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BlackRock 2014 Investment Themes January 2014 The opinions presented are as of January 2014 and are subject to change. NOT FDIC INSURED – MAY LOSE VALUE.

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Presentation on theme: "BlackRock 2014 Investment Themes January 2014 The opinions presented are as of January 2014 and are subject to change. NOT FDIC INSURED – MAY LOSE VALUE."— Presentation transcript:

1 BlackRock 2014 Investment Themes January 2014 The opinions presented are as of January 2014 and are subject to change. NOT FDIC INSURED – MAY LOSE VALUE – NO BANK GUARANTEE

2 2 A Perfect Storm For Investors: Time To Act Sources: 1 United States Census 1990 & 2010, 2 US Social Security Administration, 3 Employee Benefit Research Institute, 4 Federal Reserve Bank of St. Louis, 5 Congressional Research Service. There are more retirees Enjoying longer retirements With less guaranteed income And less savings And higher taxes Retirement Population (65+ years) M 1541%11%28% M 1917%7%35% Expected Years in Retirement 2 Pension as Retirement Income 3 (% of private sector workers with access to defined benefit plans) Average 30-Year Personal Savings Rate 4 Marginal Taxes for the Highest Earners 5

3 3 INVESTMENT SUGGESTIONS 2014 Investment Themes Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds Allocate to Traditional Equities Mitigate Risk with Diversified & Alternative Strategies Seek Conservative Equity Growth Take a Flexible Approach to Income Put Credit and Dividends to Work Adapt to Higher Taxes Allocate to Flexible Bond Portfolios Seek Returns Beyond Traditional U.S. Bonds Keep Durations Short, But Know What You Own 1 2 3

4 4 INVESTMENT LANDSCAPE 2014 Investment Themes – Rethink Your Bonds Anxiety Over Risk Confusion Around Bonds Sitting on the Sideline of investors are not willing to take on more risk to achieve higher returns of advisors think clients need more education on credit and interest rate risk of investors currently favor cash for their investments and are wary of volatility 67 % 90 % 48 % We believe longer- term interest rates will move higher in 2014, it is likely short-term interest rates will be anchored at zero Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds

5 5 Interest Rates Drive Bond Returns Todays low interest rates resemble the 1940s & 1950s financial repression era…will returns follow? Interest Rates & Bond Returns % Prior periods of financial repression such as the 1940s and 1950s have been associated with negative real returns for traditional fixed income (that is nominal return less realized inflation) 4.07 Interest rates sit below the level of inflation negating the yield Source: Morningstar as of 12/31/13. Past performance does not guarantee or indicate future results. Interest Rates and Bond Returns represented by IA SBBI IT Govt Index from 1926 to 1975 and the Barclays US Aggregate Index from 1976 to For illustrative purposes only. Indexes are unmanaged. You cannot invest directly in an index Realized inflation sDecade to Date 2000s1990s1980s1970s1960s1950s1940s Seek Growth, Manage VolatilityGenerate Income, But Dont Overreach Rethink Your Bonds

6 6 Traditional Bond Risks Remain Skewed to the Downside Source: Morningstar Direct as of 12/31/13. Past performance does not guarantee or indicate future results. Bond Returns represented by IA SBBI IT Govt Index through 1985 and the Barclays US Aggregate Index afterwards. For illustrative purposes only. The end of an era: lowest 10 year return for traditional bonds 10-Year Rolling Returns of the Core Bond Index Traditional bond funds have overly concentrated interest rate risk &limited upside potential, as evidenced by 2013 losses Long-term market cycle suggests bond returns will continue their fall Sept 2013, 4.59% Sept 1974, 4.59% High: Sept 1991, 14.68% Seek Growth, Manage VolatilityGenerate Income, But Dont Overreach Rethink Your Bonds

