Can A High Income Strategy Work When Yields Fall ?, Business News & Featured Articles

Interest rates are trending down again as central banks aim to extend the long-term expansion as macroeconomic uncertainties increase. As a result, currently less than a quarter of the world’s major fixed income markets are reporting more than 4%1. To make matters even more difficult, some $ 17 trillion in bonds offer negative yields2, which means that the buyer pays the issuer to keep it in a safe place rather than buying and receiving an interest payment.

For income investors, the current low-yield environment presents a conundrum, as sticking to traditional safe assets may not generate the returns necessary to meet their current needs. However, striving for return may involve venturing into uncharted territory and potentially assuming an unacceptably high level of risk.

One solution for these investors is to look to managers who can access a wider range of opportunities and who have the skills to manage risk.

Take, for example, BlackRock’s BGF Dynamic High Income fund.

What does BlackRock’s BGF Dynamic High Income Fund invest in?

The fund aims to generate high income and attractive total returns by broadening the range of opportunities, looking beyond traditional sources of income like stocks and bonds. The majority of the fund is invested in additional sources of income including but not limited to writing covered call options, real estate investment trusts (REITs), mortgage backed securities, variable rate loans and preferred shares.

These asset classes tend to have a low correlation3 traditional stocks and bonds, but it can be difficult for retail investors to access and manage without the expertise of a professional asset manager. While it is important to understand the details and risks of these asset classes, they can potentially help generate high income and total returns. Writing covered calls, for example, has historically provided more than 10% annual income, while other top-up income sources typically bring in around 4-7% per year.4.

Between 70 percent and 100 percent of the fund is typically invested in these complementary asset classes, while 0 to 30 percent is invested in more traditional sources of income such as corporate bonds and dividend stocks.

Source: BlackRock, as of June 2019. For illustrative purposes only. Subject to change. The sources of income listed are not equally weighted. The percentages shown represent the overall target exposure of the listed income sources as a whole, which do not constitute investment restrictions and may vary from time to time. IMAGE: BLACK ROCK

How does the fund help strengthen investment portfolios?

Many investors’ portfolios are a mix of high quality stocks and bonds, but this allocation may not be sufficient in today’s low yield environment.

The fund allows investors to supplement their existing traditional allocations by exposing themselves to additional sources of income. In addition to the potential for higher income and overall returns, the fund brings another layer of diversification to an overall portfolio by providing investors with exposure to asset classes that are often more difficult to access and therefore less commonly held in. existing income strategies.

Focused on income, the fund also offers better downside protection against equities in an uncertain economic environment made worse by geopolitical tensions. The fund is designed to complement investors’ existing income portfolio and aims to keep its risk level below that of a typical 70% equity / 30% fixed income portfolio. This means that the fluctuations in the value of the portfolio are generally much smaller than those of an equity portfolio as represented by the MSCI World Index.

In terms of performance, the fund has generated a return of 13.37% since the start of the year to August 31, 2019 *.

How important is asset allocation to the fund?

A wide range of opportunities is not enough. Investors must be prepared to adapt to changing markets and adjust risks and exposures accordingly.

The fund has the flexibility to adapt to changing market conditions thanks to its dynamic approach to asset allocation. When growth accelerates, it’s good for riskier assets like lower quality stocks and bonds. Conversely, when the economy slows, it’s bad for those assets. Tactical asset allocation is therefore essential to navigate today’s constantly changing markets.

How is the fund positioned to generate income in the recent market environment?

During this year, the fund reduced the risk of its portfolio while continuing to offer a good level of income.

Fixed income credit securities are supported in this environment, especially given low levels of inflation and demand for income in a low rate world. The fund favors opportunities with an attractive and stable coupon. In terms of additional sources of income, the fund continues to expand its covered purchase strategy to take advantage of market volatility and higher income opportunities. Valuations in the mortgage-backed securities sectors appear less attractive, but they continue to offer strong diversification advantages. High quality secured loan bonds offer some of the highest potential return per unit of risk, which is why the fund continues to maintain this exposure.

Why should investors trust BlackRock with their money?

Investing in additional sources of income requires expertise not only in asset allocation and security selection, but also in risk management. BlackRock, the world’s largest asset manager, has over 200 multi-asset income experts in its ranks.

To learn more about the BlackRock BGF Dynamic High Income Fund, click here.

1Source: BlackRock Investment Institute, Barclays and Thomson Reuters, as of August 2019

2Source: Bloomberg in August 2019. Data represented by the Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index USD

3Source: BlackRock as of July 2019. Correlations based on selected underlyings within the BGF Dynamic High Income Fund using data from the DLY risk model (252 daily observations with a half-life of 40 days).

4Source: BlackRock, as of June 2019. Past performance is no guarantee of future results. Not a buy or sell recommendation. For illustrative purposes only. Subject to change. There is no guarantee that the goal will be achieved. The assumptions on which the targets were calculated may not materialize.

* The performance is indicated for Class A2 Shares, net of fees, in USD, based on the price of the NAV with reinvested income, and annualized for periods greater than 1 year. YTD performance with 5% frontal load is 8.45% Data as of August 31, 2019.


In Singapore, this material is issued by BlackRock (Singapore) Limited (company registration number: 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

The Funds mentioned in this document are Funds of BlackRock Global Funds.

Past performance is no guarantee of future performance and should not be the only factor taken into consideration when selecting a product. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and the amount of your initial investment cannot be guaranteed. Investors may not get back the amount they invest. Changes in exchange rates between currencies can cause the value of investments to rise or fall. The fluctuation can be particularly marked in the case of a fund with higher volatility and the value of an investment can fall suddenly and substantially. Levels and the tax base may change from time to time.

Investors may wish to seek advice from a financial advisor before purchasing units of the Fund. If you choose not to seek advice from a financial advisor, you should carefully consider whether the Fund in question is suitable for you.

The Fund may use or invest in financial derivative instruments.

Fund specific risks and other caveats are explained in more detail in the current BGF Singapore prospectus and you should read them before investing. This document is for informational purposes only and does not constitute an offer or invitation to anyone to invest in funds of the BlackRock Group and has not been prepared in connection with any such offer.

BlackRock Global Funds (BGF) is an open-ended investment company established in Luxembourg and available for sale in certain jurisdictions only. BGF is not available for sale in the United States or to people in the United States. Product information for BGF should not be published in the United States

BGF has appointed BlackRock (Singapore) Limited as Singapore’s representative and agent to service the process. Subscriptions to the BGF are only valid if they are made on the basis of the Prospectus in force and the latest financial reports available on our website

All research in this material has been obtained and may have been performed by BlackRock for its own purposes. The results of this research are only indicative. The opinions expressed do not constitute an investment or any other advice and are subject to change. They do not necessarily reflect the views of any BlackRock group company or any part of it and no assurance can be given as to their accuracy.

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