’ve got, you know, you got ’31 the end of the gold standard, you’ve got ’40-’41 the beginning of the World War II, so, you know, super-unique environments.  And then you had 1969 and it was then the sort of exception that proved the rule for when bonds could be challenged as playing that traditional diversifying role.  And the rule was in what that late 1960s and the ’60-’70-’71 into the ’70-’71 recession illustrated was that bonds hedge stocks but they don’t when stocks are going down because of concerns over inflation and bonds are going down in that environment as well. 

 

00:04:51

 

The late ‘60s was the last time we had a experience of coming out of a very low inflationary environment where quite suddenly you had a big acceleration inflate – in inflation.  It feels very similar to the period that we’re in today.  Back then, it was known as the de-anchoring of inflation expectations.  And as we know now with the benefit of history, that wasn’t, you know, the end of the beginning of inflation.  It was really the beginning of a much longer period, a full decade’s worth of inflationary outcomes really challenging portfolios, portfolio construction in particularly fixed income. 

 

00:05:29

 

Now, what we see today is some similar size performance, really outsized performance when you see the degree to which fixed income returns have been negative.  So, it really highlights just how unique this environment is.  And, most importantly, what it highlights is the centrality of the inflation debate for the market outlook.  We will not get out of the current market volatility until we gain clarity around the inflationary outlook.  And so, that really is going to pivot us to the next slide and the conversation and the evolution that we’ve seen in that conversation around the inflationary outlook. 

 

00:06:08

 

So, you know, if I kind of trace the trajectory of the inflationary narrative, we started with what Larry Summers calls team transitory, right.  You'll recall Powell and team said don’t worry about inflation, it’s all supply disruption and as those go away so too will the inflation.  From team transitory, Powell retired the transitory language.  We saw what I would characterize the inflation outlook up until just last week in the June FOMC meeting and that was what I'm characterizing here in the title as the immaculate disinflation, meaning that the market expectations following the Fed’s forecast and forecast expectations was basically that inflation was going to go right back down without a significant negative impact on the economy and without a significant tightening in financial conditions and a significant tightening of monetary policy.

 

00:07:16

 

That was basically where we were up til last week, the immaculate disinflation.  And what you can see here in this chart is the consensus forecasts for the trajectory of inflation.  And what you see is basically inflation goes, spikes upward and then gradually declines almost in a linear trajectory back down to 2% by the end of 2023 and, again, without significant impact from tightening monetary policy or tightening in financial conditions. 

 

00:07:45

 

As you can see, circled on this chart here was really what undermined the immaculate disinflation narrative and that was two big misses in CPI prints in a row, the April CPI print published in May and then the May CPI print published earlier in June, which we now know is what has brought about the next theme.  And so, now we’ve transitioned from team transitory to the immaculate disinflation to the latest theme.  And if we go ahead one slide, we can start to see some of that.

 

00:08:26

 

So, this is the transition, sorry to use that word twice, from immaculate disinflation to the new theme as I'm characterizing it, a bigger boat.  This is a reference to Roy Scheider’s character in the movie Jaws.  When he sees the size of the problem, in that case Jaws, he stammers back and says you're going to need a bigger boat.  And the analogy here for central bankers is they have now seen the size of the inflation problem and now realize that they’re going to need a bigger boat.  And what a bigger boat means for financial markets and for monetary policy is a more significant tightening in financial conditions, a more significant raise in interest rates that leads to some real economic impact. 

 

00:09:16

 

So, what you can see on here are the Fed forecasts, market consensus forecasts.  But you focus on the FOMC SEP forecast for unemployment and you look at that March line, you see that the March line virtually had no increase in the unemployment forecast at 3.5, 3.5, and then a very small increase, 3.6.  What the Fed had been talking about under the immaculate disinflation narrative was we can tighten financial – we don’t have to tighten financial conditions to see our inflation goals met and, therefore, there’ll be no impact on the labor markets. 

 

00:09:54

 

Look up one line to the June SEP forecast for unemployment and now you start to see a little more reality seeping in.  That is, an increase projected in the unemployment rate.  No.  Stay on the other slide, guys.  I haven’t moved yet.  We’re still on this slide.  We’re just looking up one line on the June unemployment SEP forecast, which hopefully is on there.  I can’t see.

 

00:10:24

 

In any case, what you saw on the June FOMC SEP forecast was an admission that the Fed’s going to have to do more work and the impact of more work is going to be more significant tightening in financial conditions leading to some economic impact.  And that economic impact was seeing unemployment rates going from 3.5, 3.7, to 4.1, still very, very modest increases in unemployment relative to a Fed tightening cycle.  I would characterize this evolution in the Fed’s narrative as going from magical thinking to magical realism.  Some of you may get that reference.  For others, you can Google it.  But magical realism, meaning that there’s a tinge of reality in the forecast, but there’s still a lot of magic expected underneath those forecasts that we’re only going to need the amount of tightening leading to a very, very small increase in unemployment rates to rein in this degree of inflation. 

 

00:11:35

 

And so, this brings us to basically – let’s go to the next slide, the final slide here I’ll talk about in terms of the market commentary here.  It’s another way of sort of seeing the movement from immaculate disinflation to a bigger boat.  You can see the far right-hand portion here.  These two lines are market expectations for Fed policy rates in one year and then in two years.

 

00:12:01

 

So, the first thing you draw from this chart is after the June FOMC, what you saw was a rapid repricing in Fed level of tightening.  So, the increase in the amount of tightening that the Fed is going to have to deliver, you know, clearly follows from the Fed’s own forecasts and those are already rapidly reflected in market prices.  But the other thing that I think is important to recognize here is that if you look at what the market is saying today is that the Fed will be successful at reining in this inflation so that within a two-year horizon, that two-year Fed policy rate is below the one-year Fed policy rate.  That means that the Fed is cutting interest rates. 

 

00:12:47

 

And so, this highlights that the kind of consensus market forecast here, you’ve got the unemployment rate going down and part of why you have that – I'm sorry.  I said unemployment rate.  I mean to say inflation rate. 

 

00:12:59

 

You've got that inflation rate going down, what we saw in the earlier chart in that consensus inflation forecast.  Part of the reason why the Fed is having success on the inflation rate is because it’s engineered too much tightening and, therefore, needs to in a two-year window begin to back off that amount of tightening.  Whether or not that shows up as the reality remains to be seen. 

 

00:13:25

 

One thing I think is important to take away from the recent market volatility is that these market expectations have been proven wrong over and over and over, as well as the Fed has been proven wrong.  So, I think, you know, we’re going to pivot here for a little bit of discussion on, you know, what we’re doing and what are some of the alternative solutions – that's really at the heart of today’s webinar – for solving this 60/40 problem.  I think the conclusion here from the market dynamic is that the inflationary outlook is the number one issue and as long as that inflationary outlook remains unclear in terms of seeing success on the decrease in inflation and winning the war on inflation, we’re going to have an environment where stock markets and bond markets have the potential to move down together and that that reliability of that diversification from bonds in an environment where inflation uncertainty remains high is going to be with us for some time.

 

00:14:28

 

Now, what does that mean?  That could mean three, six months.  But it may also mean a period where we appear to win on inflation, that we see the year-over-year inflation figures do actually fall according to that consensus forecast, as we had seen. 

 

00:14:45

 

But the question then becomes does the Fed stop and does the Fed stop too early?  This is a potential for a longer perspective of inflation uncertainty, and it’ll be one of the key, and I think the most key events for this year, is going to be around September/October.  You know, you think to the June FOMC meeting, and it was a relatively easy call for the Fed to make, 75 basis point.  You had a huge inflation surprise, you had inflation expectation surprise for the upside, and you have the payroll and employment markets raging white hot.  It’s easy for the Fed in that environment to increase interest rates.