7 7 INVESTMENT RECOMMENDATIONS 2014 Investment Themes – Rethink Your Bonds 2 Seek Returns Beyond Traditional U.S. Bonds to enhance diversification and generate returns that are independent of low yields and rising rates in the U.S. 1 Allocate to Flexible Bond Portfolios that are not tethered to a benchmark and have more flexibility to respond to market changes. 3 Keep Durations Short, But Know What You Own as low duration funds do not always equal lower risk. Seek Growth, Manage VolatilityGenerate Income, But Dont Overreach Rethink Your Bonds

8 8 Allocate to Flexible Bond Portfolios Flexible, non-traditional bonds outperformed traditional core bonds Employing a flexible bond strategy is key to prepare for more volatility in monetary policy and interest rates In various interest rate environments, flexible funds can increase yield, reduce duration and effectively manage downside risks Source: Morningstar. As of 12/31/13. Flexible bond funds represented by the Morningstar category average for the nontraditional bond fund category. Traditional core bond funds are represented by the Barclays US Aggregate Bond Index. Past performance is not a guarantee of future results. Indexes are unmanaged. You cannot invest directly in an index. Average annualized returns as of 12/31/13 Seek Growth, Manage VolatilityGenerate Income, But Dont Overreach Rethink Your Bonds

9 9 Seek Returns Beyond Traditional U.S. Bonds Increase diversification by looking beyond the scope of traditional bond investing During the lost decade, diversifying away from U.S. traditional core equities improved returns Seek investments with lower correlations to traditional bonds that generate a differentiated pattern of returns Equity Asset Class Lost Decade for Stocks ( ) S&P 500 Index-0.95% International Equities+3.12% Long / Short Equity+4.36% Small / Mid Cap Value Stocks +6.36% Emerging Market Equities+9.95% 3-Year Correlation to Traditional Core Bonds Long / Short Fixed Income*0.06 Non-traditional Bonds0.19 Emerging Market Bonds0.35 International Bonds0.54 Lost decade chart – Source Morningstar. *12/1/10 – 11/30/13. Source Morningstar. *Long/Short Fixed Income represented by the BlackRock Global Long/Short Credit Fund. Traditional Core Bonds represented by Intermediate Term Bonds. Non-traditional bonds represented by the Morningstar Nontraditional bond category average. Emerging Market Bonds represented by the Morningstar Emerging Market Bonds category average. International bonds represented by the Morningstar World Bond category average. "Past performance does not guarantee future results." Diversification during the lost decade for stocks Bond categories that may provide diversification Seek Growth, Manage VolatilityGenerate Income, But Dont Overreach Rethink Your Bonds

10 10 Keep Durations Short, But Know What You Own Different solutions for different goals Add ultra short duration strategies to stay invested, put cash to work and wait for rate normalization Opportunistically barbell ultra short strategies with attractive, undervalued long duration options * An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash. Duration is a measure of a bond funds sensitivity to interest rates. For every year of duration, a 1% change in interest rates will lead to a 1% change in the opposite direction of a bond funds value. Source: Morningstar Direct. Barclays Live. S&P. BofA. As of 12/31/13. Yields are yield to maturities. Floating rate notes are represented by the Barclays US Floating Rate Note <5 Years Index. Short Maturity Bonds are represented by Barclays Short-Term Government/Corporate Bond Index. Floating Rate Income represented by the S&P/LSTA Leveraged Loan index. Low Duration Bonds represented by BofAML US Corp & Govt 1-3 Year. Yield vs. Duration Duration Yield Seek Growth, Manage VolatilityGenerate Income, But Dont Overreach Rethink Your Bonds

11 Investment Themes – Generate Income, But Dont Overreach Investor Are Being Squeezed by Low Yields Risks Have Risen Taxes Are Taking a Bigger Bite Yields on traditional core bonds are less than half of what they were in 2008 Generating a 5% income stream required taking on three times more risk (standard deviation) than in 2008 Marginal tax rates are 25% higher than 2012 levels 50 % 3X25 % Todays environment of near historic low yields and heightened volatility has led many investors to ask how to find more income. INVESTMENT LANDSCAPE Rethink Your Bonds Seek Growth, Manage Volatility Generate Income, But Dont Overreach

