Point of View from the BGF Global Allocation Team
November 2011 FOR PROFESSIONAL INVESTORS ONLY
BLACKROCK GLOBAL FUNDS (BGF)
Point of View from the BGF Global Allocation Team If markets have you down, here’s a team to look up Finding value amid volatility Sharp market gyrations have investors uncertain as to where to focus their attention. The BGF Global Allocation team has the flexibility to invest in any asset class, anywhere, and even amid today’s heightened volatility, is finding no shortage of opportunities. ``Despite a slowdown in the developed world, emerging markets are bolstering the global economy. ``Equities are attractively valued relative to both developed market government fixed income and cash. ``Price matters – paying attention to price and being aware of how the market environment changes plays to investors’ advantage. ``Investors may have to weather some short-term volatility for the long-term opportunity to own good-quality stocks at valuations that have reached their lowest in a generation. ``A globally diversified, multi-asset, professionally managed portfolio can be an important cornerstone of investors’ financial goals.
The Global Allocation investment mandate allows you to invest anywhere in the world without restriction. What are your thoughts on Europe, which is making most of today’s headlines? The current situation in Europe began as a financial crisis centred on sovereign debt markets. Since then, however, the crisis has infected the banking system and has begun to expose a political crisis of tremendous consequence for the global economy. Unfortunately, the daily headlines fail to capture the true complexity of the situation. Europe is not a uniform entity and there is no centralised European government; the democratically-elected officials who sit in the European Union ultimately answer to their own local constituencies. This arrangement can create conflicts of interest as EU officials recognise both the need to keep the union together while also constructively addressing the crisis. Solving the sovereign debt problem will take time and it would be a mistake to misinterpret the amount of time required to effect the necessary change or to view the lack of short-term resolution as ineptitude on the part of EU policymakers.
Dennis Stattman, CFA, Managing Director and portfolio manager, is head of the Global Allocation team within BlackRock’s Portfolio Management Group (PMG) and a member of the BlackRock PMG Executive Committee, Leadership Committee and Central Strategy Group. His service with the firm dates back to 1989, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. He has been a manager of the BlackRock Global Allocation Fund since its inception in 1989. Prior to joining MLIM, Mr. Stattman served as the Director of Research for Meridian Management Company, and as Pension Investment Officer for the World Bank, supervising the management of US equities in the bank’s retirement plan. Dennis earned a BS degree in commerce from the University of Virginia in 1973 and an MBA degree, with honours, from the University of Chicago in 1980. He is a CFA® Charterholder. Dan Chamby, CFA, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock’s Portfolio Management Group. His service with the firm dates back to 1993, including his years with MLIM. Dan joined MLIM in 1993 as a Research Analyst for the BlackRock Global Allocation Fund and was named Associate Portfolio Manager in 2003 and Portfolio Manager 2011. Prior to joining MLIM, Mr. Chamby worked for Fujitsu Ltd. in their Tokyo headquarters as a Research Analyst. He began his investment career at Mellon Bank in 1982 as an Asia/Pacific Credit Analyst, and later managed the international money market desk. Dan received his BA degree in political science and French literature from Duquesne University in 1982, and an MBA degree from the Wharton School, University of Pennsylvania in 1988. Dan speaks Japanese and French, and is a CFA® Charterholder. Aldo Roldan, PhD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock’s Portfolio Management Group. His service with the firm dates back to 1998, including his years with MLIM, where he was a portfolio manager for various global fixed income portfolios as well as Head of Emerging Market Debt. Aldo joined the BlackRock Global Allocation Fund team as an Associate Portfolio Manager in 2006 and was named Portfolio Manager in 2011. Prior to joining MLIM, he was a Senior Vice President at Santander Investments, and earlier was a global economic analyst at JP Morgan Chase. Aldo began his investment career at Chase Econometrics, where he founded and managed the emerging markets research group. He earned a BA degree in economics from the University of Chile in 1973, and a Ph.D. in economics and econometrics from the Wharton School, University of Pennsylvania in 1978. Aldo is fluent in Spanish.