 

00:15:27

 

As we progress over the course of the summer and into the fall, we’re going to start to see an acceleration in the slowing of the labor markets and an acceleration in the slowdown on the growth side of the economy.  This is going to make those FOMC meetings much more interesting, and it’ll become clear whether or not the Fed is still making inflation its number one priority or starts to feel the pressure of the fears of over-tightening and starts to back off.  If they back off, you'll start to see some other voices saying, hey, that itself may be the policy mistake, because by backing off too early they may not have created the success in reining in inflation and that inflation uncertainty likely in that environment moves out the yield curve into the term premium and we still are left with an environment of still heightened uncertainty around bond hedging efficacy in an environment of inflation uncertainty. 

 

00:16:22

 

So, there’s some interesting path dynamics here for us to watch for.  We’ll pivot here to talk a little bit about how we’re impacting some of this in the Systematic Multi Strategy Fund. 

 

00:16:33

 

SARAH SCHACHINGER:  Thanks, Jeff.  I – here at BlackRock we have a framework where we’re thinking about alternatives that I know you’re familiar with; hopefully some advisors who are on the line are familiar with.  We refer to it as HDMA; meaning hedge, diversity, modify, or amplify.  The strategy that you mentioned that your team oversees certainly fits squarely in the diversify category.  I think it’s particularly interesting given your comments around the lack of reliability of traditional fixed income as a diversifier.  So, can maybe you spend a little time talking about how advisors can be thinking about diversification in the environment where there is just not as much reliability of fixed income being that diversifier?

 

00:17:20

 

JEFF ROSENBERG:  Thanks, Sarah.  Yeah.  Let's pull up this next slide.  The ticker for the Systematic Multi Strategy Fund is BIMBX.  That's the institutional ticker.  That's what I'm referring to here.

 

00:17:32

 

You know, we built this fund almost seven years ago for really being an alternative to the – to fixed income, traditional fixed income.  But we do it in a very nontraditional way.  This fund is an outgrowth of one of the largest hedge funds, one of the largest hedge fund management groups, the Systematic Fixed Income team, which I'm part of.  And what we do is we use a lot of alternative strategies to deliver that correlation profile on the orange line that you see here.  That's really what you’re looking for.

 

00:18:06

 

You’re looking for a fund, an investment strategy that delivers, you know, on average zero correlation to the equity markets, but at critical periods, you can see there some negative correlation to the equity markets when the equity markets are going down.  That's the strongest form of diversification.  You contrast that to what you see a lot and why, you know, liquid alternatives gets a bad rap is the yellow line.  You know, generally this category of funds has provided a, not a diversifier, but really an amplifier or a modifier with persistent equity correlation.  So, that’s not what you’re looking for in this kind of environment.

 

00:18:47

 

Critically, on the right-hand portion is what we’ve delivered in BIMBX Systematic Multi Strategy Fund is an asymmetric return profile.  One of the challenges of fixed income in the low interest rate environment was really low returns.  So, we wanted to build some things in there that provided some better upside capture, that’s upside relative to the equity markets, while maintaining its downside diversification properties.  So, you see that downside capture ratio of around 7% compares to the category where that upside/downside capture ratio is upside down.  Again, that’s funds that are amplifying or modifying but really giving you a lot more equity exposure.  And so, that equity exposure starts to hurt when equity markets are going down and you see there’s more downside capture than upside capture.

 

00:19:31

 

So, that asymmetry that you see there in the orange, which is the Systematic Multi Strategy Fund’s upside/downside capture ratio, is really critical to making this a, an alternative diversifier.  We run it as well specifically targeted towards delivering a fixed income-like volatility.  It’s historically been somewhere between 3 and 4% volatility.  Again, that contrasts really nicely with other liquid alternatives that are either amplifying or modifying, but they tend to anchor more towards an equity volatility. 

 

00:20:04

 

So, we run it with lower risk and the diversifying strategies that we have across the portfolio really allow us to avoid the kind of reliance on market timing and beta anticipation.  Rather, the alternative strategies that we’re using is we’re borrowing from our hedge fund expertise in long/short strategies and delivering alpha, true alpha, through exploiting idiosyncratic risks.

 

00:20:32

 

One final point I’ll just make about, you know, how we link the market outlook to what’s going on in the fund is we tend to see that the outlook for market returns – are markets going up, are they going down, what’s going on between stocks and bonds, the first slide that I showed you about how challenging the 60/40 portfolio is – the outlook for beta is particularly challenging in an environment where the Fed is tightening interest rates.  And so, what we have in our strategy is a combination of strategies that exploit market beta, but also strategies that exploit market alpha, pure idiosyncratic risk without market beta exposure.  And then, we can toggle our relative risk exposures between these two categories of strategies. 

 

00:21:17

 

In an environment like today where the Fed is tightening and we have huge inflationary uncertainty, it’s actually an environment where we’ve seen an increase in the opportunity set to pure alpha strategies, exploiting idiosyncratic opportunities across both the micro individual stock and bond allocation, as well as the macro world, global interest rates, interest rate yield curves, and differentials.  And so, we’ve increased the relative proportion of our fund’s exposure into the alpha strategies as a way of delivering more reliable returns in a very unreliable environment and that flexibility is what – is one of the key tools we use as an alternative strategy in the Systematic Multi Strategy Fund.  So, with that, Sarah, I’ll turn it back to you for the last word.

 

00:22:04

 

SARAH SCHACHINGER:  Thanks, Jeff.  We appreciate it.  Always appreciate your wisdom.  And, you know, as advisors think about diversifying, I think, you know, that leads to a great conversation.  I’ll pass it back to you, Jon, and we can kind of shift toward amplification.

 

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USRRMH0622U/S-2258019

Our latest views

A shifting investment landscape can leave portfolios out of balance. Portfolio manager Jeff Rosenberg, CFA, discusses the growing need for new sources of diversification and return.

00:22:52

 

Lynn, I want to come over to you and welcome you to the conversation.  As I mentioned, Lyn Baranski, she’s the Global Head of Investments for our Private Equity business here, which we call PEP, which is the BlackRock Partners Group.  And, Lynn, thanks so much for joining us. 

 

00:23:08

Private equity has been something that’s been increasingly important in portfolios.  Certainly, it plays a prominent role in the overall economy and it’s something that we’ve seen a lot of institutional investors have been doing for a very long period of time here.  But now, we’re starting to see individual and retail investors look at this space a lot more.  So, maybe just to start out, talk to us a little bit about the investment case for private equity and how it’s been able to deliver that long-term outperformance.

 

00:23:39

 

LYNN BARANSKI:  Yeah, great.  And thanks for having me.  It’s nice to be here again.  So, just to try to step back and set the scene a little bit, private equity has really been on a roll, and we’ve had over, over the last ten years assets under management have actually quadrupled from about $2 trillion of AUM to over $8 trillion of AUM, while at the same time the number of investors has more than tripled. 

 

00:24:04

 

So, we’ve had an influx of investors into the market and at the same time those investors have been increasing their allocation to private equity.  While they’re increasing their allocation to private equity, they’ve actually been struggling to hit those allocations.  And why is that?  Over the past ten years, we’ve seen actually very, very strong returns and returns of capital coming back to the asset class.  So, it’s making it harder for investors to actually get the exposure that they’re looking for. 

 

00:24:35

 

And so, you step back and say, okay, why is this?  Why is this money flowing into private capital and specifically private equity?  And I would just say there are lots of reasons, but I’ll focus on two.  One is diversification and the second being the returns themselves. 

 

00:24:53

 

If you sit back and think about what is private equity, private equity is really investing in private companies.  And if you look across just the United States, for example, there are over two million companies that have more than 50 employees at those companies and many of these companies are exhibiting faster growth.  Often, they’re disrupting traditional business models and they’re operating in parts of the economy that are growing faster than GDP.  You know, take for instance healthcare and technology.  So, really, you’re getting exposure when you’re investing in private equity to companies that not – aren’t always, you know, exactly available when you’re investing in the public markets.

