BlackRock 2014 Investment Themes January 2014 The opinions presented are as of January 2014 and are...

BlackRock 2014 Investment Themes

January 2014

The opinions presented are as of January 2014 and are subject to change.

NOT FDIC INSURED – MAY LOSE VALUE – NO BANK GUARANTEE

2

A Perfect Storm For Investors: Time To Act

Sources: 1 United States Census 1990 & 2010, 2 US Social Security Administration , 3 Employee Benefit Research Institute, 4 Federal Reserve Bank of St. Louis, 5 Congressional Research Service.

There are more retirees

Enjoying longer retirements

With less guaranteed income

And less savings

And higher taxes

Retirement Population (65+ years)1

199031 M

15

41%

11%

28%

201040 M

19

17%

7%

35%

Expected Years in Retirement2

Pension as Retirement Income3

(% of private sector workers with access to defined benefit plans)

Average 30-Year Personal Savings Rate4

Marginal Taxes for the Highest Earners5

3

INVESTMENT SUGGESTIONS

2014 Investment Themes

Seek Growth, Manage Volatility

Generate Income, But Don’t Overreach

Rethink Your Bonds

Allocate to Traditional Equities

Mitigate Risk with Diversified & Alternative Strategies

Seek Conservative Equity Growth

1

2

3

Take a Flexible Approach to Income

Put Credit and Dividends to Work

Adapt to Higher Taxes

1

2

3

Allocate to Flexible Bond Portfolios

Seek Returns Beyond Traditional U.S. Bonds

Keep Durations Short, But Know What You Own

1

2

3

4

INVESTMENT LANDSCAPE

2014 Investment Themes – Rethink Your Bonds

Anxiety Over Risk

Confusion Around Bonds

Sitting on the Sideline

of investors are not willing to take on more risk to achieve higher returns

of advisors think clients need more education on credit and interest rate risk

of investors currently favor cash for their investments and are wary of volatility

67% 90% 48%

We believe longer-term interest rates will move higher in 2014, it is likely short-term interest rates will be anchored at zero



Rethink Your Bonds

5

0

2

4

6

8

10

12

14

16

Interest Rates Drive Bond Returns

Today’s low interest rates resemble the 1940s & 1950s “financial repression” era…will returns follow?

Interest Rates & Bond Returns %

Prior periods of “financial repression” such as the 1940s and 1950s have been associated with negative real returns for traditional fixed income (that is nominal return less realized inflation)

4.07

Interest rates sit below the level of inflation negating the yield

Source: Morningstar as of 12/31/13. Past performance does not guarantee or indicate future results. Interest Rates and Bond Returns represented by IA SBBI IT Govt Index from 1926 to 1975 and the Barclays US Aggregate Index from 1976 to 2012. For illustrative purposes only. Indexes are unmanaged. You cannot invest directly in an index.

-2.04 2.23 2.525.34Realized inflation

7.36 5.08 2.92 2.53

1930s Decade to Date

2000s1990s1980s1970s1960s1950s1940s

Seek Growth, Manage VolatilityGenerate Income, But Don’t OverreachRethink Your Bonds

6

Traditional Bond Risks Remain Skewed to the Downside

Source: Morningstar Direct as of 12/31/13. Past performance does not guarantee or indicate future results. Bond Returns represented by IA SBBI IT Govt Index through 1985 and the Barclays US Aggregate Index afterwards. For illustrative purposes only.

The end of an era: lowest 10 year return for traditional bonds

10-Year Rolling Returns of the Core Bond Index

Traditional bond funds have overly concentrated interest rate risk &limited upside potential, as evidenced by 2013 losses

Long-term market cycle suggests bond returns will continue their fall

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

0

2

4

6

8

10

12

14

16

Sept 2013, 4.59%

Sept 1974, 4.59%

High: Sept 1991, 14.68%


7

INVESTMENT RECOMMENDATIONS

2014 Investment Themes – Rethink Your Bonds

2 Seek Returns Beyond Traditional U.S. Bonds to enhance diversification and generate returns that are independent of low yields and rising rates in the U.S.

