ETF Portfolio Solutions: A Multi-Asset Approach Andrew Keegan, Portfolio Strategist, BlackRock

Transcription

1 ETF Portfolio Solutions: A Multi-Asset Approach Andrew Keegan, Portfolio Strategist, BlackRock For professional clients only - EMEAiS-1635

2 Why have ETF Solutions become increasingly relevant? 1. Focus on Asset Allocation Focus has been directed at how to use ETFs within existing portfolios as well strategic asset allocation using ETFs. This is a result of: regulatory changes, greater focus on costs and market volatility. Risk Management 2. Regulatory Change MiFID II, UK RDR and the Dutch equivalent are all regulatory frameworks aimed at protecting the end investor. They have each been catalysts for increased interest in asset allocation services and capabilities among platforms and advisory networks. Asset Allocation 3. Product Range ishares has the largest ETF range in Europe covering major markets and multiple asset classes. As well as continuing to develop innovative new products, our focus is to provide technical expertise to aid in using ETFs effectively and efficiently Client Outcomes 4. BlackRock Offering With an investment culture and philosophy rooted in empirical and analytical rigor, BlackRock has a unique ability to look and provide solutions across asset classes, geographies and investment strategies. Source: BlackRock, ETP Landscape, as of 28 November

3 Why are ETFs well positioned for this trend? Accessibility, Efficiency, Simplicity, Affordability Easy to implement well-diversified solutions across a wide range of assets Transparent for customers Asset allocation focus and not necessarily beating a benchmark Typically low costs and management fees Continuously accessible and tradable Low cost ETFs can be more cost-efficient than conventional mutual funds Transparency ETFs offer high transparency with regard to fund composition, performance and cost Diversification ETFs offer diversification and avoid a concentration on individual stocks/ bonds Flexibility Wide range of ETFs available. Buy and Sell orders can be executed simply and quickly. 3

4 Is it about Active versus Passive. or Fundamental versus Systematic? source: 4

5 The Alpha-Beta Continuum with ETFs β α ishares Exchange Traded Funds Portfolios Solutions Managed Index Portfolios BlackRock BlackRock fonds funds BlackRock Special BlackRock Solutions funds Building blocks Core market cap Smart beta, hedged Strategy Market insights Product analysis Model Portfolios Strategic, tactical and target income models Quantitative approach Portfolio Analysis & Solutions Portfolio and risk analysis, case studies Bespoke approach Active multi-asset funds Quantitative approach with tactical positioning Utilising both ishares ETFs and index funds 3 risk categories: SRRI Defensive, Moderate and Growth. EUR, GBP, CHF & USD Equity funds Fixed Income funds Absolute return Funds Dividend strategies Multi-Asset Strategies Alternative strategies Alpha-strategies Beta-strategies Multi-Asset Strategies BlackRock s Proprietary Aladdin Risk system BlackRock Risk Management Source: BlackRock. 5

