The smart money at the US$10 trillion asset manager is in hedge funds, gold and inflation-linked bonds, while local investors in its exchange-traded products are bargain hunting in China.
Hedge funds have been a big winner in BlackRock’s multi-asset portfolios, and a volatile new market regime should create even more opportunities for them to outperform, according to Katie Petering, head of multi-asset investment strategy for BlackRock Australasia.
BlackRock’s multi-asset team, which runs model portfolios for wealth clients and diversified funds and mandates for institutional investors, updates its “granular” strategic asset allocation – it has 12-14 assets at play – on a yearly basis, which allows for a more nimble approach to a new, volatile regime. And right now, it’s “ever so slightly pro-growth, cautiously risk-on, and neutral duration”, Petering told a media round table on Thursday.
That all means taking closer look at emerging markets, and infrastructure for its inflation-linked cashflows, as well as US and Australian inflation-linked bonds. BlackRock has also implemented a higher exposure to gold to give it “ballast” against geopolitical events, as well as hedge funds for a higher risk-adjusted return.
“Hedge funds can potentially do better in this new regime; if we’re looking at risk and reward in the portfolio, we’d look at not just equities and bonds but the other levers we have at hand,” Petering said.
The multi-asset team uses an assortment of global macro and systematic fixed income strategies, and is looking to deploy more broadly into the liquid alts universe, which would see the inclusion of “fundamental equity long-short, equity market neutral… and event-driven” strategies.
“The liquid alts part of the portfolio has done really well; the universe is incredibly broad and it’s difficult to bucket that universe into different strategies, even if you look at the standard Hedge Fund Research metrics,” Petering said.
“What we have in the portfolio has performed very well, and particularly over the last year, and you could put that down to having a high proportion of systematic market neutral strategies that have breadth and are highly risk-controlled and trying to be as market neutral as possible; very low or no beta to global equities.”
The multi-asset team also has a positive “tactical view” on Japan as the country enacts shareholder friendly corporate reforms, and has an overweight to US equities to expression its thesis on artificial intelligence.
Winds of change for China flows
Meanwhile, BlackRock has tracked surging interest in its fixed income exchange-traded products (ETPs) with a focus on short-term paper at the start of 2023 that broadened out to medium- and long-term durations at its end. 2024 has also brought “more balanced” sentiment, with developed market equities dominating inflows as those indices reach all-time highs.
There were $71 billion of inflows into global equity ETPs in January, and a further $86 billion in February, with a “very strong start” to March, according to Tamara Stats, iShares ETF and index investment specialist.
“We’re seeing a lot of flows into India exposures, as well as US equities, driven by what’s happening in that market with technology,” Stats said. “In February we had our largest inflow into (fixed income ETPs) globally since last October, driven more by longer parts of the curve as that narrative around peak rates and rate cuts starts to take hold.”
But local investors are also eyeing a bigger exposure to China on the basis of its bombed-out company valuations and the possibility that monetary stimulus is right around the corner.
“More specific to Australia, we’ve seen some strong interest in China exposures; there’s obviously some caution there but we’ve seen $111 million Aussie dollars into our locally listed China ETF,” Stats said. “The flows into China were basically non-existent, and that’s definitely a different narrative.
“I think the China market has been very difficult for a lot of people, and there seems to be a growing narrative among some market participants that we’ve reached levels that are too hard to ignore from a valuation perspective. There is a mechanism to stimulate that economy; it hasn’t happened yet, but we know that can happen and that it may happen.”
Lachlan Maddock is editor Investor Strategy News (Australia)