1 Allocate to Flexible Bond Portfolios that are not tethered to a benchmark and have more flexibility to respond to market changes.

3 Keep Durations Short, But Know What You Own as low duration funds do not always equal lower risk.


8


Flexible, non-traditional bonds outperformed traditional core bonds

Employing a flexible bond strategy is key to prepare for more volatility in monetary policy and interest rates

In various interest rate environments, flexible funds can increase yield, reduce duration and effectively manage downside risks

Source: Morningstar. As of 12/31/13. Flexible bond funds represented by the Morningstar category average for the nontraditional bond fund category. Traditional core bond funds are represented by the Barclays US Aggregate Bond Index. Past performance is not a guarantee of future results. Indexes are unmanaged. You cannot invest directly in an index.

Average annualized returns as of 12/31/13

1-Year 5-Year-4

-2

0

2

4

6

8

0.29%

6.99%

-2.02%

4.44%

Flexible Bond Funds Traditional Core Bonds


9


Increase diversification by looking beyond the scope of traditional bond investing

During the lost decade, diversifying away from U.S. traditional core equities improved returns

Seek investments with lower correlations to traditional bonds that generate a differentiated pattern of returns

Equity Asset ClassLost Decade for Stocks

(2000-2009)

S&P 500 Index -0.95%

International Equities +3.12%

Long / Short Equity +4.36%

Small / Mid Cap Value Stocks

+6.36%

Emerging Market Equities +9.95%

3-Year Correlation to Traditional Core Bonds

Long / Short Fixed Income* 0.06

Non-traditional Bonds 0.19

Emerging Market Bonds 0.35

International Bonds 0.54

Lost decade chart – Source Morningstar. *12/1/10 – 11/30/13. Source Morningstar. *Long/Short Fixed Income represented by the BlackRock Global Long/Short Credit Fund. Traditional Core Bonds represented by Intermediate Term Bonds. Non-traditional bonds represented by the Morningstar Nontraditional bond category average. Emerging Market Bonds represented by the Morningstar Emerging Market Bonds category average. International bonds represented by the Morningstar World Bond category average. "Past performance does not guarantee future results."

Diversification during the lost decade for stocks Bond categories that may provide diversification


10


Different solutions for different goals

Add ultra short duration strategies to stay invested, put cash to work and wait for rate normalization

Opportunistically barbell ultra short strategies with attractive, undervalued long duration options

* An investment in fixed income funds is not equivalent to and involves risks not associated with an investment in cash. Duration is a measure of a bond fund’s sensitivity to interest rates. For every year of duration, a 1% change in interest rates will lead to a 1% change in the opposite direction of a bond fund’s value. Source: Morningstar Direct. Barclays Live. S&P. BofA. As of 12/31/13. Yields are yield to maturities. Floating rate notes are represented by the Barclays US Floating Rate Note <5 Years Index. Short Maturity Bonds are represented by Barclays Short-Term Government/Corporate Bond Index. Floating Rate Income represented by the S&P/LSTA Leveraged Loan index. Low Duration Bonds represented by BofAML US Corp & Govt 1-3 Year.

Yield vs. Duration

Duration

Yie

ld

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 20

1

2

3

4

5

6

Floating Rate Notes Short Maturity

Bonds

Floating Rate Loans

Low Duration Bonds


11

2014 Investment Themes – Generate Income, But Don’t Overreach

Investor Are Being Squeezed

by Low Yields

Risks Have Risen

Taxes Are Taking a Bigger Bite

Yields on traditional core bonds are less than half of what they were in 2008

Generating a 5% income stream required taking on three times more risk (standard deviation) than in 2008

Marginal tax rates are 25% higher than 2012 levels

50% 3X 25%

Today’s environment of near historic low yields and heightened volatility has led many investors to ask how to find more income.


Rethink Your Bonds



12

Yields Have Fallen…

Sources: Morningstar Inc. and Bankrate.com as of 12/31/13. Asset-weighted average yield for various Morningstar categories.

