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00;00;00;00 - 00;00;20;11
Aaron Task
When the facts change, I change my mind. What do you do? John Maynard Keynes’ famous quote has arguably never been more relevant than it is right now. Higher for longer interest rates, a greater dispersion of returns, and the tightest stock bond correlations in a generation has many advisors wondering, what do you do?
00;00;20;13 - 00;00;34;09
Aaron Task
In this episode, we try to answer that question with Bart Sikora, head of portfolio consulting for the Americas at Blackrock. I'm Aaron Task and this Is in the know.
Aaron:
Bart, welcome.
00;00;34;11 - 00;00;35;05
Bart Sikora
Thank you for having me.
00;00;35;05 - 00;01;00;22
Aaron Task
And thank you for being here. So, I started with the Keynes quote. I'm going to read you another quote from Thomas Becker, who's a portfolio manager on BlackRock's global tactical allocation team. He recently wrote, quote, “the aftermath of the global pandemic upended many of the previous decades’ asset allocation rules of thumb, including the primacy of bonds as an uncontested complement to equities.” End quote. So given that what what do you do?
00;01;06;05 - 00;01;25;03
Bart Sikora
Great question. I love both of the quotes that you gave us, and I'm going to take us on a little history lesson here. And I think it's worth it. Right. So over the last 40 years we lived in a wonderful world of great moderation. We can think of it as starting roughly around 1990. Diversification was the main theme of portfolio construction, right?
We had bonds and we've come to rely on bonds for three strong reasons: diversification that they offered, capital preservation and income. Now, after global financial crisis, those three reasons got even stronger, although income did shrink a little bit due to quantitative easing. But you could still say that it was higher than cash. Therefore you still went to bonds for income. You absolutely went to bonds for diversification.
Diversification is defined as negative correlation between stocks and bonds. That's what makes portfolio construction exciting. You put two asset classes like that together. Your risk goes down. And then after COVID a complete change. And I don't want to overuse the term regime, but this was a regime change from a portfolio construction perspective.
We no longer have diversification. Correlation of stocks and bonds is now positive, occasionally goes to zero -- it doesn't really get negative. We have a lot of macro volatility. We have a lot of market volatility. All of that is coming from just uncertainty where things are going. Inflation is a very big theme. There was really a variety of things that are going on, variety of reasons. There were some structural shifts, but it could be said that whatever we've come to rely upon over the last 40 years, which was really below target inflation was not the norm, was the exception. It was just a really long exception. We've really got a very long period where most of us in this industry really don't remember the period before that, right, depending on how long you've been in it.
But you could argue that that was really a very prolonged exception. And now we are going back to the norm. And the norm is going to be that inflation will be a potential problem for quite a while. And that means that this whole construction benefit of bonds from a diversification perspective, has potentially gone away for quite a while.
And we essentially have a new environment to which we have to adapt to.
And what this means is that asset allocation decisions are still important. They're still even more important than they used to be. Now that there is a great cost to being wrong, if you get this whole stock-bond mix wrong, you're going to be essentially, your portfolio is going to pay the price that was much more significant done in the past. Now, of course, there is also the opposite of that. If you get this right, your portfolio is going to benefit.
So I don't want to discount the importance of bonds. I still think they have a very important role. But you could argue this environment has become more dynamic. And that means we have to adapt and we can adapt through essentially paying better attention, closer attention, more frequent portfolio monitoring, doing some stress test, outcomes on the portfolio.
But also there is a new cast of portfolio participants that could potentially be needed. And we call this category liquid alts.
00;04;16;19 - 00;04;38;02
Aaron Task
Okay. So a lot to unpack there. As I mentioned, you’re head of portfolio consulting for the Americas of Blackrock, and as I understand it, primarily what you do is consult with our institutional clients. So how have you seen them adjust to this new regime as you as you call it? And where do these alternatives that you just mentioned fit into that?
