Fund Details Methodology

High Level Methodology & Defining the ‘Health Status’ of a Fund

In Portfolio Analyzer, Fund Details uses this methodology to assign a red/yellow/green health status to funds.

Fund Details in Portfolio Analyzer utilizes a proprietary methodology in order to evaluate mutual funds and ETFs held within one or more portfolios. The methodology is intended to enable financial professionals to easily identify funds across their portfolio(s) that need further review. Fund Details then allows the financial professional to dive into supporting analytics for further due diligence.

The methodology evaluates funds within the portfolio(s) across (9) independent Areas of Focus (criteria) that are within the framework of dimensions such as performance, risk, cost, exposure etc. Details on each criterion are in the next section but cover various aspects of a fund, from historical performance to fund exposures to potential downside.

Each criterion is associated with either ‘Consider Immediate Attention’ (red) or ‘Consider Review’ (yellow). Criteria that trigger ‘Consider Immediate Attention’ (red) are a priority to look into. They are 1) directly related to decisions involving risk, reward, and cost – the most critical considerations for an advisor in suitability and 2) objectively warrant a more urgent review because they speak to long-term performance, worst in class performance given the fee level, or significant tax consequences. Criteria that trigger ‘Consider Review’ (yellow) indicate that a fund may warrant closer examination but do not, on their own, represent an objective suitability concern.

While the financial professional can evaluate funds for each criterion individually, Fund Details also rolls these nine (9) independent criteria up to an overall fund status for easy prioritization of where to focus first.

Health Status

Color in Fund Details Visuals

Definition

How a fund gets this health status?

Consider Immediate Attention

Red

Funds that have been flagged for characteristics that may have adverse and direct effects on risk, reward, or cost profiles. Criteria include sustained long-term underperformance, high tax exposure, and others. Prioritize fund for review.

One or more ‘consider immediate attention’ criteria are triggered.

Consider Review

Yellow

Funds that that have been flagged for characteristics that may make them less attractive for the portfolio when compared to other funds and/or portfolio objectives. Criteria include high downside capture, tail risk, exposure outliers and others.

One or more ‘consider review’ criteria are triggered, but no ‘needs immediate attention’ criteria are triggered.

On Track

Green

Funds that have not been flagged by any of the evaluation criteria in Fund Details. They demonstrate reasonable characteristics across a range of dimensions. Review fund as part of regular investment quality monitoring.

No criteria are triggered.

 

Details on each Area of Focus (criteria)

Each of the (9) Areas of Focus (criterion) are independently evaluated against various criteria. Each criterion:

  • May apply to all US-domiciled mutual funds and ETFs or only a subset, depending on their applicability.
  • Is associated with either ‘Consider Immediate Attention’ (red) or ‘Consider Review’ (yellow)
  • Is assigned a Dimension to align each criterion with commonly used fund analysis categories detailed below:

o Performance: Historical performance can help you understand how an investment fluctuates over different periods.

o Risk: Measures of risk can help you understand the uncertainty that is associated with an investment.

o Cost: The expenses and costs of an investment should be reasonable and appropriate given its objective and impact in a portfolio.

o Taxes: Identifying products with higher exposure to potential tax consequences is critical for clients with more tax sensitivity.

o Fitness: Products may need to be evaluated with different criteria if they serve a different purpose in a portfolio, like income generation, diversification, or seek to offer a degree of downside protection.

o Flows: Products experiencing large outflows should be reviewed periodically.

o Exposure: Monitor a funds exposure to different tilts to ensure that it is delivering the intended exposure to your portfolio.

  1. Peer Performance

Dimension : Performance

Flag : Red

Objective : Identify funds that demonstrate persistent underperformance relative to their peer category.

Input Data Points :

  • 3 years of 3 Yr monthly total return ranks, sourced from Morningstar
  • BlackRock calculates the # of months spent in the bottom quartile of their respective Morningstar category as a percent (months=36)

Logic : This criterion is triggered if:

  • If the percent of time in bottom quartile is >60%

Note: Funds without 6 years of historical performance are excluded from evaluation

  1. Short Term Performance Reversal

Dimension : Performance

Flag : Yellow

Objective : Identify funds with a reversal in near-term performance. e.g., funds that have strong 1 year performance numbers but have underperformed over the past 3 months.

