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A bigger role for active strategies
With Vivek Paul & Emily Cheetham
For professional clients and qualified investors
Emily
Question 1
A lot has happened from a macro perspective over the last few years with elevated inflation and rising rates. What is driving this in your view?
Vivek
Answer 1
So we’ve entered a new macroeconomic regime and this is an environment which is characterized by supply constraints. And what that does is it limits the overall potential for growth. It means there’s greater inflationary pressures driven by that supply.
And that means that it’s harder for policymakers to get it right in terms of prioritizing both having good levels of growth and bringing inflation down.
That difficulty, that trade-off leads to macro volatility, that leads to market volatility and that’s really the driver of the greater dispersion we’re seeing across asset classes.
Emily
Question 2
So what does this mean for how investors build portfolios?
Vivek
Answer 2
Well, I think unlike the past, we’re not going to see an extended period where stocks and bonds do brilliantly at the same time.
And what that means is the sort of static set and forget type approaches that worked so well in the past, we think aren’t quite going to cut it in this new regime. What we need is more dynamically managed strategies.
Asset allocation is just going to matter a lot more now. And through that dynamism, we think it’s part of the reason why we think there’s a greater role for actively managed strategies now.
Emily
Question 3
And how are these active returns to be generated?
Vivek
Answer 3
Well, active returns can be generated within asset classes and across asset classes.
So within asset classes, think about those investors with the expertise and the resources to really find top quality managers who are able to exploit their views on picking the best stocks or the right parts of the yield curve and away from those static benchmark exposures. And then across asset classes, what we’re thinking about here is like dynamically managed strategies.
So picking the right exposures at the right time, be that across sectors or regions or styles. I think more broadly, when you think about putting it all together, this is an environment where there is a role for both index strategies and actively managed strategies, and it’s the blend of getting them together that is really important.
In a nutshell, though, we think that blend is going to feature more of the actively managed strategies than we see in the past.
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In the new regime of higher interest rates and greater macro and market volatility, we believe there is a bigger role for active strategies and more potential opportunities for skilled managers to find and deliver active returns.
Active managers aim to generate the excess returns to meet investors’ long-term objectives. BlackRock’s scale supports our key competitive advantage – we believe we have the ability to unlock unique sources of alpha through deep collaboration.
Below you will find insight from our active investment teams on the areas of the market they believe offer alpha opportunities across:
Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
Great businesses that can sustain high returns over long periods are rare but, we believe, may offer significant alpha – especially as markets have a history of undervaluing these winning business models.
The market may be underestimating some long-term drivers of growth – or mega forces – such as digital disruption and AI, healthcare and the low-carbon materials transition.
Europe and Japan are ripe for stock pickers to source quality and earnings linked to the mega forces.
Large language models can help uncover the cascading effects of trending market themes, revealing not just the direct winners and losers, but also second and third order impact of the theme.
Systematic investors can simultaneously harvest data to pursue capital appreciation while also implementing strategies to deliver higher levels of income to meet cash flow needs.
Because there is no single global standard for how ESG information should be analysed and disclosed, sustainability data could provide powerful clues into company fundamentals.
Elevated yield levels are driving demand for high yield. Idiosyncratic opportunities present in this market that can offer upside if carefully managed. Active managers could be key to capturing returns.
Fundamentals are strong with global and emerging markets (EM). Investment opportunities exist in EM countries, tackling fiscal and external imbalances, and/or deleveraging their economies.
Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
This environment requires a heightened need for diversification, a focus on portfolio construction, and a highly dynamic approach to asset allocation.
Portfolio builders may benefit from looking beyond traditional asset classes and seek out investments that can offer a differentiated and complementary risk/return profile.
Portfolio builders may benefit from looking beyond traditional asset classes and seek out investments that can offer a differentiated and complementary risk/return profile.
The new regime could offer greater potential to generate returns in the cross-section of markets by exploiting the spread in performance between long and short holdings, in our view.
Investors who apply a rigorous fundamental process and who can take both long and short single stock positions can benefit from exposure to a breadth of diverse markets and geographies.
As investors look to navigate the new regime and the continued uncertainty it creates, private markets can offer many opportunities:
Longer holding periods allows private equity managers time to implement strategic initiatives and drive corporate change.
Long-term structural trends can support infrastructure investment in the years and decades ahead, in our view.
Recent volatility has shown the importance of not only diversification through private markets, but also within private market portfolios.
BlackRock was one of the first movers to offer ELTIFs to retail and institutional investors in Europe, successfully launching several ELTIFs and raising $1.4bn as of June 2024 across private equity and private infrastructure.1
It is our vision to offer our distribution partners world class institutional quality investments as well as outstanding client experience across operational matters.
Building on our market leading position, we intend to grow our ELTIF platform, leveraging the new ELTIF 2.0 regulation, and launch a suite of open-ended, evergreen strategies across a range of private assets.
If you are interested in learning more on how we can help you with accessing private markets and ELTIFs, please reach out to your BlackRock Relationship Manager or contact us to discuss your specific needs in greater detail.
Source 1: BlackRock as of 1 June 2024
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