It’s time to diversify investments

The Business Times
Teh Hooi Ling
31/7/2013

INVESTORS should diversify their investments and not hide in a single asset class any more as the US Federal Reserve's tapering is a game-changer, said Andy Warwick, BlackRock's managing director and portfolio manager of the firm's global multi-asset income fund.

Here in Asia for his whirlwind tour to promote his fund, Mr Warwick said the world is moving on. "The Fed's tapering is a game-changer. It signifies the end of the bond bull market. That has huge ramifications for all asset classes as well."

Investors, he said, have to have a diversified portfolio across as many different asset classes as they can. They have to try to find a variety of streams of income.

Although diversification is supposedly a mantra of good investment practice, not many actually do that, he said. "The fund flows into fixed income in the past five years have been absolutely extraordinary. And up till the beginning of this year, equities have had consistent outflows. We are just seeing people diversifying this year."

Multi-asset strategy

But increasingly, investors are coming round to the idea of diversification. Fund flows into BlackRock's multi-asset strategy have been rising. As at today, there are US$150 billion assets under multi-asset strategy. Overall, BlackRock has some US$4 trillion assets under management.

Mr Warwick said BlackRock is on target in attracting well over US$1 billion this year to its multi-asset strategy funds.

One fund under multi-asset strategy is the income fund managed by Mr Warwick. Established a year ago, the fund is seeing an inflow of "US$1 million to US$2 million" a day. The fund size is now about US$220 million.

About US$100 million of that has come from Korea. The fund has also got good support from Italy. Mr Warwick said the income fund invests in as many asset classes as it can. It invests in loans, real estate debts, infrastructure, solar farms and master limited partnerships - publicly traded vehicles that derive most of its cash flows from real estate, natural resources and commodities.

These instruments generate a net yield of 5.3 per cent. The income fund aims to generate 4 to 6 per cent of yield to pay out to unitholders, and one to 3 per cent of capital growth. In the first year of its operation, the fund chalked up returns of 10.5 per cent.

"Our whole rationale is we want to pay out of the income we generate. We are not going to pay out of capital," said Mr Warwick.

Clients' feedback to BlackRock is that they are not looking for a decumulation type of product. They want something that will give them some form of capital growth as well, he added.

With 40 per cent in equities - 25 per cent in developed market equities and 15 per cent in developing markets - Mr Warwick is looking to increase the equities allocation to 45 per cent. He is positive on the United States, and Europe in particular. He still likes high yields, as the cushion between the spreads is still very high.

Areas which are challenged are government bonds and emerging market equities. But within that two big space, there are pockets of opportunities. Italian and Spanish bonds still look attractive because they are "priced to fail", which BlackRock thinks is the wrong assessment. Brazilian and Mexican government bonds are appealing as well.

In emerging market equities, Mr Warwick is positive on the Asean region, in particular the Philippines and Thailand. "Singapore is simply in a permanent goldilocks scenario - decent growth, low inflation etc."

But China may likely find it difficult particularly in the short term.

"I'm not a perma China bear," qualified Mr Warwick. "I think China can probably come out of this very strongly. But this could be three to five years away. I think the journey to that ending is going to be a rocky one, to say the least."

From an investment point of view, Mr Warwick said the challenge is persuading clients that they are not going to be able to achieve their return expectations and goals by still sticking to fixed income. "You've got to take risks to get return."

Bond selling

One risk that Mr Warwick can identify now is bondholders rushing for the exit at the same time when they see losses in their statements for the first time in two or three years. "Clearly that amount of bond selling would put extreme pressure on bonds and yields. The investment risk here is that bond yields spike too quickly, and the Fed or other governments lose control of their bond markets. That would not be good."

Also, BlackRock's view is that interest rates are on hold until at least 2015. Another risk is that this assumption turns wrong and interest rates rise aggressively before 2015.

Another big risk, he said, is a sudden rise in inflation in the US and emerging markets. "There's no sign of that at all now. But if for some reason, it rears its head, and that forces the Fed to act aggressively, again that will be a big big risk."

BlackRock's main road map, added Mr Warwick, is that "the US grows 2 to 3 per cent, with low inflation, very low interest rates. Corporate profits hold up. And that has obviously a positive effect on the rest of the globe".