But while Europe is a big short-term worry, we shouldn’t lose sight of the fact that the world’s developing economies, including China, India and Brazil, are booming. In fact, policymakers in China and India face a completely different problem. They’re confronted with economies that are overheating and rising consumer prices and wages that are growing at a double-digit rate.
Can the relative strength of the emerging markets offset weakness in the developed world? We believe investors are concerned about both the very obvious slowing in the developed economies, as well as some slowing in the developing economies. But there is still a great deal of growth in China, in India, and in a number of other emerging economies; it’s important to remember that there are vast unmet needs in these economies. Hundreds of millions of consumers in these regions are only just beginning to get a taste for a higher standard of living, and they are not going to give up on these ambitions. They will be buying the basics of middle-class life for decades to come, and these consumption habits should continue to support the growth of developing economies. Some sceptics will argue that China’s growth is slowing. Our sense is, however, that the speed of China’s growth is reducing from a very rapid rate to merely a rapid rate. We should also bear in mind that this slower rate is not an accident; it is the direct result of Chinese government policies designed to slow the economy. With these policies, the government is trying to mitigate the effect of housing over-build in some cities, while also deploying a more restrictive monetary policy to tackle rising consumer prices and wages. As the Chinese economy slows however, there is significant scope for those policies to change and, if need be, revert to more stimulative economic measures. Overall, emerging economies do not face the same structural challenges that exist in the developed world. The pie charts below illustrate the contribution of different regions of the world to global gross domestic product (GDP) versus how their stock markets are represented in terms of market capitalisation. The emerging economies contribute far more to global GDP (nearly 50%) than is represented by their stock markets (14%). We believe these percentages will converge over the long-term. Emerging Markets: Large GDP contribution, but under‑represented on world equity stage Contribution to global stock market capitalisation
Contribution to world GDP
14%
19%
42%
49% 32%
Other developed markets
44%
Emerging markets
US
Source: International Monetary Fund (IMF), World Economic Outlook Database, MSCI World. As of 31 December 2010.
What about the US economy? The current outlook for the US economy is uncertain. One aspect that is clear to us, however, is that the so-called economic recovery since the recession of 2008-2009 has been unsatisfactory; it hasn’t created enough jobs, generated enough tax revenue for governments, or given businesses and consumers enough confidence to go out and spend. As a result, the US economy is not as strong as it would normally be following a recovery. The good news is that there hasn’t been an economic boom from which we could crash down. Instead, while unsatisfactory growth persists, companies have nonetheless been able to make money. In fact, US companies are generating record profits.
Are the major western economies entering a new recession? We will not know the answer to that question until those economies have posted negative growth figures over two consecutive quarters. We will, however, need to prepare for a prolonged period of slow growth, which contrasts with the economic environment to which the West has grown accustomed. As investors, we must be prepared to take advantage of the opportunities that arise from the current uncertainty-driven volatility, avoiding the investment pitfalls generated by slower economic growth. Investors also need to remember that stock markets and economies are not the same thing. US companies have exhibited incredible resilience amid the economic downturn, and their stocks represent tremendous value. Japan is another example. We like Japanese companies, but that doesn’t necessarily entail we are bullish on Japan as an economy. As an aside, Japan may be the only G7 country with accelerating economic growth next year, mainly as it continues to recover from the March 2011 earthquake. Japan is also home to many best-in-class operators of businesses that make goods highly demanded by consumers and industries around the world. At the moment, many investors have thrown Japan on the dust heap and we think that in doing so they are missing out on a real opportunity.
How can investors prepare for possibly prolonged slow growth? In our view, the current economic cycle differs from past cycles for several reasons. First, stock valuations are lower than at almost any other time in the history of the Global Allocation Fund. Many high-quality global companies offer dividend yields well above those offered in fixed income markets. As a result, investors do not have the ability to use fixed income as both a defensive and offensive strategy, as they were able to do at times in the 1990s. As a result, while traditional low-risk government fixed income currently functions primarily as a short-term defensive instrument, it will not satisfy an investor’s return needs over an extended period of time. So, we believe investors may have to accept a bit more short-term volatility for the long-term opportunity to own good-quality stocks at very low valuations, thereby exposing themselves to the upside that we believe is going to be evident one, two and three years down the road.