6 Why Multi-Asset? Asset Class Returns in USD ( ) Property 38% Emerging Market Equities 35% Property 42% Emerging Market Equities 33% Global Government Bonds 9% Emerging Market Equities 62% Property 20% Global Government Bonds 5% Property 29% US Equity 32% Property 16% Emerging Market Equities 16% Global Equity 16% Emerging Market Equities 28% Commodities 16% Cash 3% Global High Yield Bonds 58% Commodities 17% Grade Bonds 5% Global High Yield Bonds 19% Global Equity 29% US Equity 14% Global High Yield Bonds 12% Property 15% Commodities 24% Cash 6% Grade Bonds -5% Property 38% Global High Yield Bonds 15% Global High Yield Bonds 4% Emerging Market Equities 17% Global High Yield Bonds 6% Global Equity 10% Global Equity 11% Global High Yield Bonds 6% US Equity 16% US Equity 5% Global High Yield Bonds -25% US Equity 26% US Equity 15% US Equity 2% US Equity 16% Property 4% Global Government Bonds 8% US Equity 11% US Equity 5% Global Equity 16% Global Government Bonds 5% Commodities -36% Global Equity 26% Emerging Market Equities 14% Cash 0% Global Equity 16% Emerging Market Equities 3% Grade Bonds 8% Commodities 9% Global Government Bonds 4% Global High Yield Bonds 12% Global Equity 5% US Equity -37% Commodities 19% Global Equity 10% Global Equity -5% Grade Bonds 11% Cash 0% Emerging Market Equities 5% Grade Bonds 5% Grade Bonds 4% Cash 5% Grade Bonds 3% Global Equity -39% Grade Bonds 17% Grade Bonds 7% Property -6% Global Government Bonds 7% Grade Bonds 0% Global High Yield Bonds 3% Global Government Bonds 4% Cash 3% Grade Bonds 4% Global High Yield Bonds 2% Emerging Market Equities -46% Global Government Bonds 3% Global Government Bonds 5% Emerging Market Equities -13% Cash 0% Global Government Bonds -1% Cash 0% Cash 1% Commodities 0% Global Government Bonds 2% Property -7% Property -48% Cash 1% Cash 0% Commodities -13% Commodities -1% Commodities -10% Commodities -17% Source: BlackRock/Thomson Reuters Datastream. MSCI World Local Currency Total Return Index (Global Equity), S&P 500 $ Total Return Index (US Equity), MSCI Emerging Markets Local Currency Total Return Index (Emerging Market Equity), BarCap Global Sovereign Bond Total Return Hedged to USD Index (Global Sovereign Bonds), BarCap Global Corporate Bonds TR Hedged to USD Index (Global Grade Bonds), BarCap Global High Yield TR Hedged to USD Index (Global High Yield Bonds), FTSE EPRA/NAREIT Total Return Index (Property), Dow Jones UBS Commodity Total Return Index (Commodity), US 3M $ LIBOR TR Index (Cash) Performance to 31/12/

7 What is an optimal portfolio anyway? Strategy Full Optimization Risk Parity Volatility Throttling Naïve 1/N strategies Requirements I can estimate expected returns. So I am going to do a full optimization. I ve read up on modern portfolio theory and while I don t believe in the efficient market hypothesis, I get the free lunch that diversification and (lack of) correlation offers. OK, I know that equities are more risky than bonds (in general) so let s allocate more to less volatile assets and less to more volatile assets. None. I know nothing about the world so I am just going to diversify. 1. Sensible, well engineered portfolios. 2. Good understanding of preferences, where we have views. 3. Don t get too hung up on technically optimal portfolios. 7

8 Our Philosophy We believe that superior investment outcomes are best achieved through a disciplined, objective investment process Our investment process systematically captures return premiums while managing risks and implementation costs through optimization-based portfolio construction Return: Fundamentally-anchored, systematic approach using top-down and bottom-up based insights Risk: Proprietary portfolio & risk management systems designed to produce diversified portfolios that only take compensated risks Return Total Performance Management Risk Cost: Trading costs integrated into portfolio construction using proprietary transaction cost models Cost The team has decades of cumulative experience developing and managing investment strategies using this scientific approach Source: BlackRock. 8

9 Long-Run Risk Premium Research Average Short Rate ( ASR ) Underpins calculation of risk premiums (is the benchmark zero-risk investment strategy). Proprietary computation of 10-year risk free rate, based on modelling the trajectory of cash rates over the next 10-years, for the relevant yield curve based on the base portfolio currency Equity Risk Premium Long-run forecast expected returns less ASR. Based on fundamental economic drivers. Credit Risk Premium Default adjusted yields less ASR. Default adjustment looks through to underlying bonds. Default probability & recovery rate both taken into account. Bond Risk Premium Nominal sovereign yields (based on the yield curves at the duration point relevant to the rate exposure of the bond we are trying to price) less ASR. ASR incorporates longer-run growth & inflation views. Equity: Regional, Sector and Styles Fixed Income: Government, Grade, High Yield and Emerging Market Debt Source: BlackRock. 9