Yields have diminished on popular income categories

Yields on traditional income sources have dried up to near record lows

Higher levels of income exist, but they come with higher levels of risk

Taxable Money Market

6-mo CD US Core Bond 10-Year Treasury High Yield Bond0

2

4

6

8

10

12

0.02% 0.15%

2.58%3.04%

5.58%

Morningstar category 12-Month distribution yields 2008 vs. 2013

Yie

ld

’13 Income

’08 Income

2.28%

3.97%

11.28%

4.93%

3.36%


13

Source: Morningstar, Inc. as of 12/31/13. Risk represented by 5 -year annualized standard deviation. The hypothetical 5% Income Portfolio in 2007 consisted of a 35% allocation to Money Markets and a 65% allocation to Core Bonds. In 2013 that allocation was 35% Core Bonds and 65% High Yield Bonds. Money Funds, Core Bonds and High Yield represented by the Morningstar Taxable Money Market Funds category, Barclays Aggregate Bond Index and Barclays Issuer 2% Capped High Yield Index, respectively.

The standard deviation of a 5% income portfolio has multiplied 4 times

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

3

6

9

12

7.72%

Essentially no risk to get to a 5% income portfolio

Risk of a portfolio that generates a yield of 5%

3X the risk needed to obtain the same level of income

Std

. D

ev.

of

a 5%

in

com

e p

ort

foli

o (

%)

Risk Has Risen

Finding a yield of 5% is much riskier today than it has been in decades

Overreaching for yield without knowing the risks can be dangerous


14

2014 Investment Themes – Generate Income, But Don’t Overreach

1 Take a Flexible Approach to Income by casting a wider net to find the best income opportunities while carefully balancing the trade-offs between yield and risk

3 Adapt to Higher Taxes by increasing allocations to attractively-priced municipal bonds

2 Put Credit and Dividends to Work while decreasing the interest rate sensitivity of your portfolio



15

Source: Bloomberg. Standard deviation measures volatility of returns. Higher deviation represents higher risk. Index yields shown for illustrative purposes only. Indices are unmanaged. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Fixed income yields are yield to worst. The rest are current yield. Bank Loans, EM Debt, High Dividend Equities, High Yield Bonds, Investment Grade Bonds, MLPs, Preferred Stock, US REITs, US Treasury and Hypothetical Mixed-Asset Income Strategy represented by S&P Leveraged Loan Index, Barclays EM Debt Index, MSCI USA High Dividend Yield Index, Barclays HY 2% Issuer Capped Index, Barclays Investment Grade Index, Alerian MLP Index, S&P US Preferred Stock Index, FTSE EPRA/NAREIT Developed Real Estate Index, Barclays US 7-10 Year Treasury Bond Index and a portfolio of 20% High Div. Equities, 25% High Yield Bonds, 10% Bank Loans, 5% Preferred Stock, 5% MLPs, 15% Inv. Grade Bonds, 10% EM Debt, 10% US MBS, respectively.

Striking a prudent balance between income & risk

Risk/Yield Over the 5-Year Period Ended 12/31/13

A single-minded search for yield can result in too much risk; it’s important to consider a wider range of investments

Combining traditional & non-traditional income sources can help diversify, potentially lowering risk & increasing income

4 6 8 10 12 14 16 18 20 22 240%

2%

4%

6%

8%

Yie

ld (

%)

Risk (standard deviation)

Preferred Stock

MLPs

High Dividend Equities

US TreasuryInv. Grade Bonds

Bank Loans

High Yield Bonds

EM Debt

Low Risk Low Yield

Fixed income Equity income Alternative income sources

High Risk High Yield

Hypothetical Mixed-Asset Income strategy

US REITs



16


Source: Morningstar. As of 12/31/13. High Yield, Bank Loan and Core Bonds represented by the Morningstar High Yield Bond, Bank Loan and Intermediate-Term Bond Category averages, respectively. High Div Equities represented by the Lipper Equity Income Fund Category Average. Past performance is no guarantee of future results. Shown for illustrative purposes only. It is not possible to invest directly in an index.