00;04;39;10 - 00;05;00;28
Bart Sikora
Yeah, and I think it's worth spending a couple minutes essentially describing the categories of alts and what we mean by alts. But if you think, broadly speaking, from an alternative, perspective, institutions have always loved alternatives. We can go back to ‘80s or even ‘70s. Alternatives have always been in demand from institutions. The larger the institution, the bigger the portion of alts. Part of the reason is that large institutions can open doors to alts. They can also afford the illiquidity of alts right? Generally speaking, there's two alts categories: alternative assets like private equity, venture capital, private credit, and alternative strategies. Today's conversation is going to be about that second category alternative strategies.
And what are alternative strategies?
They're essentially traditional investments that are held in nontraditional way. And this is what makes them alts but also makes them liquid. We are talking about taking stocks or bonds individually, or as a category, and going long or short. That's, generally speaking, what most of liquid alts will be doing. Right. So, institutions will be pursuing both alternative assets and alternative strategies.
But for today's conversation we will focus on alternative strategies. Liquid alts is just a name. It's a Morningstar category. It's just a term. That term can be a little bit charged, but I really want to focus on the benefits and how to use it in a portfolio.
00;06;05;21 - 00;06;06;10
Aaron Task
Thank you for differentiating. Because frankly, you know, when I heard when I hear the term alts, I think of private equity or fine art or, you know, any number of other things that aren't typically in the playbook for most of I would think of our financial advisors -- certainly retail investor. So I like that distinction of, you know, the liquid versus the less liquid or illiquid, as you put it.
So what is the role that you see for liquid alternatives in a portfolio today, given the environment you described at the beginning?
00;06;39;15 - 00;07;02;00
Bart Sikora
Now knowing what we learn about bonds, which is bonds are not as reliable from a diversification perspective or even capital preservation at times. Right. We still have the income, but you pay a pretty big price in terms of risk or volatility for that income. Diversification is not there. This is where liquid alts can come in as a source of portfolio diversification.
The reason why they're a source of portfolio diversification is essentially the structure of a typical liquid alt fund going long, short and either removing market exposure or minimizing market exposure. It makes the return of that given instrument, typically speaking -- and I have to generalize a little bit because there's categories quite broad right.
You know, generally speaking they're all going to behave differently from each other. But, the objective is that the best liquid alts from a portfolio diversification perspective will be uncorrelated to the sources of risk in the portfolio. They're going to be uncorrelated to both stocks and bonds. And I think 10 years ago, that would be interesting. But right now it is extremely valuable.
Why is it valuable. Because bonds used to serve that role. And now all of a sudden you have a new category of assets or really funds, right, that are offering something that bonds stopped being able to offer in this new regime. And from a portfolio perspective, we're essentially looking for assets that are going to help to right-size the portfolio risk.
You can now choose what level of risk you can run in your portfolio by selecting what kind of a liquid alt you're going to put in and how much you're going to put in. And also what do you fund it by? Some liquid alts can be funded by bonds, some by cash, some even by by stocks. Right. So all these possibilities now give us more levers to pull that historically were not available prior to this change in the regime. Right. Bonds used to be more attractive, but also now we have higher interest rates, higher for longer or high for longer, whichever you want to call it.
00;08;51;22 - 00;09;08;22
Aaron Task
I'm going to ask you to drill down on that because, you know, again, as we sit here today, money market assets are at an all-time high. A lot of people are saying, well, I can get nearly 5% from the two-year treasury. Why shouldn't I just sit there?
How does that actually help make the case for these liquid alternatives that you were just starting to describe?
00;09;11;22 - 00;09;31;08
Bart Sikora
I'm, to switch my focus to discussion on the return structure. So we're putting diversification on the side for a second. Diversification still very useful, but I just want to, promptly move through each important category. Returns, I didn't speak to much before, but typically liquid alts are going to have a cash plus alpha type of return.
