Last updated: 09:40 / Thursday, 8 October 2015
Interview with M. Fredericks

BlackRock: "We Must Begin To Look Beyond The Traditional Income Generating Assets”

BlackRock: "We Must Begin To Look Beyond The Traditional Income Generating Assets”

Today’s markets have largely been characterized by increasing market volatility coming from diverging global monetary policy and macroeconomic uncertainty. In addition, future return expectations across risk assets are more modest than in previous years, causing investors to have to rethink their overall investment strategy. 

In this market environment it is very difficult to find assets which generate income while "keeping the risk at bay," which is one of the obsessions of BlackRock’s BGF Global Multi-Asset Income Fund portfolio manager, Michael Fredericks. The company’s expert is convinced that flexibility and the ability to search for assets beyond traditional income-generating sectors will be a key element for the future, and the market is beginning to realize this.

Proof of this is that traditional income-oriented investments, such as dividend paying equities and high yield bonds, have seen significant inflow in recent years and are beginning to be overvalued. It's time to look elsewhere.

The strategy, with five star Morningstar rating, has the flexibility to invest across a wide variety of income-producing asset classes, with no regional constraints. "Non-traditional income asset classes such as Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), Preferred Stock, Floating Rate Loans and Emerging Market Debt are often more difficult for individual investors to access yet can offer attractive diversification within a broader income portfolio.”

In addition to derivatives, BlackRock’s Global Multi-Asset Income Fund uses covered call options, "which are very attractive in a low interest rate and low returns environment," Fredericks said. "In particular, we favor an approach that focuses on writing calls on individual securities rather than on an index as this offers more attractive opportunities to take advantage of market and individual stock volatility. We prefer short maturities, typically writing calls with maturities between 1-3 months, and write options that are on average 5-8% out-of-the-money which allow us to capture 5-8% upside potential on the underlying stock.  We believe this approach provides the best risk-adjusted income and return opportunities for our investors."

For Fredericks, it’s a fact that equities offer attractive value in this environment relative to credit. However, he reminds us that, "it is important to consider an investor’s risk tolerance when increasing an allocation to stocks.  While valuations across most stock and bond sectors are at or near elevated levels, we do still think there are opportunities for attractive risk-adjusted yield opportunities, though investors need to tame their expectations for returns.  Specific to credit, we believe current spread levels offer investors attractive opportunities for income, but we do not expect significant appreciation above and beyond the coupon from these securities."

BlackRock’s BGF Global Multi-Asset Income Fund currently has a large percentage of assets invested within the US, mainly in fixed income. ".  With bond yields at historic lows across the globe, we have favored exposure to U.S. credit sectors that offer attractive levels of income and ample liquidity," adds the portfolio manager. However, when talking about the equity portion in the portfolio, Fredericks prefers to avoid the US market and opts for Europe or Japan. The reason is obvious: "quantitative easing programs offer an attractive backdrop for companies with greater exposure to those regions."

While it’s true that fixed income is starting to look less expensive after a recent increase in yields, the expert from BlackRock, however, heightened volatility within bonds and believe a more tactical approach is necessary during these markets. "We currently favor corporate bonds (both investment grade and below investment grade) over government debt and also find opportunities within the mortgage-backed market, particular commercial mortgage-backed securities and residential non-agency mortgages.  Finally, we see value in Preferred Stock, in particular the institutional preferred market which offers attractive income levels but also a fixed-to-floating rate structure which we find attractive amid the possibility of rising interest rates," he explains.