“The strategy follows a disciplined, risk-focused process that relies on lead managers Rick Rieder, BlackRock’s CIO of fundamental fixed income, and Bob Miller to implement macro themes and determine the portfolio’s broad asset allocations. The flexible approach has helped in several periods of market stress, allowing the strategy to stay out of trouble or outperform peers when rates have risen and when the credit has sold off,” says Eric Jacobson, director of manager research at Morningstar.
According to Jacobson, the BlackRock team’s focus on diversification and risk management, including a willingness to hedge out risks even if it means sacrificing returns, is a strong advantage in a category of risk-takers. The strategy earns a High Process Pillar rating. Meanwhile, the strength of this management team, the depth of its research bench, and the firm's massive resources underpin a High People Pillar rating.
Morningstar: How was the portfolio positioned to navigate the market volatility in 2022? Were there any particular holding(s) or theme(s) that drove the fund’s performance for the year?
BlackRock Global Fixed Income Team: Given the extraordinary degree of uncertainty in the macro backdrop, the fund maintained defensive positioning throughout the year. In particular, we maintained a bias for high quality and high carry assets; we took advantage of the inversion in developed-markets yield curves by holding bonds at the low maturity end of yield curves and tilting the portfolio toward high-quality assets.
We reduced some of our exposure to riskier assets—particularly to emerging-markets debt, and to a lesser extent high-yield assets, given the more volatile environment and global slowdown.
We reduced overall duration through the first half of the year—particularly by cutting our allocation to European government bonds, as we saw the potential for further market repricing given inflationary pressures. The flexibility built into the process meant the fund was managed with an average duration of only 1.7 years through 2022, although duration was increased toward the end of the year, through buying U.S. Treasuries and select European duration like France.
Lastly, we held an elevated cash position to dampen volatility and maintain the flexibility to deploy capital as attractive opportunities arose.
This defensive positioning helped to generate significant outperformance compared to broad market fixed-income indices that were affected by carrying significant duration risk.
Morningstar: With various central banks rolling back their stimulus measures, inflation, and ongoing geopolitical tensions, what is your outlook for 2023, and how are you expressing these views in your portfolio?
BlackRock Global Fixed Income Team: We expect a regime of greater economic and market volatility, as central banks roll back their stimulus measures and are unlikely to come to the rescue in recessionary environments with the same speed and magnitude as they have done previously.
For the growth outlook, we believe that while there will be a general slowdown, many developed markets economies are resilient enough to withstand a deep recession. Robust services consumption as well as a still-strong labour market in certain economies should prove to be resilient. When it comes to investing, this regime requires vigilance and care with a dynamic and active approach to portfolio management, with more granular views and a focus on sectors, regions, and subasset classes. We see opportunities in high-quality assets, such as developed-markets investment-grade credit, that offer not only attractive total return potential but also maintain portfolio liquidity, key qualities in an uncertain environment.
Today, looking at the opportunity set, the risk/reward trade-off from holding high-quality and liquid assets is far more attractive than going down the credit quality spectrum—the marginal pickup in yield simply does not warrant the additional risk, especially as recessionary risks mount. For instance, yields on USD and EUR investment-grade credit assets now surpass dividend yields on equities. Similarly, with inverted yield curves, low-maturity developed-markets government bonds, for example in the U.S., offer attractive yields with almost no credit risk, and abundant liquidity, and present a once-in-a multidecade opportunity for yield.
Morningstar: What are the key ingredients to your fund’s longer-term success?
BlackRock Global Fixed Income Team: BGF Fixed Income Global Opportunities Fund is a “full market cycle” product, aiming to deliver a consistent and competitive risk-adjusted return under all market environments, and do so while maintaining a risk profile that is analogous to a traditional fixed-income investment vehicle. To accomplish this, we utilize an approach that seeks to generate returns from a highly diversified range of fixed-income sectors and geographies. These sectors and geographies are covered by over 200 specialists within BlackRock, with many of these sectors lying outside the purview of many core bond-fund managers.
The investment process is designed to convey ideas from the specialists to the very experienced portfolio management team, which is headed by Rick Rieder. The result is a highly diversified portfolio invested across 40+ countries, and 30+ currencies with over 3,000 securities, with a focus on positions that have low correlations to each other as well as to mainstream asset classes.
Our approach does not rely on taking outsize positions but rather on spreading risk to “make a little bit of money a lot of the time” and in a way that provides not only a return that aims to achieve the client’s portfolio goals but also does so with a return profile that seeks to avoid shocks and troughs. We believe that this investment approach truly differentiates us from competitors and is one of the main key ingredients of the fund’s long-term success. Our outperformance relative to traditional fixed income over 2022 is a testament to the fund’s unconstrained and flexible nature and the ability of the portfolio managers to dynamically allocate risk across fixed-income sectors and geographies globally, to seek out and capture alpha.
