Agile, variable-asset funds are weathering the turbulence of today. But they also have potential to thrive in the long-term
Volatility is here to stay. BlackRock’s experts predict that the mega-forces shaping our world – from speculation around the energy transition to geopolitical tension – will continue to create inflation and make waves in world markets.
These difficult times bring opportunities as well as challenges. The valuations of securities and other assets are diverging and changing over short time periods, while new technologies, such as AI, have the potential to challenge economic norms in ways we cannot predict.
Benefitting from an environment like this requires granularity and nimbleness, which is why BlackRock gives the managers of its MyMap range of funds the ability, knowledge and tools to respond in a fast and informed manner.
Unlike other risk-rated funds with static allocations of bonds and equities, MyMap managers periodically tweak their asset allocation to respond to market changes. They can also diversify beyond equities and bonds into commodities and precious metals.
Not only does this flexibility may allow them to capture opportunities, but it can also help them stay within their volatility benchmarks in the long term – an issue that is more challenging for statically allocated funds.
One example of this is when the traditional reverse correlation between bonds and equity prices broke down last year as inflation soared.
Those funds with lower risk ratings and higher bond allocations diverged far from their target volatility range. MyMap managers were able to turn to other assets to reduce volatility – using commodities and precious metals to offset equity and bond risk, and investing in inflation-linked bonds.
Although the traditional correlation between equities and bonds seems to be returning to its former position, research by the BlackRock Investment Institute – a team of economics specialists – suggests that the inverse relationship may be a temporary one.
The behaviour of asset classes in differing economic situations will be less stable in a future affected by the mega-forces mentioned above. Bonds will not remain a perfect diversifier against equities forever, and expert insight into trends will be needed if multi-asset portfolios are to be constructed in a way that keeps them tracking within their volatility targets.
And if inflation falls in the short to medium term, multi-asset funds may have the potential to outperform, especially as cash in the bank becomes less attractive.
MyMap managers’ ability to call upon research from the BlackRock Investment Institute to inform asset allocation and strategies is the secret sauce that may help this multi-asset strategy to potentially outperform, offering clients the chance of protection against volatility that they need.
