ADVISER USE ONLY
THE NEW DIVERSIFICATION: ADDING ALTERNATIVES TO THE MIX
BlackRock Market Insight and Recommended Actions
Alternative investments offer the potential for enhanced returns and risk mitigation while providing diversification to traditional stock and bond portfolios. This guide distils the
BlackRock view of alternatives in equity, fixed income and commodities markets, explains current investor behaviour and offers macro and tactical allocation considerations.
Market Insight
Equities
Globalisation has driven up correlations across asset
classes when investors need diversification most.
The volatile, slow-growth environment is likely to continue
and will challenge traditional, long-only strategies, which
are overly dependent on market beta to drive returns.
Non-traditional, long/short strategies can thrive in volatile
markets by extracting excess returns from both positive
and negative price movements and reducing overall market
exposure.
Fixed Income
Current Investor Behaviour
We believe over the past 20 years, investors have been
insufficiently diversified with an over-allocation to Australian
equities and underexposure to alternative investments.
Traditional, long-only 60/40 balanced portfolios have been
highly correlated (0.96) with the S&P/ASX 200 Accumulation
Index over the past decade.
However, projections of the superannuation industry have
shown that the use of alternative investments will increase
over the next several years1.
Historically low rates and high volatility preclude interest
rate-sensitive portfolios from generating the same levels of
returns going forward.
Actions to consider
ereign debt and a global approach have more than doubled
the traditional opportunity set.
Traditional 60/40
Commodities
Historically, commodities have offered a hedge against
stock and bond market volatility, inflation and a weak US
dollar.
Population growth and a rising middle class have been fuelling demand while finite resources hinder supply.
Balanced and complete exposure to commodities, through
both futures and equities, can enhance diversification and
provide more investment opportunity.
• Dedicated long/short strategies can help mitigate volatility by reducing market exposure (beta).
• Absolute returns strategies can provide positive returns
irrespective of broad market performance.
Increase allocation to defensive assets, such as index funds
and fixed income:
Commodities can form part of a portfolio depending on risk
tolerance and investment horizon:
Enhanced
Alternative
Assets
Fixed
Income
long/short strategies:
• Employ tactical asset allocation exposures.
Rethink Your Traditional Portfolio Allocation
Heightened volatility, new opportunities in distressed sov-
Redeploy part of a portfolio’s traditional equity exposure to
• Redeploy to credit-sensitive fixed income.
Over the last ten years, interest rate risk has provided over
90% of returns in traditional fixed income portfolios.
Tactical Actions
Alternative
Strategies
Equity
Equity
• Exposure should come in the form of commodity futures
and commodity-oriented equities.
Fixed
Income
Traditional
Strategies
Hypothetically reallocate 15-20% to alternative assets/
strategies:
Alternative assets trade in non-traditional markets –
foreign exchange, commodities, currencies and derivatives
markets.
Alternative strategies trade in traditional equity and fixed
income markets using one or more specialised trading
strategies (such as absolute return, short selling etc).
1. Source: Rainmaker ‘composition of superannuation industry assets 1997-2020’
appearing in the Australian Financial Review 4 March 2010.
BlackRock Managed Funds
Further Reading
BlackRock Australian Equity
Absolute Return Fund
BlackRock Australian Equity
Opportunities Fund
BlackRock Asset Allocation
Alpha Fund
Aims to deliver returns (before
fees) of 8% per annum above
the RBA Cash Rate Target
(“Benchmark”) over rolling
three-year periods.
Aims to deliver returns that
are 8% per annum above the
S&P /ASX Accumulation Index
(”Benchmark”), before fees, over
rolling three-year periods.
Targets an investment return of
12 percentage points above the
UBS Bank Bill Index over rolling
three-year year periods, gross
of fees.
For more on BlackRock’s market views and fund
information, visit www.blackrock.com.au
LONG-SHORT INVESTING
FUND PROFILE
The BlackRock Australian Equity Opportunities Fund
(the Fund) seeks to return 8% p.a. (before fees) above the
S&P/ASX 200 Accumulation Index (benchmark) over rolling
three-year periods.
Break the long-only habit
FUND RATINGS
We all know it. Today’s economic and investment environment
is very different from the “good old days” of the 1980s, 1990s
and even a good slice of the 2000s. Many economies are doing
it tough as are investment markets. So new ways need to be
explored to succeed in this world of lower returns.
INVESTMENT STRATEGY
WHY A LONG-SHORT INVESTMENT STRATEGY?
Australian Equities
AT A GLANCE
Fund
overview:
Benchmark
Management
fee:
KEY FEATURES
Potential for superior returns
Aligned fee structure
Performance
fee
Buy/sell
spread
Fund
inception
Investment
style
Portfolio diversification
Significant buying power and scale
Experienced local investment team
www.blackrock.com.au
Aims to outperform the benchmark by gaining exposure to long
and short positions across the
Australian equity market. The
Fund targets zero net market
exposure and aims to deliver
absolute (positive) returns irrespective of the returns of the
broader market.
Aims to outperform the benchmark by gaining exposure to long
and short positions across the
Australian equity market.
Generates returns by implementing TAA strategies across a range
of ‘risk strategies’ including those
based on an expectation of the
direction of a particular market
and relative value strategies
within and between markets.
MAL0079AU
MAL0072AU
MAL0030AU
Highly regarded risk management system
* Past performance is not a reliable indicator of future performance. The BlackRock Australian Equity Opportunities
Fund invests in, and has the same underlying strategy as, the BlackRock Equitised Long Short Fund. Net
performance of the BlackRock Australian Equity Opportunities Fund and the BlackRock Equitised Long Short
Fund will differ due to fee differences.
Distribution
frequency
APIR code
Scientific
That’s why a long-short approach to investing deserves a look.
A long-short strategy combines ‘long’ investing, which involves
investing in stocks that are expected to increase in value, as
well as short selling.
Short selling is a way to profit when a stock drops in value.
Using this strategy, investors sell shares they have borrowed,
but don’t own, and then buy them back when their value has
fallen, and profit from the difference. So you might borrow
and sell a share at $22.00 and use the proceeds from the sale
to earn interest in an account. You then buy it back when its
price reaches $15.00, making a gain of $7.00, plus the interest
earned, minus any fees and charges, including dividends paid
on borrowed stock and fees. The risk, of course, is that the
shares will rise in value, in which case the manager would lose
money.
With long-only investments, a bad investment can only drop
to zero – and your investment is lost. With short selling, a
bad investment is one which rises in value – forcing the
investor to buy the stock back at a price higher that it was
sold at.
Long-short investing is a way to potentially enhance your
returns, no matter what the market is doing. It’s also a way of
making use of the full spectrum of research insights by
investment managers such as BlackRock. When we do
research we identify companies whose share prices we think
will rise, as well as stocks we think will fall.
AN EXAMPLE: Company A’s share price