So, how do you invest in such a muddled environment? We believe owning investments that carry healthy balance sheets and offer generous cash flow is vital to investing in 2015. When that proverbial tide rolls out, owning investments that are fairly valued and that minimize the distortion that’s been caused by years of central bank quantitative easing will make sense.
Investors who properly appreciate economic and financial fundamentals — particularly the vital three of leverage, liquidity and cash flows – have the best chance of being rewarded.
At the same time, the reality is that the days of simply relying on one fixed income fund or style are over. When thinking about your fixed income investment options, bear in mind that over the past several years, traditional bond funds have become much more correlated to stocks. Plenty of actively managed bond funds have veered away from their benchmark and taken on more risk in the pursuit of higher returns. And any single component of the income sector has experienced significant loss of capital during times of market stress.
More flexible approaches to fixed income investing can make more sense, offering higher yield potential and meaningful diversification while at the same time seeking to reduce overall volatility. For example, because the BlackRock Total Return Fund has a low correlation to the S&P 500, equity risk in a fixed income portfolio has the potential to be reduced through the use of the fund. The BlackRock Strategic Income Opportunities Fund, meanwhile, can be an appropriate choice for those investors who may be concerned about rising interest rates as it can adapt to changing market conditions through blending traditional and non-traditional investment strategies. Finally, if you’re looking to increase yield you may allocate a higher portion of a portfolio to the BlackRock Multi-Asset Income Fund because it targets alternative income sources.
Of course, allocations will depend on your specific risk appetite and investment objectives, and there is no guarantee that asset allocation strategies will preserve your assets in falling markets, but combining these three strategies is just one way to customize a fixed income portfolio to better navigate today’s complex economic landscape.
Stock and bond values fluctuate in price so the value of your investment can down depending upon market conditions. 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.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.