10 How does BlackRock define Smart Beta? Smart Beta offers some of the return advantages of active strategies, while retaining many of the benefits of passive strategies What is Smart Beta? Portfolio construction is rules-based, transparent and generally not cap-weighted Seeks to enhance risk-adjusted returns through exposure to persistent, desirable risk premia or market anomalies BlackRock Smart Beta may include equity, fixed income or multi-asset strategies What can Smart Beta do for a portfolio? A powerful tool to potentially improve investment outcomes: Addresses the known weaknesses of traditional benchmarks Captures many of the themes present in active portfolios for a fraction of the cost Provides a factor-based view of the world to understand portfolios and solve investor problems in creative ways β Passive Funds Smart Beta strategies reside in a continuum between active and passive Smart Beta Active Funds α Allocations different to market (cap) weight Capacity Fees and trading costs Low High 10

11 Helping You Navigate Risk We believe risk management is not about avoiding risk. It s about understanding more deeply the risks involved when making investment choices. $17 Trillion Dollars analyzed by our proprietary risk management software, Aladdin Leading banks, insurance companies, and sovereign nations rely on our risk-management expertise and proprietary risk management technology to examine and understand the risk in their portfolios. 30,000 Portfolios examined by Aladdin every minute 5,000 Portfolio stress tests run every week BlackRock Solutions: Aladdin System 3,000 Active risk factors monitored daily Portfolio & Risk Analysis Risk Management, Control & Oversight accounting Hedge management Risk and position reporting Centralized source of data Source: BlackRock. 31/08/

12 Growth Requirement Life Style Solutions for Growth, Savings and Income Growth Assets Focus on Savings Stability and liquidity Needs Focus on Income Needs, Capital Preservation and Drawdown Focus on Capital Growth Working Life Retirement 30 + Years Income Requirement 60+ Years 12

13 Strategic Asset Allocation Implementation Strategic Allocation Risk Profile Alts Equity Fixed Income Strategic allocation depending on appetite to risk, capacity for loss and time horizon For illustrative purposes only. Not indicative of any current model allocation. 13

14 Strategic Growth Models GBP Portfolio Allocations as of August 2015 Conservative Moderate Aggressive Standard Deviation 2 5.4% 9.1% 11.8% Weighted Average Expense Ratio 0.25% 0.32% 0.35% Fixed Income 73% 40% 15% IGLS ishares UK Gilts 0-5yr UCITS ETF 11% - 10% IGLT ishares Core UK Gilts UCITS ETF 16% 8% - INXG ishares Index-Linked Gilts UCITS ETF 5% - - ERNS ishares Ultrashort Bond UCITS ETF 8% - - SLXX ishares Core Corporate Bond UCITS ETF 20% 18% - GHYS ishares Global High Yield Corp Bond GBP Hedged UCITS ETF 8% 6% - SEMB ishares J.P. Morgan $ Emerging Markets Bond UCITS ETF 5% 8% 5% Developed Equity 21% 44% 56% CUKX ishares Core FTSE 100 UCITS ETF 5% 8% 11% IEUX ishares MSCI Europe ex-uk UCITS ETF 6% 9% 15% CSPX ishares Core S&P 500 UCITS ETF 3% - - IGUS ishares S&P 500 GBP Hedged UCITS ETF - 15% 10% SJPA ishares Core MSCI Japan IMI UCITS ETF 3% 5% - IJPH ishares MSCI Japan GBP Hedged UCITS ETF % CPJ1 ishares Core MSCI Pacific ex Japan UCITS ETF 4% 7% 10% Emerging Equity - 6% 14% EMIM ishares Core MSCI Emerging Markets IMI UCITS ETF - 6% 14% Non-Traditional 6% 10% 15% IWDP ishares Developed Markets Property Yield UCITS ETF 3% 7% 10% SGLN ishares Physical Gold ETC 3% 3% 5% 14