12 12 Yields Have Fallen… Sources: Morningstar Inc. and Bankrate.com as of 12/31/13. Asset-weighted average yield for various Morningstar categories. Yields have diminished on popular income categories Yields on traditional income sources have dried up to near record lows Higher levels of income exist, but they come with higher levels of risk Morningstar category 12-Month distribution yields 2008 vs Yield 13 Income 08 Income 2.28% 3.97% 11.28% 4.93% 3.36% Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds

13 13 Source: Morningstar, Inc. as of 12/31/13. Risk represented by 5 -year annualized standard deviation. The hypothetical 5% Income Portfolio in 2007 consisted of a 35% allocation to Money Markets and a 65% allocation to Core Bonds. In 2013 that allocation was 35% Core Bonds and 65% High Yield Bonds. Money Funds, Core Bonds and High Yield represented by the Morningstar Taxable Money Market Funds category, Barclays Aggregate Bond Index and Barclays Issuer 2% Capped High Yield Index, respectively. The standard deviation of a 5% income portfolio has multiplied 4 times 7.72% Essentially no risk to get to a 5% income portfolio Risk of a portfolio that generates a yield of 5% 3X the risk needed to obtain the same level of income Std. Dev. of a 5% income portfolio (%) Risk Has Risen Finding a yield of 5% is much riskier today than it has been in decades Overreaching for yield without knowing the risks can be dangerous Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds

14 Investment Themes – Generate Income, But Dont Overreach 1 Take a Flexible Approach to Income by casting a wider net to find the best income opportunities while carefully balancing the trade-offs between yield and risk 3 Adapt to Higher Taxes by increasing allocations to attractively-priced municipal bonds 2 Put Credit and Dividends to Work while decreasing the interest rate sensitivity of your portfolio INVESTMENT RECOMMENDATIONS Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds

15 15 Source: Bloomberg. Standard deviation measures volatility of returns. Higher deviation represents higher risk. Index yields shown for illustrative purposes only. Indices are unmanaged. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Fixed income yields are yield to worst. The rest are current yield. Bank Loans, EM Debt, High Dividend Equities, High Yield Bonds, Investment Grade Bonds, MLPs, Preferred Stock, US REITs, US Treasury and Hypothetical Mixed-Asset Income Strategy represented by S&P Leveraged Loan Index, Barclays EM Debt Index, MSCI USA High Dividend Yield Index, Barclays HY 2% Issuer Capped Index, Barclays Investment Grade Index, Alerian MLP Index, S&P US Preferred Stock Index, FTSE EPRA/NAREIT Developed Real Estate Index, Barclays US 7-10 Year Treasury Bond Index and a portfolio of 20% High Div. Equities, 25% High Yield Bonds, 10% Bank Loans, 5% Preferred Stock, 5% MLPs, 15% Inv. Grade Bonds, 10% EM Debt, 10% US MBS, respectively. Striking a prudent balance between income & risk Risk/Yield Over the 5-Year Period Ended 12/31/13 A single-minded search for yield can result in too much risk; its important to consider a wider range of investments Combining traditional & non-traditional income sources can help diversify, potentially lowering risk & increasing income Yield (%) Risk (standard deviation) Preferred Stock MLPs High Dividend Equities US Treasury Inv. Grade Bonds Bank Loans High Yield Bonds EM Debt Low Risk Low Yield Fixed incomeEquity incomeAlternative income sources High Risk High Yield Hypothetical Mixed- Asset Income strategy US REITs Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds Take a Flexible Approach to Income

