Re-risk Fixed Income in Institutional Portfolios
A new era of fixed income investing
A watershed moment in bond investing is occurring and the opportunity is profound. For the first time since 2007, more than 80% of fixed income sectors are yielding over 4%.1 Not only has it been true that ‘yields are back’ but the notion of ‘bonds as ballast’ reappeared after going missing in action. The yield environment has also improved the funding ratios of many defined benefit pension schemes and triggered a review of asset allocations. Against this backdrop, institutional investors should consider re-risking their fixed income allocations and strategically position their portfolios to thrive in this new era of fixed income investing.
1Source: LSEG Datastream, Bloomberg and BlackRock Investment Institute. 16 Jan 2024
It's all about the right combination
We believe a holistic approach to managing portfolios will carry greater rewards in this new investment landscape. The conventional reliance on traditional fixed income exposures is no longer effective in this evolved market landscape. Investors must now evolve their exposures– leveraging both private and public markets – across active and index strategies.
Unlock returns in private debt
As traditional lending institutions, particularly banks, face constraints and become more cautious in extending credit, we see a notable shift in the financial landscape towards alternative sources of funding.
Demand for private credit such as non-bank loans has risen significantly amid rising interest rates and banks’ departure from corporate lending.
Read more in our paper on private debt: the core middle market below:
A bigger role for active strategies
Dispersion of returns in the bond market allows active investment skill to thrive. Flexibility and granular views help identify divergences arising from these fluctuations and capitalize on selective income opportunities. Despite risk-off sentiment and outflows from high yield and emerging market debt (EMD) in 2023, we see opportunities in these sectors. The European HY market has matured with defaults remaining below historical average and larger issuers. EMD risk should not be underestimated, but we believe investors are being well paid for these risks with a soft-landed global economy and positive tailwinds.
Please find relevant research papers on Emerging Markets below:
Managing duration
Despite developed markets central banks having reached peaks, we continue to see a higher for longer policy rates backdrop. In the U.S., we believe valuations look attractive in the front and belly of U.S. Treasuries and Gilts whilst going long duration in European Government Bonds and EUR Credit.
Unlocking opportunities with ETFs
Institutional investors have been adopting Bond ETFs after observing the efficiency and the deep liquidity of ETFs in highly stressed market conditions relative to their underlying markets. Bond ETFs can act as investment building blocks or be part of highly customized strategies.
ETF
Institutional investors have been adopting bond ETFs and find new uses for them after observing the efficiency and the deep liquidity of ETFs in highly stressed market conditions relative to their underlying markets. Common uses of bond ETFs listed below:
Rebalancing & tactical views
Immediate, low-cost strategic exposure to sectors where active management or selecting single bonds may be insufficient, costly or unnecessary.
Efficient market access
Bond ETFs break the fixed income market down into more precise exposures across credit, sectors, duration and other risk factors. This increasing granularity enables investors to efficiently access their desired market exposure, build increasingly customisable portfolios, hedge risks and capture.
Reduce the total cost of ownership
Bond ETFs may exhibit a lower cost of ownership relative to replicating a portfolio of bonds due to their secondary market liquidity and potential trading efficiencies. Further revenues can be accrued when incorporating additional operations such security lending.
Liquidity management
Whether used as a permanent liquidity sleeve or a temporary way to access markets, bond ETFs can bring liquidity and low trading costs.
Complement private markets allocations
Bond ETFs can provide a liquid solution to help institutions better utilise cash during and following the funding of private market allocations.
An alternative to derivatives
Bond ETFs can be traded alongside, instead of, or relative to fixed income derivatives such as CDX, futures and swaps.
Systematic
Systematic fixed income strategies employ unique data-driven insights backed by disciplined risk controls that see to deliver differentiated portfolio outcomes to investors. With over 35 years’ experience and combined capabilities that span factor-based and alpha-seeking investment solutions across equities, fixed income and alternative strategies, BlackRock’s Systematic investing platform delivers tailored investment outcomes for a wide gamut of client needs.
By separating sources of returns into directional (beta & factors) and idiosyncratic (alpha) components, we can seek to engineer highly customized return streams to meet specific risk, reward and diversification properties.
Systematic fixed income strategies allow a portfolio to:
• Preserve index-like characteristic whilst adding alpha
• Deliver alpha in a cost effective manner
• Have flexible, customisable mandates with sustainable solutions
• Generate differentiated alpha with low market correlation
Credit Screened
Corporate bond strategies that seek to invest in a broad portfolio of securities that closely resemble a capitalization-weighted index, while removing issuers at greatest risk of downgrades.
