Rethinking bond allocations for a new era

Key points

• Persistently above target inflation, structurally higher debt and deficits, and lower global dollar recycling mean traditional fixed income may offer less reliable diversification and heightened volatility with more muted return potential than in the past.
• Strategies harnessing the volatility and dispersion arising in this environment can potentially generate uncorrelated alpha to better position portfolios’ diversification and returns.¹
• A decade in, BlackRock's Systematic Multi-Strategy Fund (BIMBX) has helped investors pursue enhanced diversification and return potential across a range of market environments.

Today’s investment landscape, shaped by persistently above-target inflation, structurally higher debt and deficits, and reduced global dollar recycling into US financial markets, has contributed to elevated market volatility alongside historically high policy uncertainty. In this environment, portfolio returns and diversification have come under pressure, particularly for investors relying primarily on traditional equity and fixed income exposures.

Yet this challenging environment also creates opportunities for alpha-seeking strategies able to take advantage of heightened volatility and dispersion. BIMBX combines directional fixed income exposure with differentiated alpha strategies seeking to enhance portfolio diversification and return potential—whether as a complement to traditional fixed income or as a core liquid alternative.

As BIMBX marks its 10-year anniversary, its innovative approach has never been more relevant to portfolio construction. We reflect on how the strategy has helped investors navigate a wide range of investment challenges over the past decade, and why it may be uniquely positioned for what’s ahead.

The growing need for alpha in portfolios

The macroeconomic and market dynamics that largely supported steady, low volatility returns from broad market indices and beta exposures through the post-Global Financial Crisis (GFC) cycle have shifted significantly in recent years. Today, investors are faced with elevated fiscal, policy, and macroeconomic uncertainty that is contributing to frequent bouts of market volatility and more muted return potential.

At the same time, bonds are facing structural headwinds that challenge their role as a reliable portfolio hedge. Rising fiscal deficits, elevated debt financing needs, and the prospect of more persistent above target inflation are among the forces that could continue to constrain their diversification potential. As the chart below illustrates, the historically negative correlation between stocks and bonds has weakened, with longer maturities providing the least effective ballast during recent risk-off periods.

The underperformance of longer maturity bonds as diversifiers underscores a broader shift in the traditional bond market structure that has historically supported returns. Specifically, term premia (the difference between long- and short-dated bond yields) had been steadily declining over much of the past 40 years. However, today’s fiscal and monetary (inflationary) pressures are now driving a steady rise in term premia, undermining both the returns and diversification benefits of longer maturity bonds, which were once among the most effective portfolio diversifiers.

While market volatility and uncertainty can limit directional opportunities, the cross-section of markets offers a rich source of return potential. As the chart below illustrates, cross-sectional dispersion reflects the varying macroeconomic and policy environments. At critical periods, this dispersion highlights opportunities driven by divergence in individual company performance and macro exposures. In the current environment, elevated dispersion reflects heightened policy uncertainty—creating a key return source for long/short strategies such as the alpha strategies within BIMBX. This enhances their ability to potentially generate diversifying and defensively oriented returns.

An origin of innovation

Today’s market environment validates the original vision behind BIMBX: to deliver a more resilient and consistent source of returns with strong diversification properties—the role so effectively played by traditional fixed income in the past—but now challenged.

To achieve this, we drew on the full breadth of our systematic investing platform built over the past 40 years. A key strength of our systematic process is its ability to deliver targeted outcomes through the precise combination of innovative, complementary strategies. A decade ago, we set out to deliver targeted strong risk-adjusted returns with low volatility, limited beta to broad asset classes, and a defensive posture during periods of equity market stress. In doing so, we built an alternative source of diversification, whether as a core liquid alternative or a complement to traditional fixed income.

A decade later, combining our long-only fixed income expertise with some of our most unique and defensively-oriented alpha strategies delivered on these objectives. Over the past decade, BIMBX has generated an annualized return of 4.50% on annualized volatility of 4.18% for a Sharpe ratio² of 0.59, and a beta of 0.11 to the S&P 500. This performance places it in the top decile of its Morningstar category over the last 10 years, as well as among the top decile across several comparable bond categories.