Input Data Points :

  • 3 Month total return and Morningstar Category ranking, sourced from Morningstar
  • 1 Yr return and ranking, sourced from Morningstar
  • BlackRock then calculates the lagged 9 month return and ranking within its Morningstar Category (1yr – 3m)

Logic : This criterion is triggered if:

    • The lagged 9 month return ranking is in the top quartile
    • AND The 3 month return ranking is in the bottom quartile

Note: Funds without 1 year of historical performance are excluded from evaluation

  1. Higher Downside Capture

Dimension : Fitness

Flag : Yellow

Objective: Identify funds that have experienced more downside volatility than their peers, as measured by their downside capture relative to a benchmark. As well as short-term bond funds that have had large historic drawdowns.

Input Data Points:

This criterion has 2 independent tests evaluated.

  • Downside Capture Test:

o 3 Yr Upside Capture Ratio, sourced from Morningstar.

o 3 Yr Downside Capture Ratio, sourced from Morningstar.

o 3 Yr Downside Capture Ratio Rank/Quartile. BlackRock calculates this rank for each fund, relative to its Morningstar Category.

  • Drawdown (Capital Preservation) Test:

o 3 Yr Max Drawdown, sourced from Morningstar.

o 3 Yr Max Drawdown Rank/Quartile. BlackRock calculates this rank for each fund, relative to its Morningstar Category.

Logic: This criterion is triggered if:

  • Downside Capture Test:

o The 3 Yr Downside Capture Ratio exceeds the 3 Yr Upside Capture Ratio by 5%

o AND the fund is in the highest quartile of 3 Yr Downside Capture Ratio within its Morningstar Category

  • Drawdown (Capital Preservation) Test:

o The fund is in a short duration Morningstar Category where large drawdowns typically should not occur:

  • Short-Term Bond
  • Ultrashort Bond

o AND The 3 Yr Max Drawdown Rank/Quartile is in the top Quartile.

Note: Funds without 3 years of historical performance and funds in Trading Morningstar Categories are excluded from evaluation

  1. Lower Diversification

Dimension : Fitness

Flag : Red

Objective : Identify fixed income and alternative funds that are highly correlated with equities and therefore are likely not providing portfolio diversification. Funds are evaluated by their correlation to the S&P 500.

Input Data Points :

  • 3 years of monthly returns, sourced from Morningstar
  • BlackRock calculates the historical correlation of the funds returns vs. the returns of the S&P 500

Logic : This criterion is triggered if:

  • The fund has an asset class of Fixed Income or Alternative
  • The fund is not in one of the below Morningstar Categories

o High Yield Bond

o High Yield Muni

o Nontraditional Bond

o Multisector Bond

o Preferred Stock

o Convertibles

  • The 3 Yr historical correlation > 0.70

Note: Funds without 3 years of historical performance are excluded from evaluation

  1. Higher Fee Underperformance

Dimension : Cost

Flag : Red

Objective : Identify funds that are both high cost and not providing outperformance to cover those costs, as measured by alpha.

Input Data Points :

  • 3 Yr Alpha vs Prospectus Benchmark Rank. BlackRock calculates this rank for each fund, relative to its Morningstar Category.
  • Prospectus Net Expense Ratio

Logic : This criterion is triggered if:

  • The Prospectus Net Expense Ratio is greater than or equal to 60 bps.
  • AND The 3Y Alpha is in the bottom quartile.

Note: Funds without 3 years of historical performance are excluded from evaluation

  1. Potential Tax Exposure

Dimension : Tax

Flag : Yellow

Objective : Identify funds that have the potential to generate larger taxable events based on past distributions. Funds are evaluated based on their tax costs relative to performance.

Input Data Points :

  • 1 Yr Tax Cost Ratio, sourced from Morningstar
  • 1 Yr Return, sourced from Morningstar
  • Total Capital Gains as a percentage of fund NAV

Logic :This criterion is triggered as red if:

  • Total Capital Gains > 10% of fund NAV (25% higher than the average capital gain for US Style Box Active Mutual Funds. Source: Morningstar data for 2018-2022)

This criterion is triggered as yellow if:

  • 1 Yr tax cost ratio > 5%
  • OR Negative 1 Yr return and 1 Yr tax cost ratio > 3%
  • OR Positive 1Yr return and 1 Yr tax cost ratio > 3% and a Tax Cost/Return ratio > 0.25

Note: Funds without 1yr of historical performance/tax cost and target date funds are excluded from evaluation

  1. Tail Risk

Dimension : Risk

Flag : Yellow

Objective : Identify funds with higher levels of tail risk, a measure of potential losses due to rare events. This metric may uncover volatility not captured by traditional measures of risk.