 

00:25:32

 

Secondly, in private equity you can really execute on strategies in the private sector that are very difficult in the public space.  So, just take for example buy and build strategies or rollups, consolidation plays, corporate carveouts, take privates, for examples.  These strategies lend themselves to the private markets.  Take, for example, right now today we’re seeing an unusually high number of take privates and, you know, that our team is reviewing today.  And many of these, there are many reasons for this.  One is that sort of with the downdraft in the overall market, you know, some of the sort of I call it the baby is getting thrown out with the bathwater and the public markets aren’t properly valuing some really highly valuable, strong operating performing public companies.  So, we’re seeing take privates happening.  Also, as we go through this market volatility and if we see slowing growth, I think we’re going to be able to see some companies, public companies, that are going to be carving off some non-core divisions where, you know, they’re going to be shoring up their balance sheets and maybe carving out some of their non-core divisions.

 

00:26:46

 

But if I now take a moment and turn to performance, you know, performance is one of the second key reasons that investors have been moving into the private market.  So, if you look at over 20 years now, I’ve been working in this space for 20 years, consistently private equity has outperformed public market indices, you know, by 200-300 basis points.  And if you can access that top quartile performing private equity strategies, you can actually see in any given vintage year some of that outperformance can be as much as 1,000 basis points. 

 

00:27:21

 

So, there’s, there is higher dispersion of returns.    And then, if you can tap into those top performing managers, you’re going to see, you know, returns in excess of that. 

 

00:27:36

 

So, I think those are probably two like of the real reasons that investors have been pouring into this asset class.  And then, I would just say, you know, why are we having this outperformance?  And I would just say that here that private equity is true what I call active, active investings, active investing.  The general partners in private equity, they take board seats.  They’re quick to change out management teams.  And, most importantly, they’re really aligning management incentives to the drivers of the ultimate value creation.  And it’s really exciting when you see, you know, that perfect alignment of management and the private equity firms and the investors where you can just drive the value creation in these portfolios.

 

00:28:23

 

JON DIORIO:  Those are great points, Lynn.  And I think your first point on the diversification, just all of you for – that are creating portfolios out there, as Lynn mentioned, the private markets have really been growing while the public markets have been shrinking.  So, if you do want a full allocation to the overall equity markets, if you’re not including private equity assets in there, you’re really missing a very big part of the opportunity set. 

 

00:28:47

 

That said, Lynn, I think a big reason, the reason institutions have been doing it and maybe retail a little bit less so is just, quite frankly, the access.  There’s been a lot of democratization over the last year or two, especially with creating more efficient structures specifically for individual investors to access this.  Talk to us a little bit about the evolution that you’ve been seeing there in the space.

 

00:29:11

 

LYNN BARANSKI:  Yeah.  So, it really is exciting to see like this market opening up to more investors.  And I would just say for too long this asset class has been dominated by, you know, institutions and I would say the ultra-affluent, which is a real shame that, you know, a broader scope of investors have not been able to really benefit from the return profile of private equity.  So, today I really do encourage all of the advisors out there to look into some of these newer structures that have come out which, as Jon mentioned, we believe are democratizing alts and certainly private equity.

 

00:29:46

 

Just as an example, we have our own Evergreen Fund that provides quarterly liquidity, gives access to the private investments, but through, you know, a process with lower minimums, no performance fees, no capital calls, and no pay ones, which are always sort of the bane of certainly my existence as well.  And these structures can allow for minimum invest, investments of $25,000, which finally I would say provides a reasonable entry price to get access to this asset class.  And, you know, certainly our own fund that we manage, what is great is it is investing side-by-side with our institutional funds that we’re managing.  .  It really is getting that exposure to the same institutional quality private equity investments that we are sourcing on behalf of our, you know, of all of our clients, including our institutional, I mean including the institutional clients.

 

00:30:46

 

JON DIORIO:  No, great points, Lynn, and very exciting.  Again, the name of that fund was the BlackRock Private Investment Fund.  Talk to us a little bit about, whether it’s that fund or your institutional portfolios as you mentioned, they all invest alongside each other.  Jeff, before you came on, obviously painted an interesting landscape, one of this current environment, with rising interest rates, rising inflation.  We all know, you know, the economy and central banks are a very tough situation here.  So, as you think about the overall portfolios specifically as it ascertains to the private markets, you know, how are you looking at your portfolios today?

 

00:31:23

 

LYNN BARANSKI:  Yeah.  And the private markets are not immune to the macro, you know, challenges that were described earlier in the conversation.  Certainly, as we’ve been out talking to our general partners, they’re concerned about supply chains, the inflationary pressures, and they’re spending a lot of time right now with their portfolio companies understanding how they can, you know, position themselves for these turbulent periods.

 

00:31:53

 

It’s interesting.  I was talking to a very large general partner the other day who has assets in both the US and in Europe.  And to date, he commented they’ve probably experienced inflationary prices of about 21%.  And to date, they’ve been able to pass most of those increases through to the ultimate end user and consumer.  I would challenge, you know, ourselves on how long that can really last, especially if we’re going into a declining growth rate environment.  So, you know, if you look at where asset prices have traded in the public markets, the private markets will adjust, and I expect asset prices to adjust in the private markets as well as we go through this period. 

 

00:32:36

 

We are – if you look at just deal volumes recently and sort of the overall volume of private equity market activity, definitely we’ve seen a slowdown over the last sort of first half of this year so far where we’ve seen the exit activity slow down.  We’ve seen a slowdown in deal volume, and we’ve actually seen a slowdown in fundraising as well, so a slight slowdown in fundraising.  A lot of people focus on the dry powder in the market and it’s good to note here that actually dry powder peaked in the third quarter of last year. 

 

00:33:14

 

And so, we’re seeing some sort of, you know, definite moderation in the market.  I will speak for a second to the growth side of the market.  You know, the growth side of the market was somewhat in a frenzied environment over the last year, year-and-a-half, where there were, you know, a considerable number of market players, hedge funds, public money managers all sort of moving in on the growth sector, which has taken the biggest probably hit, certainly in the public space, as those technology-related assets’ prices in the public markets have come down.  And I expect that to continue to see that sort of asset movement come into the private markets as well.  So, in general, this has just created a lot more and driven a lot more volatility in the market.

 

00:34:00

 

But what, you know, the good thing I know about private equity is volatility is good for private equity and our managers are always able to sort of take advantage of market dislocations to find unique opportunities for investment.  So, I really think that over the 12, the 12, the next 12 to 18 months we’re going to see some great opportunities for investing.  I think I already mentioned that right now we’re seeing one of the highest number of take privates in our shop right now at given – at any given time.  Usually, we may be having one take private that we’re looking at alongside a general partner.  Right now, we’re looking at three.  A few weeks ago, it was four.

 

00:34:39

 

And then, as I mentioned, I do expect to see opportunities coming along to invest in non-core divisions of larger corporations.  And this has always been that sort of a happy hunting ground for private equity.  You can often take these companies that have been undermanaged and underinvested, spin them out, bring in best-in-class management teams, align the incentives, and then go out and maybe do corporate M&A, product line extension, but really investing in the business to allow it to have its next sort of phase of growth.  So, we’re seeing that. 

 

00:35:14

 

I do also expect we will continue to lean into technology companies.  If you think about where we are in the market with a rising inflationary environment, companies are going to look to technology to see if there’s a way that they can take costs out of their cost structure through the use of technology.  So, I expect that to continue to be sort of, you know, very prevalent in our portfolio.

 

00:35:39

 

And then, another market sector that we look at is healthcare.  You know, healthcare is a very complex ecosystem between the patient, the provider, and the payers of how we bring efficiency and scale into the healthcare, which is, you know, clearly those costs are growing at greater than GDP.  So, I think we’ll be able to see great opportunities there as well.