The advantage of bonds + alpha

BIMBX is unique in its deliberate combination of return sources—distinguishing it not only from other liquid alternative funds but also from traditional bond funds.

At its core, the fund takes targeted credit and interest rate risk. It allocates across traditional fixed income sectors such as high yield, investment grade, securitized credit, and agency mortgages, while also actively managing duration and yield curve exposure. This means that at the fund level, BIMBX exhibits fixed income characteristics like yield and duration.

We combine that long-only fixed income exposure with pure, defensive alpha strategies across macro rates and equity markets. These strategies are long/short and market neutral, structured to take idiosyncratic risk rather than directional market risk. This makes them complementary to the beta portion of the portfolio, offering sources of return that are designed to behave independently across market environments.

In essence, these complementary (and often negatively correlated) strategies are intended to work at different times for different reasons, seeking to bring greater balance, diversification, and resilience to the overall portfolio. The complementary nature of these strategies’ low and negative correlations means that performance can be less reliant on things that traditional fixed income funds typically rely on—including excess risk and yield, market timing, and duration anticipation—potentially leading to more consistent, reliable and repeatable returns.

A decade of showing up when it’s needed most

Over the past decade, BIMBX has demonstrated its ability to deliver across a range of market environments, with its individual strategies performing as designed.

Example 1: when growth fears hurt equity markets

In October 2018, equity markets sold off sharply amid rising US-China trade tensions and growing concerns about global economic growth and corporate earnings. During this period of heightened volatility, BIMBX demonstrated its role as a core alternative strategy by providing meaningful equity diversification. Its combination of long-only fixed income exposure and defensive alpha strategies helped dampen portfolio risk and deliver stability at a time when equity markets struggled.

Example 2: when unprecedented events drive steep sell-offs

In early 2020, the onset of the COVID-19 pandemic triggered one of the fastest and most severe market drawdowns in history. The S&P 500 Index fell more than 30% in just a few weeks as global uncertainty spiked and investors rushed to de-risk. BIMBX’s strategies performed as they were designed to, including its defensive equity long/short strategy which has a track record of strong performance during periods of market stress. This is due to the strategy’s application of credit-oriented insights in equity markets, enabling it to provide resilience during times of extreme turmoil, when dispersion rises and investors turn to companies with healthy balance sheets and strong cash flows.

Example 3: when bonds no longer behave as expected

In 2022, investors faced a painful scenario: both stocks and bonds declined sharply, undermining the traditional 60/40 portfolio and exposing the limits of bonds as a reliable diversifier in a new investment regime. With inflation surging and interest rates rising at the fastest pace in decades, the Bloomberg U.S. Aggregate Bond Index posted its worst annual return in history—falling over 13%—alongside steep equity losses.³ This environment highlighted the role that BIMBX can play as a resilient complement to traditional fixed income. While bonds failed to cushion equity declines, the fund provided an uncorrelated, defensive return stream as an added source of diversification beyond traditional duration.

The above examples underscore how BIMBX has performed across a range of challenging market environments. This has made it a valuable option for investors seeking both core alternative exposure and a complement to traditional fixed income. From 2015 to 2022, BIMBX grew from virtually zero assets to $10 billion—reflecting its broad adoption as a tool for navigating market complexity and addressing portfolio construction challenges.⁴

Navigating the next 10

As BIMBX enters its second decade, its relevance in today’s evolving investment landscape has never been clearer. With traditional sources of return and diversification under pressure, it offers a differentiated approach—combining fixed income exposure with defensive, alpha-driven strategies. Its history of being able to navigate complex market conditions positions it as a compelling option for investors seeking to build more resilient portfolios for the decade ahead.

To obtain more information on the fund, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit:

Systematic Multi-Strategy Fund

The Morningstar Rating^TM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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