BGF FIXED INCOME GLOBAL OPPORTUNITIES FUND (FIGO)

Transcription

1 For ProFeSSionaL CLientS and QUaLiFieD investors only BGF FIXED INCOME GLOBAL OPPORTUNITIES FUND (FIGO) Risk management at the heart of unconstrained bond investing JUNE 215 At BlackRock we believe it s vital that bond investors now go beyond the constraints of a traditional bond benchmark. Unconstrained investing could help them maximise their opportunity set, and potentially limit the downside in uncertain market environments. Such a move requires flexibility, discipline and a forensic understanding of risk. overview The BGF Fixed Income Global Opportunities Fund (FIGO) is a flexible portfolio offering access to the full spectrum of fixed income investments from around the globe. It is completely free of benchmark constraints and operates within wide duration bands (from -2 to +7 years). It pulls together BlackRock s highest conviction views across all bond market sectors and credit qualities to create a diverse portfolio capable of maximising opportunities in today s bond markets. By drawing on multiple sources of returns, the portfolio is built to adapt to today s ever-changing bond markets. Putting risk management at the core Our proprietary risk dashboard allows us to understand the risks in our portfolio. It gives us the transparency, structure and framework to manage risk in the absence of a benchmark. We have a dedicated team of risk managers, specific to FIGO, which is charged with ensuring that everything that we do is deliberate, diversified and scaled. FIGO s flexible structure, combined with its acute focus on risk, allows us to maximise the risk/reward opportunity in every position we hold, through a detailed and granular understanding of the possible outcomes. SCOTT THIEL Deputy Cio of Fundamental Fixed income and Figo co-portfolio Manager It s time to invest differently. We need to accept that from these low points in bond yields, fixed income investing has become about the business of risk management, just as much as portfolio management. Proprietary risk dashboard FIGO s risk dashboard provides an incredibly deep understanding of risk and return trade-offs across the bond markets. It tracks multi-dimensional risk exposures and portfolio behaviour, which we believe leads to better decision making. Put simply, it: Serves as the foundation of daily investment meetings; Enables portfolio managers to understand whether return generated is proportionate to the risk taken; Aggregates portfolio dynamics and characteristics for all risk strategies. Captures and consolidates alpha and macro beta strategies into one, consistent view.

2 Proprietary risk dashboard (continued) The dashboard captures five key factors that are at the heart of our disciplined risk management process: 1. Strategies: From government bonds, mortgages and investment grade credit all the way through to emerging markets, securitised assets, high yield and foreign exchange the dashboard captures the full range of strategies and sub-strategies across the whole portfolio. Where we re taking risk now FIGO stand alone risk allocation US rates Non-US rates Vol FX Inflation CMBS ABS Source: BlackRock Solutions (BRS) as at 3 April 215. Mortgage Non-agency EM IG HY Swap spreads Equity 3. Multiple scenario analyses: We believe no one risk measure provides the whole picture. Therefore we use scenario analysis to supplement many of our standard metrics. Daily scenario analyses across thousands of risk factors help us understand what could drive volatility in the portfolio and gives us a better understanding of how to control risk. We have also incorporated lessons from previous periods of extreme market dislocation and volatility. Correlations and volatility relationships frequently break down during periods of market stress and, therefore, applying tests that range from normal market environments to crisis conditions enables greater understanding and the ability to quantify portfolio sensitivity to varying market environments. There are three examples of the kind of stress tests we use today outlined opposite, each of which represented one of the most striking market dislocations we ve seen in the last five years and helps us answer the question how would our portfolio react if it happened again? The pie chart above shows the distribution of Stand Alone Risk (Ex-ante value-at-risk (1 standard deviation) based on the BlackRock Solutions (BRS) Portfolio Risk model average contribution to risk ) within the BGF FIGO Fund. 2. Portfolio risk: BlackRock s technology platform, Aladdin, enables daily analysis of the underlying risk factors that are driving risk in the portfolio and the overall risk level. The flexible nature of the system means that risk can be modelled in many different ways, using different confidence intervals and parameters. The portfolio team can track the risk of the Fund over time to ensure it is taking risk in a diversified way (see chart below). Where we ve taken risk SINCE JUNE 213 FIGO stand alone risk allocation since June 213* 1 35 STANDALONE RISK AS % OF TOTAL TOTAL RISK (BPS) Jun 213 Aug 213 Oct 213 Dec 213 Feb Apr Jun Aug Oct Dec Feb 215 Apr May US Rates Non-US Rates Vol FX Inflation CMBS ABS Mortgage Non-Agency EM IG Swap Spreads HY Equity Fund Source: BlackRock, as at 31 May 215. *Fund inception: 31 January 27. Global flexible fixed income strategy adopted by FIGO under new management team as at June