15 Tactical Growth Model GBP Portfolio Allocations as of August 2015 Fixed Income 39.6% Developed Equity 45.0% Emerging Equity 6.0% Non Traditional 9.40% Standard Deviation % Weighted Average Expense Ratio 0.34% Ticker Allocations Current IGLT ishares Core UK Gilts UCITS ETF 3.9% SLXX ishares Core Corporate Bond UCITS ETF 17.9% SLXH ishares Corporate Bond Interest Rate Hedged UCITS ETF - GHYS ishares Global High Yield Corp Bond GBP Hedged UCITS ETF 6.8% SEMB ishares J.P. Morgan $ Emerging Markets Bond UCITS ETF 11.0% CUKX ishares Core FTSE 100 UCITS ETF 10.5% IEUX ishares MSCI Europe ex-uk UCITS ETF 11.3% IGUS ishares S&P 500 GBP Hedged UCITS ETF 14.1% IJPH ishares MSCI Japan GBP Hedged UCITS ETF 5.0% CPJ1 ishares Core MSCI Pacific ex Japan UCITS ETF 4.1% EMIM ishares Core MSCI Emerging Markets IMI UCITS ETF 6.0% UKRE ishares MSCI Target UK Real Estate UCITS ETF 7.0% IWDP ishares Developed Markets Property Yield UCITS ETF 2.4% SGLN ishares Physical Gold ETC - 15

16 Income & Growth Asset Allocation Implementation Strategic Allocation Income Profile Alts Equity Fixed Income Income allocation depending on income requirement, appetite to risk, capacity for loss and time horizon *For illustrative purposes only. Not indicative of any current model allocation. 16

17 Income & Growth Asset Allocation Current GBP Asset Allocation Core Income Moderate Income High Income Aggressive Income Multi-Asset Income Current Yield Objective After Expenses 1 2.0% % 3.0% % 3.5% % 4.0% % 3.5% % Standard Deviation % 3.02% 3.82% 4.63% 5.10% Weighted Average Expense Ratio 0.24% 0.28% 0.31% 0.37% 0.34% Duration Government Bonds 31.7% 2.4% % Grade Credit 53.3% 72.6% 65.0% 42.0% 36.0% High Yield Credit 15.0% 20.0% 25.0% 35.0% 16.4% Emerging Markets Debt - 5.0% 10.0% 23.0% 6.4% Equities % Asset allocation strategies do not assure profit and do not protect against losses. Past performance does not guarantee future results. 17

18 Target Income Models GBP Portfolio Allocations as of August 2015 GOVERNMENT BONDS Core Income Moderate Income High Income Aggressive Income Multi-Asset Income IGLS ishares UK Gilts 0-5yr UCITS ETF 18.0% 2.4% % IGLT ishares UK Gilts UCITS ETF 13.7% INXG ishares Index-Linked Gilts UCITS ETF INVESTMENT GRADE CREDIT ERNS ishares Ultrashort Bond UCITS ETF 18.0% 11.1% SLXX ishares Core GBP Corporate Bond UCITS ETF % 13.5% 8.9% - SLXH ishares Corporate Bond Interest Rate Hedged UCITS ETF 17.3% 14.7% 15.5% - - IS15 ishares Corporate Bond 1-5yr UCITS ETF 18.0% 18.0% 18.0% 15.1% 18.0% ISXF ishares Corporate Bond ex-financials UCITS ETF % 18.0% 18.0% 18.0% HIGH YIELD SDHY ishares $ Short Duration High Yield Corporate Bond UCITS ETF % - - SHYU ishares $ High Yield Corporate Bond UCITS ETF 2.0% 3.6% 8.3% 17.0% 16.4% GHYS ishares Global High Yield Corp Bond GBP Hedged UCITS ETF 13.0% 16.4% 9.9% 18.0% - EMERGING MARKET BONDS SEMB ishares J.P. Morgan $ Emerging Markets Bond UCITS ETF - 5.0% 10.0% 18.0% 6.4% EMCP ishares USD Emerging Markets Corporate Bond UCITS ETF % - DEVELOPED MARKET EQUITIES ISF ishares FTSE 100 UCITS ETF % IUKD ishares UK Dividend UCITS ETF % IAPD ishares Asia Pacific Dividend UCITS ETF % 18