 

00:36:02

 

The other thing that we are finally seeing in the private equity or just I think overall is we’re seeing this move to onshoring and near shoring as supply chains continue to be challenged.  There we will see opportunities too.  Companies are finally looking for – at ways that they can diversify their supply chain, bring some of their suppliers closer to home.  And we’re seeing opportunities in the market to participate in that.

 

00:36:31

 

So, overall, you know, I look back at least our own deal flow and we’re continuing to see sort of 200 to 250 deals per quarter.  Our selection rate in our shop is still about less than 4%.  So, we have this great deal funnel.  And right now, I'm telling the team to be patient.  Given the market volatility, I think the back half of the year is going to provide some great investment opportunities and we’re really blessed to have the deal flow to be highly selective.

 

00:36:59

 

JON DIORIO:  Lynn, thanks so much for your comments.  Really appreciate you being on with us today.  So, with that, let’s get to the last part of trying to bring this all together.  Before I bring Carolyn on, let me just try to summarize.  The first part of what we heard from Jeff, certainly a lot of macro uncertainty out there and with that we’re seeing some really interesting idiosyncratic opportunities, a lot of dispersion in the market.  So, as you think about portfolios, try to diversify those portfolios using alternative strategies.  Jeff talked a little bit about our Systematic Multi Strategy Fund.

 

00:37:36

 

And then, the other thing that we’re certainly seeing is the need for higher returns and a way to amplify that without necessarily taking on more risk.  And I think Lynn outlined why we think private equity makes a lot of sense here.  Longer-term horizons, deeper due diligence, better alignment of interests, really taking that long-term approach to equity.  Certainly where we see a lot of investors in the public markets get hurt is just the psychology of investing, which when you look at those statements and they’re down 20-20-25%, sometimes you can get kneejerk reactions.  And certainly, if you amplify your portfolios with private equity, that long-term outlook can certainly help investors on that side.

___________

Source: Burgiss, Bloomberg as of 9/30/21. Private equity represented by the Burgiss Private Equity index (Buyout, Expansion Capital, VC Late & Generalist) which contains 1,962 private equity funds (vintages 2001-2018) as of 9/30/21 with 3/31/-9/30/21 performance data.

Standardized performance as of 03/31/22 for BIMBX is as follows: 1yr 1.92%, 3yr 3.41%, 5yr 4.87%, since inception (5/19/15) 4.17%

 

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. All returns assume reinvestment of all dividend and capital gain distributions. Refer to blackrock.com for current month-end performance.

 

Please ask your clients to consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund, and are available, along with information on other BlackRock funds by calling 800-882-0052 or from your financial professional. The prospectus and, if available, the summary prospectus should be read carefully before investing.

 

Important Risks of the BIMBX: The fund is actively managed and its characteristics will vary. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves special risks including, but not limited to political risks, currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. 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. Principal of mortgage- or asset-backed securities normally may be prepaid at any time, reducing the yield and market value of those securities. Obligations of US government agencies are supported by varying degrees of credit but generally are not backed by the full faith and credit of the US government. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher rated securities. Investments in emerging markets may be considered speculative and are more likely to experience hyperinflation and currency devaluations, which adversely affect returns. In addition, many emerging securities markets have lower trading volumes and less liquidity. The fund may use derivatives to hedge its investments or to seek to enhance returns. Derivatives entail risks relating to liquidity, leverage and credit that may reduce returns and increase volatility. For a complete list of fund risks, please see the prospectus. Short-selling entails special risks. If the fund makes short sales in securities that increase in value, the fund will lose value. Any loss on short positions may or may not be offset by investing short-sale proceeds in other investments. Investing in alternative strategies such as a long/short strategy, presents the opportunity for significant losses, including the loss of your total investment.

 

Important risks of BPIF: The Fund’s investment program entails risk.  There can be no assurance that the investment objective of the Fund will be achieved or that its investment program will be successful.  A summary of certain risks associated with an investment in the Fund is set forth below and on the following pages.  It is not complete and you should read and consider carefully the more detailed description of the risks associated with an investment in the Fund described in the Fund’s Prospectus before purchasing Shares. Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus.

 

Closed-End Fund; Illiquidity of Shares. The Fund is designed primarily for long-term investors. An investment in the Shares, unlike an investment in a traditional listed closed-end fund, should be considered illiquid. The Shares are appropriate only for investors who are comfortable with an investment in less liquid or illiquid portfolio investments within an illiquid fund. An investment in the Shares is not suitable for investors who need access to the money they invest. Unlike open-end funds (commonly known as mutual funds), which generally permit redemptions on a daily basis, the Shares will not be redeemable at an investor’s option.

 

Unlike stock of listed closed-end funds, the Shares are not listed, and are not expected to be listed, for trading on any securities exchange, and the Fund does not expect any secondary market to develop for the Shares in the foreseeable future. The NAV of the Shares may be volatile and the Fund’s use of leverage, if any, will increase this volatility. As the Shares are not traded, investors may not be able to dispose of their investment in the Fund when or in the amount desired, no matter how the Fund performs.

Risks Associated with Private Company Investments. Private companies are generally not subject to SEC reporting requirements, are not required to maintain their accounting records in accordance with generally accepted accounting principles, and are not required to maintain effective internal controls over financial reporting. As a result, the Sub-Advisor may not have timely or accurate information about the business, financial condition and results of operations of the private companies in which the Fund invests. There is risk that the Fund may invest on the basis of incomplete or inaccurate information, which may adversely affect the Fund’s investment performance. Private companies in which the Fund may invest may have limited financial resources, shorter operating histories, more asset concentration risk, narrower product lines and smaller market shares than larger businesses, which tend to render such private companies more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. These companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. These companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity. In addition, the Fund’s investment also may be structured as pay-in-kind securities with minimal or no cash interest or dividends until the company meets certain growth and liquidity objectives.

 

Typically, investments in private companies are in restricted securities that are not traded in public markets and subject to substantial holding periods, so that the Fund may not be able to resell some of its holdings for extended periods, which may be several years. There can be no assurance that the Fund will be able to realize the value of private company investments in a timely manner.

 

Pre-IPO Securities Risk. Investments in pre-IPO securities involve greater risks than investments in shares of companies that have traded publicly on an exchange for extended periods of time. These investments may present significant opportunities for capital appreciation but involve a high degree of risk that may result in significant decreases in the value of these investments. Issuers of pre-IPO securities may not have established products, experienced management or earnings history. The Fund may not be able to sell such investments when the Advisor and/or the Sub-Advisor deems it appropriate to do so because they are not publicly traded. As such, these investments are generally considered to be illiquid until a company’s public offering (which may never occur) and are often subject to additional contractual restrictions on resale following any public offering that may prevent the Fund from selling its shares of these companies for a period of time. Market conditions, developments within a company, investor perception or regulatory decisions may adversely affect an issuer of pre-IPO securities and delay or prevent such an issuer from ultimately offering its securities to the public. If a company does issue shares in an IPO, IPOs are risky and volatile and may cause the value of the Fund’s investment to decrease significantly.

Preferred Securities Risk. There are special risks associated with investing in preferred securities, including deferral, subordination, limited voting rights, special redemption rights, risks associated with trust preferred securities and risks associated with new types of securities.

Convertible Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, when the market price of the common stock underlying a convertible security exceeds the conversion price, the convertible security tends to reflect the market price of the underlying common stock. As the market price of the underlying common stock declines, the convertible security tends to trade increasingly on a yield basis and thus may not decline in price to the same extent as the underlying common stock. Synthetic convertible securities are subject to additional risks, including risks associated with derivatives.

 

Warrants and Rights Risk. If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock. The failure to exercise subscription rights to purchase common stock would result in the dilution of the Fund’s interest in the issuing company. The market for such rights is not well developed, and, accordingly the Fund may not always realize full value on the sale of rights.