Investors absolutely should be looking closely at equities. We’re experiencing some of the lowest stock prices in decades. All measures of value – including dividend yields, price/earnings (P/E) ratios, price-to-cash flow - are at attractive levels This is not the time for investors to shun stocks, especially when cash equivalents yield zero and fixed income yields are among the lowest many of us have ever seen in our lives. As professional investors who are immersed in global markets every day, we are beginning to find a lot of interesting stocks to buy in various markets and sectors. Certain stocks, particularly when compared to the traditional fixed income markets, are almost a screaming buy. Global equity valuations US Europe Japan China India Brazil Russia
Price/EPS (2012) 10.2x 7.5x 11.7x 9.1x 12.0x 8.0x 5.0x
Proj. EPS Growth 11.6% 7.1% 14.1% 19.9% 15.5% 12.8% -2.6%
Dividend Yield 2.3% 5.5% 2.4% 2.1% 1.6% 4.5% 2.5%
Source: Bloomberg. As of 30 September 2011. Indices used are as follows: US – S&P 500 Index; Europe – Eurostoxx 50 Index; Japan – Topix Index; China – Shanghai Stock Exchange Composite Index; India – BSE Index Sensex 30 Index; Brazil – Bovespa Index; Russia – MICEX Index.
Oil demand accelerated by industrialisation of China and India 35 Per capita (barrels per year)
The daily market swings have many investors steering clear of equities. Is it wise to wait out the volatility or should investors be looking at equities now?
30 25 20 15 10 5 0
1900
20
40 US
60 South Korea
80 Japan
2000 China
2010
India
Source: BP Statistical Review of World Energy, Respective Census Bureaus, World Bank, Tristone Research. As of 31 December 2010
Where are the opportunities in fixed income today? The short answer is that there are fewer opportunities than we would like. That said, we do see opportunities in select areas of emerging market debt. We see growth in emerging economies, good balance sheets and, in many cases, declining debt-to-GDP ratios. We like to see these attributes in a bond issuer. In addition, some currencies appear poised to appreciate versus the US dollar. Within the US interest rate environment, however, we see far fewer opportunities. Global 10-year bond yields 10 8.4%
8.8%
8
What sectors and markets are you looking to add to? Europe is one area. As a result of the financial crisis, the sell-off in Europe has been fierce, and we’ve found some particularly interesting stocks amid the rubble. There are companies within the German stock index, the DAX, that have already had their earnings estimates slashed substantially, and yet, we’re still seeing the market as a whole trading at a forward P/E of roughly 8x. Some best-in-class stocks are trading sometimes at 5x or 6x earnings, representing, in our view, remarkable value. Opportunities can be found in commodities as well, particularly where emerging markets are the marginal consumer, representing a growing portion of demand. Emerging economies are not slowing down in the same way as the developed world, and they are becoming a larger part of commodity consumption. Oil prices, for example, may decrease now because of declining consumption and inventory build-up in the United States. However, other regions continue to grow. As indicated on the chart below, India and China consume far less oil than other nations. As these developing economies continue to grow at faster rates, it is likely that the demand for natural resources such as oil, coal and natural gas will continue to increase. The temporary weaknesses in some of these markets are creating excellent buying opportunities for the longerterm, in two or three years’ time.
%
6 3.9%
4 2 0
1.9%
1.9%
US
Europe
4%
1% Japan
China
Brazil
India
Russia
Global 10-Year yields Source: Bloomberg. As of 30 September 2011.
Describe your investment process. How do you narrow your vast investment universe? Choosing amidst such a broad universe is a daunting challenge, but it’s also a great luxury because very few investment managers have the flexibility that we do to go wherever the opportunities are. Unlike most asset allocation funds, we don’t take a solely top-down approach. Instead of making decisions based only on which asset classes, sectors and geographies look attractive, we also approach our research from the bottom-up. This means we look for individual securities that can outperform their markets. Our team constantly searches for those individual securities that can validate the topdown view, giving us greater conviction that we have the correct investment view of the world.