If you have a skilled manager, we're talking top quartile. You're expecting to have alpha being generated by the strategy. But the starting point is cash plus alpha. When cash is at 4 or 5%, you have a higher floor for that return. So you're going to have essentially a cash return plus a certain alpha return. Now why is the cash, the sort of embedded benchmark of a liquid alts? That is because liquid alts, as strategies are either going to deploy derivatives and post cash as collateral and earn a higher cash rate, or they're going to be shorting individual securities and essentially are funding that portfolio structure from the short side by sitting in cash and posting that cash.
So, money market return is a component of a liquid alts structure. From a benchmarking perspective, alpha is what you expect to get from the talent of the top quartile manager, right? Cash plus alpha means we have two separate things separate things that are both attractive, higher cash and also higher alpha.
Why is alpha higher in this environment. It's not necessarily going to be higher for all of the managers, but the top quartile managers are now playing in the world with greater dispersion, which means if you're skilled at picking stocks that are going to go long and go short, you can technically free top quartile manager on a hypothetical level - generate higher level of alpha if you're successful right now, this also means opposite.
A not successful liquid alt manager can have a more negative alpha, right? So I don't think the average alpha is going up, I just think that dispersion of stocks results in a dispersion of potential alpha that good and bad managers can generate. Right. So higher cash and more alpha, if we picked a successful manager, this is why we are looking at liquid alts as an attractive return strategy.
That's a lot of interesting things right. We bring back what we discussed about bonds. Bonds are no longer as attractive. That actually makes liquid alts even more attractive. Right. So that's that's in essence what we're looking at.
00;11;59;21 - 00;12;00;06
Aaron Task
All right. So before we get to the implementation of this one more sort of broad general question here about this category: for advisors who certainly, you know, many of them have clients who are at or near retirement or individuals in that point in their life. Why do you think this is such an important tool in the toolkit right now?
00;12;20;15 - 00;13;06;15
Bart Sikora
Yeah. So historically, we know that investors, or any financial advisors who have investors who are approaching retirement, we have historically counted on bonds to essentially deliver, certain prospects in retirement -- a certain uncertainty and essentially, portfolio behavior or maybe, a limitation of unexpected portfolio drawdowns. Now with, essentially bonds being less reliable to to accomplish this, it's tough for everybody and anybody to constructing portfolios, but it's additionally tough for investors and financial advisors with investors heading towards retirement, because the greater bond proportion is now even more potentially unreliable in a portfolio construction.
When somebody has a 20% bond allocation, sure, diversification would have been nice, but you can still make it through. You have a long time horizon. But when you're looking at 80% bond allocation and you want that certainty of returns, this is where I think financial advisors with investors close to retirement, with clients close to retirement. This is where
the risk of essentially missing your objective is even higher.
Aaron Task
Okay And Bart before we wrap, for those listening who might be interested in pursuing some of these strategies, what would your approach be in terms of implementing this?
00;13;41;17 - 00;14;00;11
Bart Sikora
Every portfolio is different, right? This is really specific to an individual allocation. I'm just going to give you one hypothetical example on how, one would do it. Right. You can either go with a single liquid alts strategy or you can combine few of them.
If you select the right ones on a going forward basis, they should complement each other.
They should be uncorrelated to each other, and they should have an additional level of portfolio benefits.
So the example that I'll give in this case, we have an equity liquid alts that is essentially going long-short on traditional global equities. and this fund should have a fairly low level of correlation to stocks and bonds, and that alpha should be essentially uncorrelated, but the general sources of economic risk.
And for us that fund is BDMIX, which is the Global Equity Market Mutual Fund. Now, I'm going to pair this hypothetically with a fund on a fixed income side. And that fund here is called Systematic Multi Strategy BIMBX. Both of these funds are liquid alts from a traditional perspective of low correlation to stocks and bonds and also low correlation to each other.
So now let's imagine a hypothetical allocation where you go 5% one 5% of the other. And you fund that maybe equally from stocks and bonds. But you also have a choice to fund that fully from bonds. Or you can fund it from cash. You have essentially, a lot of levers to pull in your portfolio. Every portfolio is different.