 

Risks Relating to Dispositions of Portfolio Company Investments Held Through a Separate Entity. In connection with the disposition of an investment in a Portfolio Company, the legal entity that is the holder of the interests in the Portfolio Company may be required to make representations and warranties about the business and financial affairs of such Portfolio Company typical of those made in connection with the sale of any business. The interest holder may also be required to indemnify the purchasers of such Portfolio Company to the extent that any such representations or warranties turn out to be inaccurate or misleading. These arrangements may result in liabilities for the interest holder, and thus possibly for the Fund, depending upon recontribution obligations owed to the legal entity that is the holder of the interest. The Fund may face similar risks with respect to dispositions of its Direct Investments it holds directly.

 

Co-Investment Transactions Risk.  The Fund may co-invest alongside third-party co-investors, including through joint ventures or other entities, or with private equity funds in so-called “club deals.” Such investments may involve risks not present in investments where third parties are not involved, including the possibility that a co-investor may at any time have economic or business interests or goals which are inconsistent with those of the Fund, may take a different view than that of the Sub-Advisor as to the appropriate strategy for a co-investment, may be in a position to take action contrary to the Fund’s investment objective or may become bankrupt or otherwise default on their obligations. Further, in the case of co-investments that are made available to the Fund by a third party private equity sponsor, it is expected that the sponsor generally will have the ability to exercise control over the transaction. In addition, because one or more Portfolio Funds in which the Fund may hold an interest may invest in any particular club deal, the Fund may be more exposed to the risks associated with the underlying Portfolio Company than it would otherwise prefer. In some cases, the Fund may pay fees such as placement fees, management fees, administrative fees and/or performance fees to private equity sponsors in connection with a co-investment transaction in which the Fund participates, which fees would be in addition to the fees charged to the Fund by the Advisor and would be indirectly borne by investors in the Fund.

 

Risks Relating to Acquiring Secondary Investments.  The Fund may acquire Secondary Investments in Portfolio Funds from existing investors in such Portfolio Funds. In such cases, the Fund will not have the opportunity to negotiate the terms of its interests in Portfolio Funds acquired in a secondary transaction, including any special rights or privileges. In addition, valuation of interests in Portfolio Funds acquired in a secondary transaction may be difficult, since there generally will be no established market for such interests or for the securities of Portfolio Companies which such Portfolio Funds may own. Moreover, the purchase price paid for a Secondary Investment is subject to negotiation with the seller of such interest. The overall performance of the Fund may depend in part on the acquisition price paid by the Fund for its Secondary Investments and the structure of such acquisitions. The Sub-Advisor may have the opportunity to acquire, for the account of the Fund, a portfolio of Secondary Investments from a seller on an “all or nothing” basis. In some such cases, certain of the Secondary Investments in the portfolio may be less attractive than others, and certain of the managers of the Portfolio Funds in which interests will be acquired in a secondary transaction may be more experienced or highly regarded than others. Investments in sponsor-led continuation vehicles involve many of the risks associated with a primary investment in a Portfolio Fund, although such investments are not anticipated to be made on a “blind pool” basis.

 

Portfolio Fund Risks.  The Fund’s investments in Portfolio Funds are subject to a number of risks, including:

Portfolio Fund interests held by the Fund expected to be illiquid, their marketability may be restricted and the realization of investments from them may take considerable time and/or be costly.

 

Portfolio Fund interests are ordinarily valued based upon valuations provided by the Portfolio Fund Managers, which may be received on a delayed basis. Certain securities in which the Portfolio Funds invest may not have a readily ascertainable market price and are fair valued by the Portfolio Fund Managers. A Portfolio Fund Manager may face a conflict of interest in valuing such securities since their values may have an impact on the Portfolio Fund Manager’s compensation. The Fund intends to invest in Portfolio Funds that require an annual  independent audit of their financial statements, which includes testing of portfolio valuations made by the Portfolio Fund Manager. The Sub-Advisor will review and perform due diligence on the valuation procedures used by each Portfolio Fund Manager and monitor the returns provided by the Portfolio Funds. However, neither the Sub-Advisor nor the Board is able to confirm the accuracy of valuations provided by Portfolio Fund Managers. Inaccurate valuations provided by Portfolio Funds could materially adversely affect the value of Shares.

 

The Fund may pay asset-based fees and performance-based fees in respect of its interests in Portfolio Funds. Such fees and performance-based compensation are in addition to the fees charged to the Fund by the Advisor. Moreover, an investor in the Fund will indirectly bear a proportionate share of the expenses of the Portfolio Funds, in addition to its proportionate share of the expenses of the Fund. Thus, an investor in the Fund may be subject to higher operating expenses than if the investor invested in the Portfolio Funds directly. Investors could avoid the additional level of fees and expenses of the Fund by investing directly with the Portfolio Funds, although access to many Portfolio Funds may be limited or unavailable, and may not be permitted for investors who do not meet the substantial minimum net worth and other criteria for investment in Portfolio Funds.

 

Performance-based fees charged by Portfolio Fund Managers may create incentives for the Portfolio Fund Managers to make risky investments, and may be payable by the Fund to a Portfolio Fund Manager based on a Portfolio Fund’s positive returns even if the Fund’s overall returns are negative.

 

Portfolio Funds generally are not registered as investment companies under the Investment Company Act; therefore, the Fund, as an investor in Portfolio Funds, will not have the benefit of the protections afforded by the Investment Company Act. Portfolio Fund Managers may not be registered as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”), in which case the Fund, as an investor in Portfolio Funds managed by such Portfolio Fund Managers, will not have the benefit of certain of the protections afforded by the Advisers Act.

Some of Portfolio Funds in which the Fund will invest may have only limited operating histories.

 

There is a risk that the Fund may be precluded from acquiring interests in certain Portfolio Funds due to regulatory implications under the Investment Company Act or other laws, rules and regulations or may be limited in the amount it can invest in voting securities of Portfolio Funds. For example, the Fund is required to disclose the names and current fair market value of its investments in Portfolio Funds on a periodic basis, and a Portfolio Fund may object to public disclosure concerning the Fund’s investment and the valuation of such investment. Similarly, because of the Sub-Advisor’s actual and potential fiduciary duties to its current and future clients, the Sub-Advisor may limit the Fund’s ability to access or invest in certain Portfolio Funds. For example, the Sub-Advisor may believe that the Fund’s disclosure obligations or other regulatory implications under the Investment Company Act may adversely affect the ability of such other clients to access, or invest in, a Portfolio Fund. Furthermore, an investment by the Fund could cause the Fund and other funds managed or sub-advised by the Sub-Advisor to become affiliated persons of a Portfolio Fund under the Investment Company Act and prevent them from engaging in certain transactions. The Fund may forego certain voting rights with respect to the Portfolio Funds in an effort to avoid “affiliated person” status under the Investment Company Act. The Sub-Advisor may also refrain from including a Portfolio Fund in the Fund’s portfolio in order to address adverse regulatory implications that would arise under the Investment Company Act for the Fund and the Sub-Advisor’s other clients if such an investment was made. In addition, the Fund’s ability to invest may be affected by considerations under other laws, rules or regulations. Such regulatory restrictions, including those arising under the Investment Company Act, may cause the Fund to invest in different Portfolio Funds than other clients of the Sub-Advisor.

 

Although the Sub-Advisor will seek to receive detailed information from each Portfolio Fund regarding its historical performance and business strategy, in most cases the Sub-Advisor will have little or no means of independently verifying this information. A Portfolio Fund may use proprietary investment strategies that are not fully disclosed to the Sub-Advisor, which may involve risks under some market conditions that are not anticipated by the Sub-Advisor.

 

The Fund may receive from a Portfolio Fund an in-kind distribution of securities that may be illiquid or difficult to value and difficult to dispose of.