19 Target Income GBP Risk Contribution as of August 2015 Total Standard Deviation by Risk Contribution Factor 4 These fixed income portfolios seek to meet their yield objectives with the least amount of risk (standard deviation) by diversifying across a wide variety of factors that can impact fixed income investments, such as interest rates, credit spreads and foreign exchange. This chart shows the contribution of individual risk factors to each portfolio's total risk, leveraging BlackRock s proprietary risk management system Aladdin. 7% 6.35% Total Standard Deviation (%) 2 6% 5% 4% 3% 2% 1% 0% 1.93% 3.15% 3.93% 4.53% 5.49% -1% Barclays Sterling Aggregate Bond Index Core Income Moderate Income High Income Aggressive Income Multi-Asset Income Rate Risk 6.40% 1.11% 1.46% 1.76% 1.83% 0.52% Credit Risk -0.05% 0.79% 1.56% 1.22% 1.40% 1.20% FX Risk % 0.13% 0.95% 1.30% 0.41% Equity Risk % Total Standard % 1.93% 3.15% 3.93% 4.53% 5.49 Past performance does not guarantee future results. Please see footnotes section at the end of the document for risk factor explanations. This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) the ishares Funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisor know enough about their circumstances to make an investment decision. 19

20 Constructing Portfolios Using ishares Broadest Global Range of ETFs 700+ funds globally the most comprehensive range of choices for your portfolios ishares give you versatility to build the core of your portfolio, help meet specific goals, and implement your market views ishares can work with you to build and shape your portfolios using ETFs, from core exposures to targeted and outcome orientated exposures VERSATILITY TO HELP YOU BUILD PORTFOLIOS THAT PERFORM RATES REGIONAL COUNTRY EQUITY INCOME FACTORS SECTORS FIXED INCOME MINIMUM VOLATILITY CREDIT GOLD CORE BROAD EXPOSURE GOALS OUTCOME ORIENTED VIEWS TARGETED EXPOSURE Source: BlackRock, as of June

21 Footnotes 1) While each current yield objective was determined with reference to the current yields of the underlying funds, it is specific to each model and is not a prediction of fund or model yield or reflective of actual results. Realized yields will vary and may be lower. Model yields can be calculated by using a weighted average of the fund yields found in the table above. Past performance is not predictive of future results. 2) Standard deviation for the model portfolio is a statistical estimate measuring how dispersed returns are around an average. Standard deviation is estimated using the risk factor exposures and volatilities of the underlying funds, based on BlackRock Solutions multi-asset class risk models, and takes into account the correlations of these factors across the portfolio. Standard deviation is not meant to be a prediction of fund or model volatility and actual volatility of any portfolio based in whole or in part on the models shown will vary and may be higher. 3) Duration, represented by Option Adjusted Duration and a gauge of rate risk, measures the sensitivity of market price to parallel shifts in the yield curve. Positive duration means that as rates rise, the price decreases, and negative duration means that as rates fall, the price increases. 4) Contribution to risk is an additive measure of risk. The contribution to risk of a factor exposure of the fund is calculated as the change in the total portfolio risk that results from a small incremental increase to that factor exposure. This risk measure takes into account correlations across exposures and captures the risk of these as well as how diversifying they are in the total portfolio. Risk contributions are designed to sum to equal the total volatility of the portfolio. Past performance does not guarantee future results. Risk contribution factor exposures are: Total Risk contribution is the total standard deviation of the portfolio and is the sum of the risk contributions across rate, credit, FX and other risk.; Rate Risk contribution captures volatility associated with portfolio covariation with benchmark government interest rates.; Credit Risk contribution captures volatility associated with portfolio covariation with investment grade, high yield and distressed debt credit spreads over benchmark interest rates.; FX Risk contribution captures volatility associated with portfolio covariation with foreign exchange rate fluctuations.; Other Risk contribution captures the remaining portion of volatility that is idiosyncratic relative to Rate, Credit, Equity and FX Risk. Measures of risk contribution as defined by BlackRock Solutions. 21

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