1994 1999 2006 2013

BankLoan6.60%

High Div Equities6.00%



HighYield

-3.04%

BankLoan5.87%

High Yield

10.14%

HighYield6.35%

High Div Equities-1.65%

HighYield5.05%

BankLoan6.57%

BankLoan5.17%

CoreBond

-4.01%

CoreBond

-1.35%

CoreBond4.15%

CoreBond

-0.97%

“Credit” & “Dividends” outperformed “Core Bonds” in periods of rising rates

Performance in calendar years when interest rates rose


High yield bonds, bank loans& high dividend equities have historically outperformed bonds in periods of rising rates

Careful of overreaching for yield in undiversified sectors like utilities, US/International REITs & MLPs

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Source: Source: Barclay’s Live. Data as of 12/31/13. For illustrative purposes only. Index yields are shown for illustrative purposes only and do not predict or depict the yield of any Blackrock fund. Past performance does not guarantee future results. Fixed income yields are represented by yield to worst. All other yields represented by current yield. US Treasuries represented by the Barclays Treasury Index; Municipal bonds by the Barclays Municipal Index; Corporate bonds by the Barclays Corporate Index.

Impact of tax changes: Muni bond yields attractive vs. taxable bonds

Yields and Tax-Equivalent Yields

Core Bonds Municipal Bonds Tax Equivalent Muni Bond Yield 43.4% tax

rate

High Yield Bonds0

2

4

6

2.48%

3.15%

5.57% 5.64%

Yie

ld t

o W

ors

t (%

)

With higher taxes in 2013, municipals offer attractive after-tax income

Municipals are generally considered a high-quality asset class with yields that are rivaling high yield bonds



18


2014 Investment Themes – Seek Growth, Manage Volatility

A New Look at Equity Diversification

A Growing Need for Growth

Of equity assets have “diversified” into equities that are riskier than the S&P 500† rather than using less volatile and less correlated strategies

of investors didn’t benefitfrom recent rallies. To achieve their goals, investors should consider increasing their use of equities and managing risk

by mixing less-volatile and higher-potential solutions.

85% 54%We expect modest global growth with fewer, but continued, political and fiscal pressures world-wide.


Extreme Volatility

The amount of equity returns clients missed out on over 20 years* due to mis-timing the markets. The wild ride of equity highs and lows, produced both exciting returns and painful losses.

1/2

*Source: Bloomberg,Dalbar; as of 12/31/12. Past performance does not guarantee or indicate future results. †Source: Morningstar as of 12/31/13.

Rethink Your Bonds


19

Better Equity Diversification: Embracing Lower Risk Growth

Source: Morningstar as of 12/31/2013. Dividend Stocks represented by MSCI USA High Dividend Yield Index, Global Flexible represented by the Morningstar World Allocation category, Alternative Equity Strategy represented by the Credit Suisse Long/Short Equity Index, Global Stocks represented by the MSCI World Index, International represented by the MSCI EAFE Index, and Small Caps represented by the Russell 2000 Index.

Finding less-volatile diversifiers

Return/Risk, last 10 years ended 12/31/13

Lower Risk Equity Diversifiers Traditional Equity Diversifiers

10 15 206

8

10

S&P 500

International

Alternative Equity Strat-

egy

Small Caps

Global FlexibleGlobal Stocks

Dividend StocksR

etu

rn

Risk

Utilizing additional growth categories can support diversification and lower risk across growth strategies

Generate Income, But Don’t OverreachRethink Your Bonds Seek Growth, Manage Volatility

20

Overweight Growth, Not Risk

More Growth Doesn’t Have To Mean Higher Risk

20-Year Stats Traditional Stock and Bond 60 Stock / 40 Bonds

Risk Managed Growth Approach67 Stocks / 33 Bonds

Risk 9.17 8.20 Lowest Risk

Return 8.31 8.66 Highest Return

33%

22%11%

33%

40%

60%

Traditional Equities

Conservative Equities

Flexible & Alternatives

Bonds

Sticking with 60/40 or including more growth doesn’t necessarily imply higher volatility

Source: Morningstar, Lipper. Flexible & Alternatives Portfolio incorporates Morningstar Market Neutral (20%), Morningstar Equity Long-Short (20%) & Lipper Global Flexible Portfolio (60%) Categories. Conservative Equities portfolio is comprised of Lipper Equity Income (100%). Traditional Equitiescomposed of 100% Russell 1000 Value. Bonds represented by Morningstar Intermediate-Term Bond Category.