The Fund may be required to make incremental contributions pursuant to capital calls issued from time to time by a Portfolio Fund. The Fund expects to allocate a portion of its Managed Assets to the Income-Focused Sleeve in part for the purpose of funding capital calls.

 

If the Fund fails to satisfy capital calls to a Portfolio Fund in a timely manner then, generally, it will be subject to significant penalties, including the complete forfeiture of the Fund’s investment in the Portfolio Fund. Any failure by the Fund to make timely capital contributions may (i) impair the ability of the Fund to pursue its investment program, (ii) force the Fund to borrow, (iii) cause the Fund to be subject to certain penalties from the Portfolio Funds, or (iv) otherwise impair the value of the Fund’s investments (including the devaluation of the Fund).

 

A Portfolio Fund Manager may focus on a particular industry or sector, which may subject the Portfolio Fund, and thus the Fund, to greater risk and volatility than if investments had been made in issuers in a broader range of industries. Likewise, a Portfolio Fund Manager may focus on a particular country or geographic region, which may subject the Portfolio Fund, and thus the Fund, to greater risk and volatility than if investments had been made in issuers in a broader range of geographic regions.

Portfolio Fund Risks (Continued).

 

Portfolio Funds in which the Fund will acquire an interest may pursue different strategies or establish positions in different geographic regions or industries that, depending on market conditions, could experience offsetting returns.

 

Although the Fund will be an investor in the Portfolio Funds, investors in the Fund will not themselves be equity holders of the Portfolio Funds and will not be entitled to enforce any rights directly against the Portfolio Funds or the Portfolio Fund Managers or assert claims directly against the Portfolio Funds, the Portfolio Fund Managers or their respective affiliates.  Shareholders will have no right to receive the information issued by the Portfolio Funds that may be available to the Fund as an investor in the Portfolio Funds.

 

Illiquid Investments and Restricted Securities Risk. Most, if not all, of the Fund’s investments made through the Private Equity Sleeve will be highly illiquid, and there can be no assurance that the Fund will be able to realize on such investments in a timely manner. Illiquidity may result from the absence of an established market for the Fund’s investments, as well as legal or contractual restrictions on their resale by the Fund. It is anticipated that almost all of the Portfolio Companies in which a Portfolio Fund or the Fund may invest will be subject to restrictions on sale by the relevant Portfolio Fund or the Fund, as applicable, because they were acquired from the issuer in “private placement” transactions. In addition, the Fund’s investments by their nature are often difficult or time consuming to liquidate.

 

Investments in Non-Voting Stock. The Fund may hold its investment in a Portfolio Company or Portfolio Fund in whole or in part in non-voting form in order to avoid being deemed to be an “affiliated person” of such Portfolio Company or Portfolio Fund within the meaning of the Investment Company Act. To the extent the Fund invests in non-voting securities or contractually waives the right to vote, the Fund will not be able to vote on matters that may be adverse to the Fund’s interests, which may consequently adversely affect the Fund and its investors.

Non-Diversified Status. The Fund is a non-diversified fund. As defined in the Investment Company Act, a non-diversified fund may invest a significant part of its investments in a smaller number of issuers than can a diversified fund. Having a larger percentage of assets in a smaller number of issuers makes a non-diversified fund more susceptible to risk, as one single event or occurrence can have a significant adverse impact upon the Fund.

 

Investment Risk. An investment in the Shares is subject to investment risk, including the possible loss of the entire amount that you invest. The Shares are designed for long-term investors, and the Fund should not be treated as a trading vehicle. At any point in time an investment in the Shares may be worth less than the original amount invested, even after taking into account distributions paid by the Fund. During periods in which the Fund may use leverage, the Fund’s investment and certain other risks will be magnified.

 

Additional Risks.  For additional risks relating to an investment in the Fund, including “Effect of Additional Subscriptions,” “Best-Efforts Offering Risk,”  “Valuation Risk,” “Competition for Investment Opportunities,” “Non-U.S. Securities Risk,” “Emerging Markets Risk,” “Frontier Markets Risk,” “EMU and Redenomination Risk,” “Foreign Currency Risk,” “Publicly Traded Equity Securities Risk,” “Investments in ETFs,” “Subsidiary Risk,” “Fixed-Income Securities Risk,” “Yield and Ratings Risk,” “U.S. Debt Securities Risk,” “Sovereign Debt and Supranational Debt Risk,” “Corporate Bonds Risk,” “Below Investment Grade Securities Risk,” “Senior Loan Risk,” “Second Lien Loan Risk,” “Mezzanine Securities Risk,” “Bank Loans Risk,”  “Risks of Loan Assignments and Participations,” “LIBOR and Other Reference Rates Risk,” “Insolvency of Issuers of Indebtedness Risk,” “Leverage Risk,” “Strategic Transactions Risk,” “Inflation Risk,” “Deflation Risk,” “Risks Associated with Recent Market Events,” “Market Disruption and Geopolitical Risk,” “Regulation and Government Intervention Risk,” “Regulation as a ‘Commodity Pool’,” “Legal, Tax and Regulatory Risks,” “Failure to Qualify as a RIC or Satisfy Distributions Requirement,” “Investment Company Act Regulations,” “Legislation Risk,” “Investment Dilution Risk,” “Potential Conflicts of Interest of the Advisor, the Sub-Advisor and Others,” “Allocation Risk,” “Decision-Making Authority Risk,” “Management Risk,” “Reliance on the Advisor and Sub-Advisor,” “Reliance on Service Providers,” “Information Technology Systems,” “Cyber Security Risk,” “Misconduct of Employees and of Service Providers,” and “Portfolio Turnover Risk,” please see “Risks” in the Prospectus.

 

No assurance can be given that the Fund’s investment strategies will be successful or that the Fund will be able to achieve its investment objective. Accordingly, the Fund should be considered a speculative investment that entails substantial risks, and a prospective Investor should invest in the Fund only if it can sustain a complete loss of its investment. An investment in the Fund should be viewed only as part of an overall investment program.

 

The Fund's investments in private companies is subject to a number of risks. Private companies are generally not subject to SEC reporting requirements, are not required to maintain their accounting records in accordance with generally accepted accounting principles, and are not required to maintain effective internal controls over financial reporting. As a result, the Sub-Advisor may not have timely or accurate information about the business, financial condition and results of operations of the private companies in which the Fund invests. There is risk that the Fund may invest on the basis of incomplete or inaccurate information, which may adversely affect the Fund’s investment performance. Private companies in which the Fund may invest may have limited financial resources, shorter operating histories, more asset concentration risk, narrower product lines and smaller market shares than larger businesses, which tend to render such private companies more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. These companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. These companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity. In addition, the Fund’s investment also may be structured as pay-in-kind securities with minimal or no cash interest or dividends until the company meets certain growth and liquidity objectives.


Typically, investments in private companies are in restricted securities that are not traded in public markets and subject to substantial holding periods, so that the Fund may not be able to resell some of its holdings for extended periods, which may be several years. There can be no assurance that the Fund will be able to realize the value of private company investments in a timely manner.

 

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 to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary.

 

Prepared by BlackRock Investments, LLC, member FINRA.

 

©2022 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

 

FOR FINANCIAL PROFESSIONAL USE ONLY - NOT FOR PUBLIC DISTRIBUTION

 

USRRMH0722U/S-2258029

 

Navigating private markets

Hear from BlackRock Private Equity Partners’ (PEP) Lynn Baranski on our private market opportunities in 2022 and how private markets are more accessible than ever.

00:38:17

So, Carolyn, thanks so much for coming on.  I think your seat is pretty unique, because you can kind of bring this all together for advisors and for clients.  So, talk to us a little bit about what you're seeing as you review the whole portfolio sitting in our Portfolios Consulting Group.  And thanks again for being on with us today.