16 16 Put Credit and Dividends to Work Source: Morningstar. As of 12/31/13. High Yield, Bank Loan and Core Bonds represented by the Morningstar High Yield Bond, Bank Loan and Intermediate-Term Bond Category averages, respectively. High Div Equities represented by the Lipper Equity Income Fund Category Average. Past performance is no guarantee of future results. Shown for illustrative purposes only. It is not possible to invest directly in an index Bank Loan 6.60% High Div Equities 6.00% High Div Equities 18.94% High Div Equities 25.12% High Yield -3.04% Bank Loan 5.87% High Yield 10.14% High Yield 6.35% High Div Equities -1.65% High Yield 5.05% Bank Loan 6.57% Bank Loan 5.17% Core Bond -4.01% Core Bond -1.35% Core Bond 4.15% Core Bond -0.97% Credit & Dividends outperformed Core Bonds in periods of rising rates Performance in calendar years when interest rates rose Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds High yield bonds, bank loans& high dividend equities have historically outperformed bonds in periods of rising rates Careful of overreaching for yield in undiversified sectors like utilities, US/International REITs & MLPs

17 17 Source: Source: Barclays Live. Data as of 12/31/13. For illustrative purposes only. Index yields are shown for illustrative purposes only and do not predict or depict the yield of any Blackrock fund. Past performance does not guarantee future results. Fixed income yields are represented by yield to worst. All other yields represented by current yield. US Treasuries represented by the Barclays Treasury Index; Municipal bonds by the Barclays Municipal Index; Corporate bonds by the Barclays Corporate Index. Impact of tax changes: Muni bond yields attractive vs. taxable bonds Yields and Tax-Equivalent Yields With higher taxes in 2013, municipals offer attractive after-tax income Municipals are generally considered a high-quality asset class with yields that are rivaling high yield bonds Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds Adapt to Higher Taxes

18 18 INVESTMENT LANDSCAPE 2014 Investment Themes – Seek Growth, Manage Volatility A New Look at Equity Diversification A Growing Need for Growth Of equity assets have diversified into equities that are riskier than the S&P 500 rather than using less volatile and less correlated strategies of investors didnt benefit from recent rallies. To achieve their goals, investors should consider increasing their use of equities and managing risk by mixing less-volatile and higher-potential solutions. 85 % 54 % We expect modest global growth with fewer, but continued, political and fiscal pressures world-wide. Seek Growth, Manage Volatility Extreme Volatility The amount of equity returns clients missed out on over 20 years* due to mis-timing the markets. The wild ride of equity highs and lows, produced both exciting returns and painful losses. 1/2 *Source: Bloomberg,Dalbar; as of 12/31/12. Past performance does not guarantee or indicate future results. Source: Morningstar as of 12/31/13. Rethink Your Bonds Generate Income, But Dont Overreach

19 19 Better Equity Diversification: Embracing Lower Risk Growth Source: Morningstar as of 12/31/2013. Dividend Stocks represented by MSCI USA High Dividend Yield Index, Global Flexible represented by the Morningstar World Allocation category, Alternative Equity Strategy represented by the Credit Suisse Long/Short Equity Index, Global Stocks represented by the MSCI World Index, International represented by the MSCI EAFE Index, and Small Caps represented by the Russell 2000 Index. Finding less-volatile diversifiers Return/Risk, last 10 years ended 12/31/13 Lower Risk Equity DiversifiersTraditional Equity Diversifiers Risk Utilizing additional growth categories can support diversification and lower risk across growth strategies Generate Income, But Dont OverreachRethink Your Bonds Seek Growth, Manage Volatility

20 20 Overweight Growth, Not Risk More Growth Doesnt Have To Mean Higher Risk 20-Year Stats Traditional Stock and Bond 60 Stock / 40 Bonds Risk Managed Growth Approach 67 Stocks / 33 Bonds Risk Lowest Risk Return Highest Return Traditional Equities Conservative Equities Flexible & Alternatives Bonds Sticking with 60/40 or including more growth doesnt necessarily imply higher volatility Source: Morningstar, Lipper. Flexible & Alternatives Portfolio incorporates Morningstar Market Neutral (20%), Morningstar Equity Long-Short (20%) & Lipper Global Flexible Portfolio (60%) Categories. Conservative Equities portfolio is comprised of Lipper Equity Income (100%). Traditional Equitiescomposed of 100% Russell 1000 Value. Bonds represented by Morningstar Intermediate-Term Bond Category. Generate Income, But Dont OverreachRethink Your Bonds Seek Growth, Manage Volatility