3 SAMPLE CRISIS SCENARIOS Stress test scenario August 211 November 211 Spring 213 Historical period 1 August to 22 August November to 25 November May to 21 June 213 Description of events These stress tests represent the severe historical market moves in reaction to the European sovereign debt crisis. Risk assets performed poorly in August, with both investment grade and high yield spreads widening significantly, meanwhile risk-off flows pushed the yield on safe-haven assets such as US Treasuries lower. Risk assets continued to underperform in November, however the safe-haven flows started to ebb and for instance 1-year US Treasuries finished the month virtually unchanged. Spring 213 reports the market reaction to the potential tapering from the US Federal Reserve. Credit spreads widened significantly and equities underperformed. At the same time US Treasury yields also increased as the US Federal Reserve talked about tapering their asset purchase programme (QE) and market expectations for a rate hike were pushed forward. 4. Liquidity: As FIGO is a daily liquidity strategy we have created a liquidity tiering structure of 1 through 4, 1 being the most liquid Government bond sectors, Tier 4 being tradeable but less liquid in a risk-off environment. We have effectively limited our exposure to Tier 4 liquidity securities to 2% of NAV. This allows us to maintain a liquidity profile consistent with a daily liquidity pooled fund. 1 Tier 4 - Typically has a smaller investor base than Tier 3 in normal market conditions and may 8 become fully illiquid in stressed market conditions BGF FIGO Fund Liquidity Tiers Source: BlackRock as at 31 May 215. Tier 3 - Securities which are liquid during normal market environments, but due to a smaller investor base can become illiquid in stressed market environments. Tier 2 - Generally liquid securities which remain easily transactable even during periods of market stress. Tier 1 - Cash and other securities which can be easily convertible to cash. BGF FIGO FUND PERFORMANCE ATTRIBUTION BASIS POINTS (BP) Q13* 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Duration IG Credit High Yield ABS CMBS Non Agency CLOs Munis US Absolute Return European Credit Asia Strategies Emerging Markets Macro Global Fund Source: BlackRock as at 31 May 215. *From 31 May 213. Fund inception: 31 January 27. Global flexible fixed income strategy adopted by FIGO under new management team as at June P&L: On a daily basis, the portfolio management team has a strong understanding of total risk, where that risk is being allocated, how risk can change under different scenarios and then ultimately P&L and what is driving P&L on a very granular basis in the portfolio. The result of this disciplined process is a well-diversified portfolio built to navigate today s highly uncertain environment. 3

4 Figo in action FIGO is an unconstrained strategy designed to adapt rapidly to changing markets. The chart below is shown for illustrative purposes and highlights how the Fund s flexibility has helped it offer downside protection in rising rate environments. DoWnSiDe ProteCtion Increase on Yield 2. TOTAL RETURNS % bps ( ) +29bps ( ) +52bps ( ) +28bps ( ) +25bps ( ) +5bps ( ) +27bps ( ) +43bps ( ) view from risk and Quantitative analysis (rqa) BlackRock s RQA team strives to be a trusted partner to the firm s investment teams. For us, risk management is not about avoiding risk, it s about taking smart risks, about taking risks that are deliberate, diversified and consistent with the investment team s conviction level. We re essentially trying to answer the following question every day for every strategy, position and trade implemented within a global unconstrained fund that typically has well over a thousand line items: If things get bad, how bad can they get? -2.5 FIGO A2 USD Returns (A2 USD, net of fees) Barclays Global Aggregate Bond Index USD hdg Source: BlackRock, Bloomberg as at 31 May 215. Rising rate defined as any increase of 25 basis points or more in 1-year US Treasury Yields. FIGO returns shown in USD, net of fees with income reinvested, calculated on an NAV price basis, A2 share class. 4

5 WHY BLACKROCK BlackRock helps people around the world, as well as the world s largest institutions and governments, pursue their investing goals. We offer: a comprehensive set of innovative solutions, including mutual funds, separately managed accounts, alternatives and ishares etfs global market and investment insights Sophisticated risk and portfolio analytics We work only for our clients, who have entrusted us with managing $4.77 trillion*, earning BlackRock the distinction of being trusted to manage more money than any other investment firm in the world. *AUM as at 31 March 215. Want to know more? +44 () blackrockinternational.com [email protected] May 215 This material is for distribution to Professional Clients (as defi ned by the FCA Rules) and qualifi ed investors and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. 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Fund specifi c risks: The Fund invests in fi xed interest securities issued by companies which, compared to bonds issued or guaranteed by governments, are exposed to greater risk of default in the repayment of the capital provided to the company or interest payments due to the Fund. The Fund invests a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment. The Fund invests in fi xed interest securities such as corporate or government bonds which pay a fi xed or variable rate of interest (also known as the coupon ) and behave similarly to a loan. These securities are therefore exposed to changes in interest rates which will affect the value of any securities held. The Fund may invest in structured credit products such as asset backed securities ( ABS ) which pool together mortgages and other debts into single or multiple series credit products which are then passed on to investors, normally in return for interest payments based on the cash fl ows from the underlying assets. These securities have similar characteristics to corporate bonds but carry greater risk as the details of the underlying loans is unknown, although loans with similar terms are typically packaged together. The stability of returns from ABS are not only dependent on changes in interest-rates but also changes in the repayments of the underlying loans as a result of changes in economic conditions or the circumstances of the holder of the loan. These securities can therefore be more sensitive to economic events, may be subject to severe price movements and can be more diffi cult and/or more expensive to sell in diffi cult markets. The Fund invests in high yielding bonds. 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