00:38:34

CAROLYN BARNETTE:  Absolutely.  Yeah.  I'm happy to be here and thank you for having me.  You know, it’s hard not to listen to Jeff and Lynn and immediately think, yes, but how?  And that’s exactly my job and my team’s job is to give implementation guidance.  So, you have a great idea.  How do you fit in a – it into your portfolio?  How do you source it?  How do you size it?  How do you scale it across your practice?  And so, we’ll spend the balance of our time here talking through exactly that. 

00:39:04

You know, if we start through the slides, Sarah mentioned this, Jeff mentioned this.  I think everybody so far on the call has mentioned this in passing, this idea of what we call the HDMA framework.  And, you know, we mention this because the most important thing in figuring out alternatives is what is it designed to do.  And being able to answer that simple question first and foremost, why am I hiring this particular strategy, this particular alternative, is going to guide the way you do your due diligence, the way you do your process, the way you figure out whether you’re picking a fund that is set up for success.

00:39:42

So, I'm going to turn through them really quickly because, you know, think about your own practice, think about your own history of choosing alternatives funds, the ones you’ve been really happy with, the ones you’ve been really unhappy with.  And chances are the ones you’ve been really happy with are the ones where you hired for, it for a specific purpose and it delivered.  The ones you’ve been really unhappy with, and this is when I talk to advisors, you know, I’ve talked to advisors who have just flat out sworn off alternatives because they’ve had one really bad experience and all the time when that happens it’s because they picked a fund that was mismatched from the objective it was hired to do.

00:40:22

So, we’ve got these four objectives, hedge, diversify, modify, amplify.  Hedge, those are strategies that are literally designed to zig when equities zag.  So, markets go up by 1%, these are designed to go down by 1%.  They’ve got a negative correlation of close to -1 and they’ve been really hard to invest in, because as equity markets have done well these have done poorly and people have paid for these and gotten really unhappy with consistently negative results.

00:40:52

We’ve experienced a lot of volatility this year.  But if you believe that global growth in the long-term is going to be positive, you can’t perpetually be short the equity market.  And so, those hedge strategies are really for investors who are day trading, watching the markets, watching their portfolios every day.  We don’t tend to in – to advise your typical advisor or money manager to buy those.

00:41:19

The second category is diversify and this is what Jeff talked about a lot earlier.  These are strategies that have low to zero correlation with equity markets.  They’re designed to be equity diversifiers that can both do well when equity markets are doing poorly, but still deliver a consistently positive experience over time.

00:41:41

Third is the modifiers and I include these here because they’re popular.  A lot of people invest in them.  But these are also the strategies that people loved in 2019, hated in 2020, and really hated this year.  Modifiers are strategies that are really highly correlated to equities and just have lower betas and can be really cheaply and easily recreated by just buying a cheap index fund and combining it with cash or buying low volatility.

00:42:11

Last is the amplifiers and this is what Lynn just spent a lot of time talking about.  These are funds that are really designed to amplify your returns.  You take on more risk in the hopes of getting more return.

00:42:25

So, for this time today, we’re only going to talk about the diversifiers and amplifiers because those are where the longer-term opportunities are.  They’re around helping you manage the risk in your portfolio and diversifying your sources of returns in there and also amplifying the returns in what has been a really volatile market.

00:42:44

So, if we go to the next slide, I wanted to talk a little bit about being selective with your diversifiers.  And I think this slide is really, really telling on, one, just how hard it is to get this right, combining the ability to not capture much on the downside with the ability to deliver consistent return.  So, you look at the left-hand side of the slide, what we’ve done is we’ve parsed out funds that have a low beta to the equity market, which we define at 0.3 or less, compared the performance of those funds to funds with a higher beta to the equity market to the whole market.  And what we found is those alternatives funds with the lowest beta to markets had the lowest amount of downside capture to markets.

00:43:32

Now, that is obvious, right?  By definition, a low beta fund does not capture as much of the market movements.  The less obvious part is that you want to not only have low beta in down markets, but also deliver a consistent return over time and only 12% of funds have been able to do both of those things, have been able to both give you that low beta experience on the downside and a consistently positive return in all markets.  And, by the way, Jeff’s fund is one of those funds.

00:44:03

So, if you go to the next slide here, I want to step back and really talk about how you find those funds in advance, because a lot of people will do this backwards.  And, again, this is where we see the most disappointment with alternatives is where, you know, you sort alternatives from high returns to low returns in one particular market by the highest returning funds and then the market shifts and the regime change, changes and those funds that had done really well, and generally those had been funds with a high degree of equity beta embedded, don’t do so well anymore.

00:44:39

 

So, if you're looking for diversifying alternatives and the case is really strong to be doing that right now with still a lot of volatility in the interest rate markets, step one is to look at the correlation of those funds.  If you’re hiring a fund to be an equity diversifier, make sure it has a low correlation to equity.  And for each of these, I'm going to give you an easy metric to look at and a harder but ideal metric to look at.

00:45:07

So, the easy one here is correlation, you know, pulling the correlation of a fund to the broad equity markets.  The harder but more important metric to pull, if you can get it, is down market correlation.  Jeff made this point earlier, too.  Ideally, what you’d like is a fund that has a low to negative down market correlation and a higher up market correlation and if you can get both of thing, those things, that leads you to the low downside capture and the consistent returns over time.

00:45:34

So, first screen out any fund that has – if it has a correlation of 0.9 or above, it shouldn’t even be in your universe.  I mean that means it’s moving with equity markets 90% of the time and if it’s moving with equity markets 90% of the time, it’s not diversifying equity markets 90% of the time.  So, screen out all of those.  Put anything between 0.75 and 0.9 on your watchlist to make sure that it is something that you want to be longer-term.  But get all of those that are 0.9 or above out of the universe.

00:46:07

Second step once you’ve narrowed that universe down is look at the risk of the individual fund.  And, again, the easy metric here is looking at the standard deviation of the fund, making sure it’s a risk level that you’re comfortable with.  The harder but ideal metric there is contribution to portfolio risk.  So, you know, you can think of asset classes that might have really high volatility on their own but a low contribution to portfolio risk because they have such a low correlation with equities.  Long duration treasuries for the most part, not this year, gold, really highly volatile on their own, low contribution to risk. 

00:46:45

And so, ideally, you’ve got sophisticated portfolio construction software where you can test out how much risk does my portfolio have with this investment, how much does it have without, and compare the two.  If you don’t have that software or you don’t want to do the iterative work, you’ll look at the individual risk profile of the fund you’re looking at and the correlation of that fund to equities and scale it up and down.  The higher the correlation to equities, the lower the standalone risk should be and vice versa.

00:47:15

And then last, look at returns.  We are seeing a shifting regime.  We are seeing higher returns out of the fixed income market, which should change what you demand out of your diversifiers.  You know, it’s one thing to say my diversifying alternatives should be able to beat bonds when the agg is yielding 1%.  It should also be able to beat bonds when the agg is yielding 3-3.5%.  So, you should be looking for funds that have low to negative correlation, particularly in down markets, a reasonable risk profile, and competitive returns with the asset class you're sourcing it from.

00:47:50

And on that note, if we go to the next slide, it talks a little bit more about sourcing.  This is probably the most common question I get is from where and how?  And so, on the diversifying side, the question you have to ask yourself is what am I trying to do to risk?  Am I trying to reduce the risk of my portfolio?  If so, you’ll be sourcing them from equities.  Or am I trying to keep risk roughly the same, in which case you would be sourcing them from bonds.

 

00:48:21

On the next slide, if we go to the next one, you know, Jeff and Lynn both talked about this a little bit.  There is a lot of dispersion in private markets and in alternatives and these numbers are just striking to me.  You look at the left-hand side of the slide and you see the dispersion in stocks and in bonds.  And, by the way, to make these numbers even more striking, that’s across the entire stock and bond universe.  So, if you just look at something narrow like core bond or large cap stocks, the dispersion between top quartile and bottom quartile managers is even smaller. 