21 Investment Themes – Seek Growth, Manage Volatility 2 Mitigate Risk with Diversified and Alternative Strategies that provide equity-like growth and dampen volatility 1 Allocate to Traditional Equities with an investment approach that makes volatility an asset, helping to provide the growth you need at any stage of life 3 Seek Conservative Equity Growth that offer growth in strong markets, and help cushion the downside in difficult markets INVESTMENT RECOMMENDATIONS Generate Income, But Dont OverreachRethink Your Bonds Seek Growth, Manage Volatility

22 22 Allocate to Traditional Equities Equities remain attractively valued Asset class valuations vs. historical range Stocks look attractive relative to bonds While US equities are fairly valued by historical levels, many international regions continue to exhibit considerable value Average Cheap Expensive EQUITIES FIXED Sources: BlackRock, Thomson Reuters and Bloomberg, as of 12/31/2013. Notes: Historical time periods vary in range from 13 to 30 years. Regional equities represented by comparative MSCI indexes, US 10 Yr represented by US 10-YR treasury and High Yield by BofA ML HL index. Equity valuations based on average blend of dividend yield, book values and price earnings ratios versus historical levels. Generate Income, But Dont OverreachRethink Your Bonds Seek Growth, Manage Volatility

23 23 Sources: Morningstar, Inc. as of 12/31/13. Performance is historical and does not guarantee future results. World Allocation, US Stocks, International Stocks and Bonds represented by Morningstars World Allocation, Large-Cap Blend, Foreign Large Blend and World Bond Categories, respectively. Diversification can offer growth and risk protection The aim is to provide performance consistency, not spectacular one-off returns An enlarged opportunity set provides the flexibility to navigate diverse markets Annual Total Returns of Morningstar Categories 12/31/03–12/31/13 Mitigate Risk with Diversified & Alternative Strategies US Stocks International Stocks World Allocation Bonds 6.93% 6.95% 7.01% 4.61% 10-Year Annualized Returns by Category Generate Income, But Dont OverreachRethink Your Bonds Seek Growth, Manage Volatility

24 24 Seek Conservative Equity Growth Lower volatility strategies have proved stronger at navigating the extreme highs and lows of the last decade… …by limiting losses and aiding participation in stronger markets Source: Morningstar, BlackRock; as of 12/31/2013. Past performance does not guarantee future results. When risk doesnt pay Minimum Volatility Indices, 12/31/09 (year of inception) – 12/31/13 Risk (standard deviation %) Annualized Return (%) Generate Income, But Dont OverreachRethink Your Bonds Seek Growth, Manage Volatility

25 25 INVESTMENT SUGGESTIONS 2014 Investment Themes Seek Growth, Manage Volatility Generate Income, But Dont Overreach Rethink Your Bonds Allocate to Traditional Equities Mitigate Risk with Diversified & Alternative Strategies Seek Conservative Equity Growth Take a Flexible Approach to Income Put Credit and Dividends to Work Adapt to Higher Taxes Allocate to Flexible Bond Portfolios Seek Returns Beyond Traditional U.S. Bonds Keep Durations Short, But Know What You Own 1 2 3

26 26 Important Notes You should 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 or from your financial professional. The prospectus and, if available, the summary prospectus should be read carefully before investing. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. 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. Asset allocation strategies do not assure profit and do not protect against loss. 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. BLACKROCK, iSHARES and SO WHAT DO I DO WITH MY MONEY? are registered trademarks of BlackRock, Inc. in the United States and elsewhere. All other trademarks are the property of their respective owners. © 2014 BlackRock, Inc. All Rights Reserved. Prepared by BlackRock Investments, LLC, member FINRA USR-3404


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