Input Data Points :

  • Tail Risk is sourced from Aladdin for each fund. (Tail Risk is calculated using the Aladdin Scenario Test framework; 10 years of monthly observations are used to identify the bottom 5%.)
  • Tail Risk rank. BlackRock calculates this rank for each fund, relative to its Morningstar Category.

Logic : This criterion is triggered if:

  • The tail risk is highest decile within their respective Morningstar category (highest levels of tail risk)
  1. Exposure Outliers

Dimension : Exposure

Flag : Yellow

Objective : Identify funds that have large exposures that are inconsistent with its Morningstar category. These exposures may not be delivering what the investor expects and can have a major impact on the fund’s risk profile.

Input Data Points :

  • Fund allocation data, sourced from Morningstar. Varies by fund asset class (see logic for more detail)

Logic : This criterion is triggered if funds with the Morningstar Category of:

  • Large Blend, Large Value or Large Growth funds have 10%+ allocation to small cap stocks
  • Small Blend, Small Growth or Small Value funds have 30%+ allocation to large + mid cap stocks
  • Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Diversified Pacific/Asia, Europe Stock, Pacific/Asia ex-Japan Stk, Japan Stock funds have 20%+ allocation with to US stocks
  • Diversified Emerging Mkts, Latin America Stock, China Region, India Equity funds with 10%+ allocation to US stocks
  • All other Equity categories not covered in prior rules with 5%+ allocation to cash
  • World Bond, Emerging Markets Bond, Emerging-Markets Local-Currency Bond, Global Bond-USD Hedged funds with 10% allocation to US bonds
  1. Recent Outflows

Dimension : Flows

Flag : Yellow

Objective : Identify funds that have been susceptible to outflows and other events that may impact liquidity. Funds are evaluated based on changes in AUM over the past six months.

Input Data Points :

  • Fund share class net assets for analysis date + 6 months prior, sourced from Morningstar
  • 6 months of monthly returns for the fund, sourced from Morningstar
  • Fund flows calculated by BlackRock, as a percentage of AUM, that have occurred over the last six months.

Logic : This criterion is triggered if:

  • Fund outflows exceed 20%.

Note: Funds without 6 months of historical track record are excluded from evaluation

BlackRock Fund Ideas Methodology

BlackRock fund ideas appear in the Fund Details table, in line with the funds held in the loaded portfolio(s). It is important to note that each BlackRock fund idea is shown for promotional purposes only, and It is the responsibility of the financial professional to determine whether a fund idea may be appropriate for a given portfolio. BlackRock fund ideas are not customized for your portfolio and are based solely on the criteria identified below. BlackRock’s methodology for displaying BlackRock fund ideas is proprietary to BlackRock, only considers BlackRock mutual funds and iShares ETFs as potential alternatives and will yield different results than other methodologies used to compare funds.

BlackRock fund ideas are assigned to Morningstar Categories and not on a fund-by-fund basis. For any Morningstar Category, there could be from 0 to 3 BlackRock fund ideas shown, up to 1 from each bucket; BlackRock Active Mutual Fund, iShares ETF, iShares Sustainable ETF. If the below criteria is not met, a Morningstar Category will not have a fund idea for that bucket.

Criteria for BlackRock fund ideas:

  • Fund is from BlackRock or iShares fund families
  • Fund is not flagged as ‘Consider Immediate Attention’ in Fund Details
  • Fund has at these three years of return history
  • Fund is not in Money Market, Trading, Target Date, Miscellaneous Region or Miscellaneous Sector Morningstar Categories

Selecting the BlackRock fund idea per bucket:

  • BlackRock Active Mutual Fund

o Largest BlackRock open-end mutual fund in the Morningstar Category (by fund AUM)

o Fund must be the Institutional share class and not index-tracking

  • iShares ETF:

o iShares ETF with the lowest prospectus net expense ratio in the Morningstar Category

o In case of equal expense ratios, selects the largest by fund AUM

o The intent is to highlight a ‘core ETF’, so Factor, ESG and Active ETFs are excluded