00:49:00

In private markets and in hedge funds, the dispersion is huge.  So, it’s really, really important that you get this right because, you know, if you get it right you could up 10%-plus per year in hedge funds.  You get it wrong, you’re losing money every year.  On the amplifier side, the difference is 16 percentage points between top quartile and bottom quartile.  So, really, really key to get it right here.

00:49:24

And on the amplifier side, you know, Lynn talked a lot about this too.  You really should approach each

one of these private equity managers similar to the way you would evaluate an active equity manager with a few more screens on top.  But you have to look at the people.  You have to look at the process, the philosophy.  You have to look at the team’s historical performance.  You know, have they run strategies like this before?  Have they been able to do that successfully?  What is their access to deal flow? 

00:49:55

All of those things are going to be really, really important and depending on the amplifying strategy that you’re looking at, you probably shouldn’t put all of your eggs in one basket.  You know, there’s certainly strategies out there that try to do the diversification work for you.  But more often than not, these really are driven by idiosyncratic risk.  There are some that can be really highly volatile on their own.  So, you will get a lot of value from combining strategies and creating one really great amplifying sleeve.

00:50:27

If we got to the next slide here, you know, sourcing on amplifiers can be a little bit more challenging.  You know, similar to the how do you do due diligence earlier, you've got an easy way and you’ve got a harder way.  The easy way is to source like for like.  So, if you’re interested in a private equity strategy, you’d source it from the most highly volatile pieces of your equity portfolio.  For the most cap part, that means small caps.  It might also mean some of the tech heavy, growthier funds or even emerging markets funds that you’ve lost conviction in or perhaps are trying to realize losses on.  That could be a really clear place to source those.  But not everybody has those high-octane strategies in their portfolios anymore.  So, you also can look at sourcing more broadly from your equity sleeve.

00:51:23

On the bond side, private credit strategies can really add a lot of value.  If you have an allocation to high yield, that’s a great place to source them.  If not, depending on what you’re trying to do with risk, you might source them from your equities and take down risk a little bit, add to the yield of your portfolio.  Or you might source them from traditional bond and accept that higher uptick in risk.

00:51:48

Now, if you move to the next slide here, you know, the elephant in the room when it comes to private investing is just how much?  What are your liquidity needs?  How much can I really afford to lock up for years?  And chances are that number is higher than you think.

00:52:06

So, the way we think about it is we bucket money into three categories.  There’s the now money that you

need for the next six months of expenses, kind of your emergency fund, and that’s pretty obviously not where you’ll source private investments.  We’ve also got this bucket of later money, which is for financial goals that might be 10, 15, 20 years in the future that could be great, great funding sources.  And then you generally have this whole pot of money in between that we call lazy money that could really go either way.

00:52:38

So, if you go to the next slide here too, I think this is another way to show just how much opportunity there might be for you, because the average holding on active funds is over four years at this point.  And if you think about your own favorite funds that you hold, you’ve probably held them for longer than that.  I mean I’ve talked to advisors who have held their favorite funds for decades at this point.  And so, if you’re not going to sell it anyway, you might as well lock it up and try to take advantage of some of those better opportunities and the illiquidity premium that you get from private investment.

00:53:13

So, I’ll wrap up pretty shortly and hand it back to Jon.  But I want to go to the next slide first just to put this into context, because I never actually gave you numbers on what this could look like.  We think it’s really reasonable to go up to 20% in your 60/40 portfolio.  So, you might start with a broad 60/40 portfolio.  There’s one version of this where you're most worried about bonds and you create a diversifying portfolio that’s 60/20/20, 20% bonds, 20% diversifying alts.  There’s a version of this where you amplify and just take 20% out of your highest-octane stocks and bonds and there’s a version where we call it your all-in, where you do both. 

00:53:53

And if you go to the next slide, doing both, that all-in portfolio, has been hugely successful over time.  I mean it, it’s outperformed the 60/40, it’s outperformed the 80/20 with less risk.  So, this is something where if you get it right, it can really be right.

00:54:10

And to just, you know, sum this up really quickly, these are index returns.  I can’t overemphasize how important it is to get the implementation right.  Do your due diligence.  Do the right screens.  Make sure you're hiring managers that are able to deliver on what you’re hiring them for.  And we’re here for you.  I mean we would love to partner with you.  My team does this all day every day with the largest and fastest growing advisors helping make this their own and we’ve got a whole team of specialized specialists that specialize in this stuff.

00:54:43

So, if you heard anything today that you find – found interesting, reach out to your market leader, reach out to your partners at BlackRock and we would love to work more closely with you on this.  So, with that, thank you very much and, Jon, I’ll turn it back to you.

00:54:57

JON DIORIO:  Carolyn, great stuff.  Thanks so much.  I think implementation is, as you mentioned, the hardest piece of this.  So, hopefully that was a great framework for everybody.

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE SHOWN OR DISTRIBUTED TO CLIENTS.

The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will perform well under all market conditions. Outlook and strategies are subject to change without notice.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.

Alternative investments may engage in speculative investment practices which increase investment risk, can be highly illiquid, often are not required to provide periodic prices or valuation, may not be subject to the same regulatory requirements as mutual funds and often employ complex tax structures. Also, some alternative investments have experienced periods of extreme volatility.

Stock and bond values fluctuate in price so the value of your investment can go down depending upon market conditions. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. The principal on mortgage- or asset-backed securities may be prepaid at any time, which will reduce the yield and market value of these securities. Obligations of US Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the US Government. Investments in non-investment-grade debt securities (“high-yield bonds” or “junk bonds”) may be subject to greater market fluctuations and risk of default or loss of income and principal than securities in higher rating categories. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.

©2022 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

 

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We expect long-term public market gains to be more muted, creating a return challenge for your clients. Look to potentially amplify returns through private markets, which are now easier to access than ever before, through non-listed closed-end funds.

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US Census Bureau – Statistics of US Businesses; Droidge, Karolyi and Stulz (1988-2017) . Represents the latest data available as of February 5, 2021.

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BlackRock alternative funds

 

Ticker

Name

Morningstar Category

Overall Morningstar Rating

Alternative strategies

BIMBX

Systematic Multi-Strategy

Multistrategy

4

PBAIX

Tactical Opportunities

Macro trading

4

BILPX

Event Driven Equity

Event Driven

5

BDMIX

Global Long/Short Equity

Equity market neutral

3

BGCIX

Global Long/Short Credit

Nontraditional bond

3

Alternative asset classes

BICSX

Commodity Strategies

Comm. broad basket

4

BIREX

Real Estate Securities

Real estate

4

Access to private markets

CREDX

Credit Strategies

Credit

 

XPIFX

Private Investments

Equity

 

 

Source: Morningstar as of 6/30/2022. Ratings based on risk-adjusted total return, determined monthly and subject to change. Systematic Multi-Strategy, rated against 129 Multi-strategy Funds. Tactical Opportunities rated against 84 Macro trading Funds; Event Driven Equity rated against 42 Event Driven Funds. Global Long/Short Equity rated against 34 Equity Market Neutral  Funds; Global Long/Short Credit  rated against 302 Nontraditional Bond Funds; Commodity Strategies  rated against  102 Commodities Broad Basket Funds; Real Estate Securities rated against 229 Real Estate Funds. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. See important notes for additional information. **Credit Strategies is an internal fund. An interval fund provides liquidity through periodic repurchase offers, for instance, quarterly (not daily). Morningstar does not currently have a representative peer group for interval funds. CREDX launched on 2/28/2019 and is not yet rated. †* Private Investments Fund is a continuously offered, closed-end fund*.* XPIFX launched on 3/01/2021 and is not yet rated.

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