Systematic Enhanced
Investment grade and high yield strategies using a variety of insights to target high quality and undervalued securities to seek improved risk-adjusted returns.
Multi-sector bond
Strategies that seek high quality alpha through a consistent, repeatable process that validates fundamentally oriented market insights with quantitative research.
Private credit
We have the ability to construct customized client solutions across the full private credit and liquid credit spectrum based on client currency, fund structure and risk-return needs. Our team consists of 200+2 investment professionals with cycle-tested experience in deployment, asset management and workouts, combining fundamental credit analysis, macro research and bottom-up expertise from 18 local offices and 19+ industry verticals.
Our scale and resources mean we can solve unique client needs through dynamic and bespoke integrated portfolio solutions.
2Source: BlackRock as of September 30 2023
Direct lending
Private loans to performing middle market companies.
Opportunistic
Capital solutions with complexity and liquidity premium.
Venture and growth debt
Operationally flexible loans to innovative high growth companies.
Infrastructure debt
Global platform investing in energy, power, renewables, transport, social and digital assets.
Real estate debt
Our platform combines global reach, industry expertise, and trusted deal execution capabilities.
Flexible debt solutions
Flexible single entry point global solutions across the credit universe.
Fundamental
BlackRock is a leader in active fundamental fixed income with over 400+3 specialists covering sectors around the globe. We have one of the most comprehensive range of strategies in the industry.
With a focus on alpha generation and risk management, the team uses top-down views from lead portfolio managers and bottom-up expertise from our sector specialists to drive consistent alpha. The breadth and depth of our platform puts us in a strong position to deliver returns regardless of macroeconomic regime, volatility or interest rate environment.
3Source: BlackRock, as of March 8 2024
Unconstrained funds
BlackRock’s unconstrained fixed income strategies navigate across the breadth of the fixed income universe to optimize for stable attractive returns, while managing downside risk.
Short Duration strategies
BlackRock’s Short Duration strategies employ a diversified and relative-value approach focused on opportunities in the front end of the yield curve. Short duration strategies may be suitable for those looking to optimise strategic cash allocations, reduce the interest rate sensitivity of core bond allocations, or anticipate cutting cycles from central banks.
Investment Grade Credit
Investment Grade Credit offers rich pickings for active managers, given high level of inefficiency in the market. Through a focus on deep fundamental analysis, bottom-up security selection, and relative value strategies, BlackRock IG Credit strategies seek to deliver consistent alpha throughout the cycle.
High Yield credit
The high yield market could be considered a fertile ground for active management with large discrepancies in fundamental quality — even of issuers with the same credit rating. BlackRock’s high yield platform is managed by a dedicated High Yield team who have extensive experience across multiple credit cycles.
Emerging Markets Debt
The Emerging Markets Debt (EMD) platform seeks to extract the very attractive premium present in EM assets while controlling for the asset class’s volatility and riskiness.
Securitised Assets
BlackRock's Securitised Assets platform draws upon sector expertise and global relative value determinations to seek portfolio outperformance regardless of market environment. BlackRock’s Global Securitised team is focused on marrying capital preservation with delivering superior risk-adjusted returns based on thorough fundamental credit research.
Inflation-Linked Bonds (ILB)
BlackRock’s active ILB strategies employ a fundamental, diversified, relative-value approach that focuses on real and nominal sovereign bonds.
Buy and Maintain
BlackRock’s dedicated buy and maintain team specialise in managing low turnover with a focus on bottom-up security selection and yield optimisation. Buy and maintain portfolios seek to deliver consistent long-term performance with zero defaults.
Sustainable solutions
Our Fundamental Fixed Income platform employ proprietary sustainability frameworks which span the breadth of the fixed income asset class. Our proprietary externalities profiler: ‘PEXT/NEXT™’ profiles the fixed income universe to identify securities with associated positive and negative externalities, as well as those holdings warranting additional issuer engagement.
Dedicated ESG investing investment specialists are responsible for green, social and sustainability bond research for use across fundamental fixed income portfolios.
Liability Driven Investing
As defined benefit pension funds embark on their end journey, designing an effective de-risking plan becomes ever more crucial. Our liability-driven investment platform offers defined benefit pension funds the power and flexibility of one of the most comprehensive fixed income businesses in the world, combined with proprietary asset-liability focused technology.
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