So you can essentially choose how you're going to allocate. But that's just one idea of how we would think through portfolio implementation. Two tickers, in this case a very simple 50/50 weighting. But there is infinite numbers of ways to implement it. It really is portfolio specific.
00;15;32;01 - 00;15;43;00
Aaron Task
All right. And I don't know about infinitely, but I'm sure we could discuss this further. We do have to leave it there.Our guest has been Bart Sikora, head of portfolio consulting for the Americas at Blackrock. Bart, thanks very much.
00;15;43;02 - 00;15;44;25
Bart Sikora
And thank you so much. Pleasure.
Spoken Disclosure:
Visit www.blackrock.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including possible loss of principal.
Written Disclosure:
Alpha is the excess return of a fund relative to the return of a benchmark.
Correlation measures how two securities move in relation to each other. Correlation ranges between +1 and -1. A correlation of +1 indicates returns move in tandem, -1 indicates returns move in opposite directions, and 0 indicates no correlation.
Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal. Diversification and asset allocation may not protect against market risk or loss of principal.
BlackRock Global Equity Market Neutral Fund (BDMIX): The fund is actively managed and its characteristics will vary. Stock values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. The issuers of unsponsored depositary receipts are not obligated to disclose information that is, in the United States, considered material. Investing in long/short strategies presents the opportunity for significant losses, including the loss of your total investment. Such strategies have the potential for heightened volatility and in general, are not suitable for all investors. The fund may use derivatives to hedge its investments or to seek to enhance returns. Derivatives entail risks relating to liquidity, leverage and credit that may reduce returns and increase volatility. The fund may engage in active and frequent trading, resulting in short-term capital gains or losses that could increase an investors tax liability. Short-selling entails special risks. If the fund makes short sales in securities that increase in value, the fund will lose value. Any loss on short positions may or may not be offset by investing short-sale proceeds in other investments. Investing in small- and mid-cap companies may entail greater risk than large-cap companies, due to shorter operating histories, less seasoned management or lower trading volumes.
Systematic Multi-Strategy Fund (BIMBX): The fund is actively managed, and its characteristics will vary. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves special risks including, but not limited to political risks, currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. Fixed income risks include interest rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Principal of mortgage-or asset-backed securities normally may be prepaid at any time, reducing the yield and market value of those securities. Obligations of US government agencies are supported by varying degrees of credit but generally are not backed by the full faith and credit of the US government. Non-investment grade debt securities (high yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher rated securities. Investments in emerging markets may be considered speculative and are more likely to experience hyperinflation and currency devaluations, which adversely affect returns. In addition, many emerging securities markets have lower trading volumes and less liquidity. The fund may use derivatives to hedge its investments or to seek enhanced returns. Derivatives entail risks relating to liquidity, leverage and credit that may reduce returns and increase volatility. Effective 1/4/19, the Alternative Capital Strategies fund name was changed to the “Systematic Multi-Strategy Fund”. The Fund’s information prior to September 17, 2018 is the information of a predecessor fund that reorganized into the fund on September 17, 2018. The predecessor fund had the same investment objectives, strategies and policies, portfolio management team and contractual arrangements, including the same contractual fees and expenses, as the fund as of the date of reorganization. As a result of the reorganization, the Fund adopted the performance and financial history of the predecessor fund.
This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.
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Bart Sikora, head of portfolio consulting for the Americas at Blackrock, explains the 'what, how and why' of the liquid alts category. That is: What are liquid alts…how do they fit in portfolio construction…and why more advisors might consider leveraging them for clients?
This popular financial podcast is designed for a wide range of professional and individual investors. The Bid breaks down what's happening in the world of investing and explores the forces changing the economy and finance.
Within just a few minutes, get a breakdown and clear takeaways about the latest market events. Count on webinar replays and videos for timely insights on markets, geopolitics and economics.
