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Blackrock launches ‘non-traditional’ multi-asset fund

Launched in Hong Kong, the portfolio invests in assets such as covered calls and collateralised loans in the US, targeting investors who want to diversify away from traditional income investments.
Blackrock launches 'non-traditional' multi-asset fund
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Many asset managers are launching multi-asset funds in Hong Kong after net sales of the funds grew tenfold in 2017 compared to the year before, according to data from Hong Kong Investment Funds Association. Among the different categories of mixed-asset funds, global funds recorded the highest net sales during the year.

Blackrock’s multi-asset product aims to deliver a 6.9% yield per annum in US dollar terms, according to the firm.

The Ucits fund is managed by the New York-based team led by lead manager Michael Fredericks and co-managers Justin Christofel and Alex Shingler. The fund was launched in Europe in February and began to sell in Hong Kong today.

“The fund is designed as a complementary income strategy investing less in what investors have already held, such as investment grade and high yield corporate bonds or dividend-paying stocks,” according to Eric Mueller, multi-asset product strategist at Blackrock.

Instead, the majority of investments are in floating rate loans, preferred stocks, mortgage-backed securities and REITs globally, he said.

“In the portfolio, one of the favourite allocations today is a covered call strategy. It is the part of strategy where we own individual stocks as well as selling a call option above the current price to generate income.”

70/30 portfolio

The fund does not have a specified index for asset allocation. However, the portfolio tracks a combined risk-based benchmark comprising of 70% MSCI World Index and the remaining in Bloomberg Barclays Global Aggregate Bond Index. The benchmark aims to serve as an indicator of an approximate level of risk to investors, according to the firm.

“The portfolio does not hold 70% in stocks and 30% in bonds, but the benchmark indicates a similar level of risk or volatility that the fund is taking,” Mueller explained.

In terms of geographical allocation, the total portfolio holds 80-85% of assets in the US, according to him. He added that the fund is global and the heavy allocation to the US is a result of the accessibility of the selected asset classes.

He took an example of the options market. “The fund holds of majority of equity assets in companies listed in the US, as there is a more liquid options market with higher pricing efficiency.”

On the equity side, the manager said he would avoid investing in sectors that are influenced by interest rates, including utility and telecom stocks, while favouring cyclical stocks, such as technology, financials and consumer discretionary companies.

On the fixed income side, the fund reduces bond duration to an average of 2.5 years to address interest rate risk. Mueller believes the duration is relatively low for a portfolio with a yield just under 7%.

“This is a deliberate position. In our view, we do not want to take a lot of interest rate risk today,” he said.

Although the fund aims to generate high income, owning bonds with a low credit rating is not part of the strategy to maximise yield.

“It is not necessarily a good idea to go very far down in credit quality to chase yield,” he said. “At this part of the cycle, we would rather have a up in quality stance and take a bit more risk in equity than we would in low quality bonds.”

The average credit rating in the portfolio is about BB to BB-, he added.

Moreover, mortgage-based securities are also used to diversify the portfolio. He believes they have a low correlation to other parts of the loan market.

The fund vs its category average since its inception in February

Source: FE. Category average is converted to US dollars for comparison purposes. The fund was first launched in Europe in February 2018.

Part of the Mark Allen Group.