LIABILITY DRIVEN INESTMENT
John Dewey, Managing Director within BlackRock Multi-Asset Client Solutions (BMACS), said: “The extreme political and market uncertainty challenges investors to understand and manage the investment risk they face relative to their liabilities. As conditions evolve rapidly, we are working with our LDI clients to protect their position and seize opportunities. Gyrations in fixed income markets drive both assets and liabilities, with political developments, policy responses and investor panic surrounding peripheral European countries all having potential to create very sharp moves. This requires a holistic view and a careful analysis of the possible scenarios and their impact on each investor’s funding. Increasingly, investors are seeking cost-effective means of mitigating the ‘tail risk’ of extreme market events, such as through option strategies.”
ASSET ALLOCATION
Adam Ryan, Managing Director within BlackRock Multi-Asset Client Solutions (BMACS), said: “From an asset allocation perspective, periods of volatility always create opportunity and events in Europe are no exception. For example, European equities have underperformed those in the US by over 20% in the last year, and as such have the ability to snap back quite sharply, particularly given that parts of the market are now looking very cheap. However, sentiment in markets will continue to be driven by politics whose behaviour is almost impossible to predict. Our focus is to make sure our views take into account all of the risks and we therefore often use of derivatives to structure positions that have limited downside.”
BLACKROCK DIVERSIFIED GROWTH (DDG)
Sara Morgan, Managing Director within BlackRock Multi-Asset Client Solutions (BMACS), said: “Europe is more likely to experience a deeper recession than expected due to weakening economic activity and the political uncertainty of Greece. We have limited our exposure to the euro and European equities and bonds and have no exposure to peripheral debt. As risk aversion rises, we believe that the US dollar will be supported so we have reduced our slight underweight to the currency. The core growth engine of the portfolio is focussed on dividend payers, corporate bonds and high yield. We have retained positions in emerging markets but, given their riskier nature, are monitoring positions closely. We retain a liquid portfolio to respond to opportunities and threats – tactical asset allocation continues to be a key pillar of the strategy.”
BLACKROCK ALTERNATIVE INVESTORS (BAI)
Ingo Heinen, Managing Director within BlackRock Alternative Investors, said: “The latest chapter of the European crisis is one of continued heightened uncertainty and asset price volatility. It underlines once again that maintaining allocations to traditional asset classes does not work when those asset classes do not perform as they have in the distant past. One way to weather the storm is to increase a portfolio’s allocation to uncorrelated return streams, such as renewable power or market neutral hedge fund strategies. The current level of dislocation in the global fixed income and credit markets offer great opportunities for relative value strategies, especially in Europe. The flipside of the crisis is one of significant opportunities: investors could look at ways to benefit from the pressure on asset prices, bank balance sheets and capture the illiquidity premium in distressed and other credit opportunities as well as in private equity transactions.”
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