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Market take
Weekly video_20250113
Wei Li
Opening frame: What’s driving markets? Market take
Camera frame
We think U.S. equity gains stay strong. Yet an economic transformation and global policy changes could spur volatility.
That calls for outlining triggers for adjusting our views.
Title slide: Triggers to change our pro-risk view
1: Tracking U.S. policy changes
First, we’re focusing on how U.S. trade, fiscal and regulatory policy changes take shape.
In a market-friendly approach, rolling back banking regulation could boost economic growth and risk asset gains. Efforts to reduce deficits could encourage other countries to loosen fiscal policy.
Yet plans to extend tax cuts plus broad and large-scale tariffs could support market less by bolstering deficits and inflation.
2: Eagerly awaiting earnings
We’re also watching how investor sentiment could respond to corporate earnings results and lofty tech valuations.
We expect earnings growth to keep broadening beyond tech. Yet the “magnificent seven” are still expected to drive overall earnings.
3: Bond market blues
Finally, we’re monitoring vulnerabilities in public markets – including an already jittery bond market.
It’s unclear how well markets can absorb record U.S. Treasury issuance that has helped drive term premium to its highest level in a decade.
Outro: Here’s our Market take
We see U.S. equity performance cooling from its highs this year but still staying strong, while U.S. Treasury yields will climb due to rising term premium.
That supports our overweight to U.S. stocks and underweight to long-term Treasuries.
Closing frame: Read details: blackrock.com/weekly-commentary
Market take
Weekly video_20250113
Wei Li
Opening frame: What’s driving markets? Market take
Camera frame
We think U.S. equity gains stay strong. Yet an economic transformation and global policy changes could spur volatility.
That calls for outlining triggers for adjusting our views.
Title slide: Triggers to change our pro-risk view
1: Tracking U.S. policy changes
First, we’re focusing on how U.S. trade, fiscal and regulatory policy changes take shape.
In a market-friendly approach, rolling back banking regulation could boost economic growth and risk asset gains. Efforts to reduce deficits could encourage other countries to loosen fiscal policy.
Yet plans to extend tax cuts plus broad and large-scale tariffs could support market less by bolstering deficits and inflation.
2: Eagerly awaiting earnings
We’re also watching how investor sentiment could respond to corporate earnings results and lofty tech valuations.
We expect earnings growth to keep broadening beyond tech. Yet the “magnificent seven” are still expected to drive overall earnings.
3: Bond market blues
Finally, we’re monitoring vulnerabilities in public markets – including an already jittery bond market.
It’s unclear how well markets can absorb record U.S. Treasury issuance that has helped drive term premium to its highest level in a decade.
Outro: Here’s our Market take
We see U.S. equity performance cooling from its highs this year but still staying strong, while U.S. Treasury yields will climb due to rising term premium.
That supports our overweight to U.S. stocks and underweight to long-term Treasuries.
Closing frame: Read details: blackrock.com/weekly-commentary
Opening (00:00)
This is Mark Peterson with the January 2025 BlackRock Student of the Market update.
Slide 2 (00:08)
This month, we've got a handful of things on stocks wrapping up 2024, another great year for U.S. stocks. Then we'll move on to bonds, not as good on the bond side. We'll talk about how active fixed income actually added a lot. We'll touch the economy and then finish up with a story on diversification that we always love, winning more by losing less.
Slide 3 (00:30)
Let's start with 2024 for U.S. stocks, another great year for U.S. stocks, up 25%, and really like this chart that categorizes calendar year returns for us stock. So, you can see the various levels, and certainly, no precision to this, just kind of group them by various levels of return with the bear market years on the far left, years where you lose money slightly to the right of that, and then probably most interesting is right in the middle. Look at the average return for stocks, is right around 10.4% historically, but rarely these stocks finish the year around that average. So, anywhere between 8-12%, you've only had six of those calendar years going back to 1926. So, almost 100 years of data, yet, you've only got six years that finish right around that average, but look at the far right side. This is probably the most compelling thing about this page, is you've had 38 great years. So, by far, the biggest column is years in which stocks are up more than 20% in a given calendar year. I think that's tremendously compelling. You just need to hang around for those great years. That's what works. That's what makes stocks move and gain and build wealth over time, is sticking around, weathering some of the storms on the far left of this page. The fact that stocks rarely finish around average, but if you hang around for some of those great years, that's how you build wealth over time.
