Justin Christofel, portfolio manager in Global Multi-Asset Income, BlackRock, discusses his outlook on fixed income and the market, in the latest in our series featuring fund managers and leading market experts
Mr Justin Christofel is a portfolio manager for the BlackRock Multi-Asset Income, the BlackRock Global Multi-Asset Income, and the BlackRock Dynamic High Income Funds.
He is a member of the BlackRock Multi-Asset Strategies group, responsible for developing, assembling and managing global tactical asset allocation portfolios as well as outcome oriented investment solutions. He also manages decumulation strategies designed for investors in retirement.
BlackRock says that retail investors could consider Global Multi-Asset Income Fund if their current portfolio does not generate enough yield, if they are worried about the negative impact rising interest rates will have on their portfolios, or if they are simply cautiously optimistic about what the future holds for the global economy.
Incepted in June 2012, the Global Multi-Asset Income fund has achieved annualised total returns of 4.9 per cent since inception while its one-year total return stood at 10.9 per cent.
Q Tell us more about the Global Multi-Asset Income Fund.
A Global Multi-Asset Income is designed for yield-oriented investors who want a "risk first" approach to their portfolio management process.
Let me elaborate. Our process starts with a "risk first" approach to portfolio construction. "Risk first" means everything we do begins with answering the question: "Are we being appropriately compensated to take risk in this asset class or investment opportunity?"
We never recommend sacrificing quality for higher yield...
'' MR JUSTIN CHRISTOFEL, portfolio manager in Global Multi-Asset Income, BlackRock.
We are tactical in how we position the portfolio. Therefore, an investor can rest easy knowing our team is constantly researching the optimal blend of assets based on the market opportunities and risks at any given time. Investors looking for an "all weather" portfolio should find our process very appealing compared with single asset-class strategies.
Q Market uncertainties and challenges globally have made it more difficult to achieve good returns. How do you ensure you pick the winners most of the time to generate a sustainable income?
A Our portfolio construction begins with a risk budget instead of a traditional benchmark. We can never own more risk in the portfolio than a 50/50 mix of global bonds and global stocks. Using that risk budget, we work with almost two dozen teams around the world at BlackRock to build the best income-generating portfolio we can.
Our process utilises a broad opportunity set across global markets and all asset classes, and we construct an appropriately diversified portfolio where exposures and risks are deliberately scaled. At its core, we try to balance the desire to generate income and return with the competing objective of mitigating losses in challenging environments.
We use traditional stocks and bonds as well as non-traditional strategies like equity covered call writing, and securitised areas of the fixed income market that are not as linked to the corporate credit cycle. We also employ hedging strategies to manage the broad risks around interest rates, equity sell-offs and currency fluctuations.
Q What guides your asset allocation for a balanced and well-diversified portfolio?
A The upside for investors this year is likely to come from stocks as earnings appear set to rebound, yet it's hard to ignore the rather expensive multiples of most equity markets today. We've modestly added to Europe and emerging market equities where valuations are lower than the US and similar improving growth trends exist. We think credit markets are still well positioned to deliver positive returns but the upside remains limited, given current spread levels.
While a lot has changed over the course of the last year, the challenges facing investors have not. Interest rates remain low and global growth continues to be challenged.
A low-return environment coupled with "reflation" being observed throughout the world is an ideal environment for the Global Multi-Asset Income Fund. Our portfolio is globally diversified and derives the majority of its return from income-paying asset classes. Therefore, we are not as reliant on changes in price to make money for clients. Reflation is a recovery of price level that has fallen below long-term trend through monetary policy and tax reforms.
Q Which are the markets and sectors you're looking at and why? Do you see more bright spots or is it all doom and gloom?
A We are optimistic about the improving fundamentals for the global economy, however, there is no doubt that geo-political risks loom.
Given the current landscape, we think income-paying assets are well positioned to contribute meaningful return. We are, however, concerned about how much optimism is priced into market today.
Finding cheap assets continues to be a challenge. As we have always done, we will be very careful and tactical about where we invest client assets.
In recent quarters, we have been building allocations to floating rate bonds, which are likely to be insulated from rising rates globally and will actually benefit in the form of higher coupons if the US Federal Reserve continues to hike the federal funds rate in the United States.
Q What will be driving investment decisions in 2017?
A Markets have performed well since the US election with economic data indicating a strengthening backdrop. However, there has been a pronounced disconnect between forward-looking economic survey data, which have been accelerating at a fast pace, and actual economic data, which is best described as measured. We are watching this dichotomy closely and it is one of the reasons we remain conservatively positioned.
The robust string of data and recent Fed rhetoric have led markets to quickly reprice a more aggressive rate hiking schedule for this year in the US. This shift has not yet been reflected in 2018 or 2019 market expectations which makes us more cautious on duration risk, particularly on the front end of the curve.
With interest rates set to rise, equity prices near all-time highs and no shortage of political and central bank risk on the horizon, we are remaining patient in anticipation of a likely increase in market volatility that could lead to more attractive entry points.
Q Should investors in Asia be concerned about geopolitical developments such as US President Donald Trump's protectionism, Brexit, and the coming elections in Europe?
A These geopolitical developments warrant close monitoring. We believe there are many competing forces at work and the path forward remains positive, yet murky.
Reasons for optimism include stronger economic fundamentals, an increased likelihood of fiscal stimulus in the US, diminished deflation risks globally and soaring business and consumer confidence. However, there may be equally as many risks for this year.
Combined with the above, the potential for a China slowdown and elevated prices across many asset classes are some of the reasons to remain level-headed this year. Weigh all of these factors and we still find ourselves in a late-cycle world where subdued economic growth and elevated valuations likely lead to moderate asset returns.
Q How can investors reduce their exposure to risks in such a volatile market?
A Investors should look for a well-diversified portfolio that has the ability to tactically allocate between different sectors, asset classes and geographies to protect capital in periods of volatility but also capture opportunities.
We never recommend sacrificing quality for higher yield and in more volatile markets - this more prudent approach will always pay off.
We believe above all else, the ability to be extremely flexible and focus on mitigating risk over the desire to maximise profit should be a central principle to portfolios as we move forward in this cycle.
A version of this article appeared in the print edition of The Sunday Times on April 02, 2017, with the headline 'Keep eye on geo-political risks, but path ahead still positive'. Print Edition | Subscribe
We have been experiencing some problems with subscriber log-ins and apologise for the inconvenience caused. Until we resolve the issues, subscribers need not log in to access ST Digital articles. But a log-in is still required for our PDFs.