21

2014 Investment Themes – Seek Growth, Manage Volatility

2 Mitigate Risk with Diversified and Alternative Strategies that provide equity-like growth and dampen volatility

1 Allocate to Traditional Equities with an investment approach that makes volatility an asset, helping to provide the growth you need at any stage of life

3 Seek Conservative Equity Growth that offer growth in strong markets, and help cushion the downside in difficult markets



22


Equities remain attractively valued

Asset class valuations vs. historical range

Stocks look attractive relative to bonds

While US equities are fairly valued by historical levels, many international regions continue to exhibit considerable value

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Average

Cheap

Expensive

EQUITIES FIXED

Sources: BlackRock, Thomson Reuters and Bloomberg, as of 12/31/2013. Notes: Historical time periods vary in range from 13 to 30 years. Regional equities represented by comparative MSCI indexes, US 10 Yr represented by US 10-YR treasury and High Yield by BofA ML HL index. Equity valuations based on average blend of dividend yield, book values and price earnings ratios versus historical levels.


23

Sources: Morningstar, Inc. as of 12/31/13. Performance is historical and does not guarantee future results. World Allocation, US Stocks, International Stocks and Bonds represented by Morningstar’s World Allocation, Large-Cap Blend, Foreign Large Blend and World Bond Categories, respectively.

Diversification can offer growth and risk protection

The aim is to provide performance consistency, not spectacular one-off returns

An enlarged opportunity set provides the flexibility to navigate diverse markets

Annual Total Returns of Morningstar Categories 12/31/03–12/31/13


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

+17.41 +14.80 +24.75 +12.78 -2.2 +30.90 +14.18 +3.28 +18.30 31.32

+14.77 +6.26 +16.27 +11.24 -30.25 +28.14 +10.95 -1.40 +14.85 19.29

+10.05 +5.87 +14.00 +7.33 -37.89 +24.20 +10.24 -3.66 +10.18 8.46

+9.20 -3.23 5.41 +6.01 -44.05 +13.58 +6.79 -13.89 +7.74 -2.88

US Stocks

International Stocks

World Allocation

Bonds

6.93%

6.95%

7.01%

4.61%

10-Year AnnualizedReturns by Category


24


Lower volatility strategies have proved stronger at navigating the extreme highs and lows of the last decade…

…by limiting losses and aiding participation in stronger markets

Source: Morningstar, BlackRock; as of 12/31/2013. Past performance does not guarantee future results.

When risk doesn’t pay

Minimum Volatility Indices, 12/31/09 (year of inception) – 12/31/13

Risk (standard deviation %)

An

nu

aliz

ed

Re

turn

(%

)


8 10 12 14 16 18 20 220

4

8

12

16

20

S&P 500

MSCI USA

MSCI EM

MSCI EAFE

S&P 500 Dividend Aristocrats

MSCI USA Min Vol

MSCI EM Min VolMSCI EAFE Min Vol

25

INVESTMENT SUGGESTIONS

2014 Investment Themes



Rethink Your Bonds




1

2

3




1

2

3




1

2

3

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Important Notes

You should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund, and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus and, if available, the summary prospectus should be read carefully before investing.

Stock and bond values fluctuate in price so the value of your investment can go down depending on 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. Asset allocation strategies do not assure profit and do not protect against loss. Short-selling entails special risks. If the fund makes short sales in securities that increase in value, the fund will lose value. Any loss on short positions may or may not be offset by investing short-sale proceeds in other investments.

BLACKROCK, iSHARES and SO WHAT DO I DO WITH MY MONEY? are registered trademarks of BlackRock, Inc. in the United States and elsewhere. All other trademarks are the property of their respective owners.© 2014 BlackRock, Inc. All Rights Reserved.

Prepared by BlackRock Investments, LLC, member FINRA

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BlackRock 2014 Investment Themes January 2014 The opinions presented are as of January 2014 and are...

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Transcript of BlackRock 2014 Investment Themes January 2014 The opinions presented are as of January 2014 and are...