Slide 4 (02:01)
Moving on, the fact that we've been up 25% or more the last two calendar years is pretty historically rare. You can see on the right side, it's only happened… this is the fifth time. So, four of the times, historically, you had several in the Great Depression era. So, ’27, ’28, ’35, ’36. Obviously, those ran into some bad years, but more recently, you've actually had better outcomes in that third year. So, you can see ’54, ’55 were great performance years, and in ’56, you were positive, but not… you know, well below average at 6.6%. More recently, ’97 and ’98 were greater than 25%, and then ’99, you were up over 21%. So, certainly, a lot of follow through during that period. Great question, what does that mean for 2025? Stocks certainly aren't cheap, but we're still leaning into stocks at this point. We think a lot of the fundamentals still support the case, and we think maybe the history looks a little bit more like what we saw in the 50s, or more recently, in the 90s, where stocks continue with their momentum.
Slide 5 (03:07)
Stepping ahead to the next slide, we've touched on this last month and several times in previous issues, is just the fact that the diversified portfolio, a stock and bond mix, is trailing the U.S. stock market, which is natural, of course. We all know that intuitively, and it's even worse if you add some other diversifying elements, like small company stocks or international stocks as well. This gap even grows even more. So, we've affectionately named that S&P Envy. So, just the gap between the diversified portfolio and S&P Envy is pretty wide over the last couple years, and I think that causes some frustration out there. Even though they've been good years for diversified portfolio, double-digit returns, the fact that you've made a lot more if you've just owned U.S. stocks can be a somewhat frustrating feeling for investors, and we call it S&P Envy because it's natural. I think folks need to understand it. We put it on the right side, just the largest years ever, where you get a big gap between the diversified portfolio and U.S. stocks. Again, we just, for simplicity, used a simple 60% stock, 40% bond mix, but obviously, if you have some of those other diversifying asset classes, you're probably down, even the gap might even be a little bit bigger, but you can see it's a natural thing. You can see it happened. 2021 was even bigger from an S&P Envy standpoint. Just thought it was good to remind folks that, hey, this happens. You know, this is pretty wide this year, but this is only the eighteenth largest S&P Envy gap that we've seen since 1926. Again, almost 100 years of data and really outlines that this is a natural thing. It happens. We need to stick with the plan, right, and we'll touch on that with the final slide on winning more by losing less.
Slide 6 (04:58)
I mentioned the bull market length. I think this is one of the most convincing cases just for where we're at in the cycle. The fact that, yeah, we've been up 25+% the last two years, but if you look at the bull market, the length versus average, normally, bull markets average about 55 months. So, pretty good over the… that's a median, actually, since 1926, and you can see that the average return is over… normally about 200%, 202% to be exact. We're only up about 74% in this cycle. So, it's still pretty young, still some ways to go versus the historic average. Of course, valuations aren't cheap, but maybe the market might broaden out a bit, and you might have some of those stocks that haven't carried the weight of return start to carry some of their weight and add to return. So, a broadening of the market, some of those smaller company mid-cap company stocks might do a little bit better. Not something we're jumping on the bandwagon at this point, but you might see that at some point here in 2025. Something to keep an eye on.
Slide 7 (06:02)
Switching gears on the bond side, that'll be interesting, just to lay out the slide, looking at the same type of calendar year return pattern that we looked at for stocks, but the pattern is very different here. So, just looking at various levels, of course, you have the one bear market year for bonds down over 13% in 2022, not too far in the past. Reminds us how difficult that year was and how historically rare it was. This year, we were up 1.3% for that core bond index. We gave up a bunch the last couple months, as interest rates drifted higher, but you can see. it's very normal for bond returns to be right in the middle, anywhere between 0 and 7%. That's where 59 out of the 99 years sits, right in the middle there, and that's one reason why bonds in a portfolio make a nice balance or ballast, is because they provide that predictability and that level of return that's a little bit more stable than what we saw on the stock side, where you see a little bit more at the extremes on both sides of the chart. So, I thought it was a nice contrast. I think it's a great way just to compare and contrast bonds and why they work well traditionally in a portfolio, and you can see the longer-term average in the black box. Bonds average about 5%. So, that's certainly something we're shooting for, for this year. They tend to gravitate towards where interest rates start, and we're right in the high fours on a ten-year U.S. treasury bond. So, that bodes well for better bond returns in the future.
Slide 8 (07:36)
The next slide shows how active fixed income has played out here, really, over the last couple years. You can see, going back to October of 2022, when we reset interest rates, the ten-year U.S. treasury, again, reset to over 4%, and look at how we've been in a trading range, really anywhere between 3.2% back in April of 2023 to 5% in October of ’23. We've kind of bounced around right in between. So, rates actually haven't gone very far. They've gone a little bit higher since October of 2022, but not much, but look at the dramatic swings in fairly short periods of time. I think it's one of the most interesting things folks haven't talked about, and you can see on the right, we just put the return for some of the categories, how active managers have actually been able to play this pretty well, whether it's adding to higher income producing bonds, some of those spread sectors that have performed better, given you a little bit more return, have been a little less interest rate sensitive. That's been better performers in that multi-sector bond space, or certainly, something for us, a big category is that non-traditional bond category, adding a lot of value above cash and at core bond index as well.
Slide 9 (08:52)
Moving on to the economy on the next slide, this is always one I like to keep out on the desk, just to remind ourselves what's the economic cycles look like, just from an economic expansion standpoint or a recession. What do they look like historically? Of course, we had one of the… we actually had the shortest recession on record, that pandemic recession in March and April of 2020, and you can see how rare that was, only two months long, very severe, but very short, and you can see now the recovery. We're at 57 months. So, closer to the average, historically, you can see the average going back to 1927 is about 61 months. So, a little bit over five years, but I think more interesting is look at the bottom left hand corner. We just highlighted that, really, since the early 1980s, the average expansion has lasted closer to 100 months. So, almost not quite twice as long as the historical average, but I think this is how the economy's evolved a bit, where we're more of a service economy today than we've been in the past. So, we don't have some of the extreme economic cycles that we had when we were more of a manufacturing economy, more of a boom and bust cycle, and you'll hear that from a lot of folks, and I think you see that, just in the fact that the economic expansions have not been quite as dramatic. Of course, the exception, you know, at least on the recession side, was the global financial crisis in ’07 into ’08 and ’09, but I think you see the economic expansion, especially on the left side, tend to last a little bit longer, and again, at 57 months we're all, you know, you're only halfway into what's been a typical cycle since the 1980s,
Slide 10 (10:39)
and finally, our winning more by losing less story is all about diversification and why it still makes sense, really pairs well with that S&P Envy slide that touched on earlier, the fact that you get frustrated by the fact that your portfolio might not be keeping up with the overall U.S. stock market, but this just looks at, really, the period starting with the global financial crisis, and on the left side, you can see 100,000 has actually grown to about 530,000. So, not too shabby, considering you got three bear markets in there. You have the global financial crisis, you have 2020 in the pandemic, you have 2022, when the Fed was raising interest rates, and inflation was a challenge, but you've still grown to over 530,000 over that stretch, I think, is pretty impressive, but on the right side, we just look at the simple mathematic reality, that if you captured 83% of the upside of all those bull markets on the left, but also, the same ratio on the bear market side. So, you've protected better on the downside. So, you got less upside in a bull market and less downside in a bear market. Look at what happens to your overall outcome. You actually end up in a slightly better spot, $531,320 versus $530,245, not an enormous difference, but you've actually better return, better overall outcome, with less risk along the way, I think, is super compelling, and you can see at each stop along the way. You're actually higher on the right side of the page. You've limited the downside. You've got a chunk of the upside, but not all of it, and that's allowed you to win more by losing less, ends up in a better outcome over time. I think a great reminder for some of those folks who might be feeling a lot of that S&P Envy, just to say, hey, this is why we're building portfolios the way we do. This is why we asset allocate and diversify and spread your investment eggs across a variety of investment baskets. It's all to get to this winning more by losing less story. It's just sometimes tough to see when you go through a couple years like, uh, the last couple, where S&P Envy and the gap between the diversified portfolio and the U.S. stock market can seem pretty extreme. It's just part of the process, just something that happens. Again, a good reminder, I think, for all investors, even some of the best folks we work with need this reminder from time to time.
Slide 11 (12:57)
So, that does it for us for the January 2025 BlackRock Student of the Market update. As always, if you have ideas or questions on content, put that through our website. If you Google BlackRock Student of the Market, it'll pop up there, and there's a spot to add those comments, but as always, thank you for listening, and we'll see you next month on BlackRock Student of the Market update.
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00:00:02
CAROLYN BARNETTE: Hi everyone. I’m Carolyn Barnette, Head of Market and Portfolio Insights for US Wealth, here with a few key takeaways from our In the Know Webinar on our 2025 outlook.
00:00:12
So, look, first and foremost, I’d say we are very optimistic for the year, particularly on US Equities. We see a lot of room for growth there. You know, Alister Hibbert, the Portfolio Manager for our Unconstrained Equity Fund, said it’s always easier to sound smart when you’re sounding bearish and talking about all the risks, but we’re not seeing anything in markets right now to suggest that bearish view.
00:00:38
If anything, to think that valuations aren’t justified, you’d need to expect profit margins to come down, and again, not seeing any suggestions that that could happen. So, definitely staying overweight equities, overweight US equities in particular.
00:00:53
On the bond side, certainly seeing some risk to longer duration assets. You did see the Fed start their cutting cycle, but you also saw longer-term treasury yields rise as the Fed was lowering interest rates with the potential for persistent inflation, with the potential high deficits. We’re still concerned about the risks involved in long-dated treasuries, and so instead what we prefer to do is really build balance into our fixed income sleeves.
00:01:24
Part of that is leaning into shorter and intermediate dated core bonds on the high quality side, and part of that is also shifting more of our fixed income portfolios towards what we call plus sectors, which could be high yield bonds, but other bonds that are delivering a spread over treasuries like securitized debt where you can get higher yields with potentially less risk and also have a nice balancing effect for your high quality bonds.
00:01:50
Last piece I’ll leave you with is we’re really optimistic about private markets going forward. We think the return in premium could go up there. We’re seeing a lot of dry powder sitting on the sides, we’re seeing valuations that might not have yet adjusted the way public market equities have, and we’re certainly seeing lower financing costs, more demand for fundraising capital as well, making us really excited about that private market space.
00:02:17
So, you put that all together into a diversified portfolio, we are at our max, almost at our max overweight to equities within our model portfolios. They can go up to 5%. They’re sitting at +4% right now. So, that gives you a sense of how bullish we are and how overweight, but still building in as complements all of those other exposures as well.
00:02:40
We’re going to be doing these In the Know Webinars on a monthly basis going forward. The next one is going to be on February 20th at 2:00 Eastern. So, really excited for that as well. Hopefully we’ll see you there, and if not, have a wonderful January, and we’ll talk again soon.
Watch a recap of our latest In the Know event where our top thought leaders gathered to share their perspectives on the market and how they’re positioning portfolios for 2025.
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