Tell us about your team We built the BGF Global Allocation team very carefully over time and would venture to say there is no other team like it anywhere in the industry. In addition to three portfolio managers, the team boasts 13 senior analysts with a deep background and a great deal of experience looking for individual securities believed to be superior investments for our clients. We also have research associates supporting them, gathering data and doing analysis. In addition, we have a group that helps structure our transactions, another group that helps us with our information, and a team that specialises in communicating with our clients. The way we tend to hire people on our team is also very important. We look for people who are engaged, who have tremendous intellectual curiosity and who exhibit a certain intrepidness. In other words, people join our team with vast knowledge in their areas of expertise, but they must be willing to work outside their comfort zones, to consider opportunities across the asset class spectrum and to connect ideas that seem unrelated to arrive at some of the most compelling investment opportunities. Oftentimes, the greatest investments lurk between the seams of two apparently disparate ideas. It’s in those intersections where we often find the opportunities that the broader marketplace does not. This, we believe, is our opportunity to realise profits for our shareholders.
What role does risk management play in your investment process? Risk is the other side of the return coin, and we seek to balance those two sides out. We are always trying to achieve abovemarket return with controlled risk and we manage risk in a multidimensional manner. We apply risk management techniques from the broader BlackRock organisation by using our in-house, industryleading quantitative risk group. Broad diversification is our second key risk management tool, as different asset classes respond differently to various market movements. We have 600-700 distinct names in the portfolio.
To what do you attribute the Global Allocation Fund’s performance success? First is flexibility. Not only is our mandate flexible, but the team is flexible, experienced, and willing to take their knowledge and apply it anywhere in the investment universe. We foster constant dialogue that involves sharing ideas and questioning one other; this often uncovers the most interesting ideas. The second thing that is very important to our team is price. Price matters, and we never want to overpay for a security. A finelytuned price consciousness as well as an awareness of the shifting environment is quite advantageous.
Thirdly, conviction. Volatility can make investors behave irrationally. The panic roused by market gyrations can cause an investor to sell something that may otherwise be an excellent investment. We are very disciplined and we realise that sometimes it’s necessary to sustain some of the pain of an investment to reap its rewards. We buy when we see value and when we are confident in the factors supporting a particular investment: is it the right country, the right sector, the right management and the right point in the company’s capital structure? When the answers to those questions are “yes,” we then have the conviction to maintain an investment through volatility and, ultimately, realise the value that we hypothesised was there. As investors, we are careful to separate our emotional from rational behaviour. The bottom line is that we’re blessed with flexibility, we maintain diversification and we’re very value-oriented. Price matters.
Any final advice for investors? No one, including us, knows exactly what the stock market is going to do tomorrow, next week or in the next three months. However, we do have a good grasp on how things are priced and what value you can expect for your money. At the moment, the value for money is pretty good in the stock market and less good in the bond market. When prices are low and securities are on sale, the same amount of money can buy more. As a result, in today’s environment, price favours the equity investor.
About BlackRock BlackRock is one of the world’s pre-eminent asset management firms and a premier provider of global investment management, risk management and advisory services to institutional, intermediary and individual investors around the world. BlackRock offers a range of solutions – from rigorous fundamental and quantitative active management approaches aimed at maximising outperformance to highly efficient indexing strategies designed to gain broad exposure to the world’s capital markets. Our clients can access our investment solutions through a variety of product structures, including individual and institutional separate accounts, mutual funds, investment trusts and other pooled investment vehicles, and the industry-leading iShares® ETFs. This offering has been recognised so far in 2011 with 118 first-placed industry awards received globally.† BlackRock is a truly global firm that combines the benefits of worldwide reach with local service and relationships. We manage assets for clients in North and South America, Europe, Asia, Australia and the Middle East. The firm employs more than 9,700 professionals and maintains offices in 29 countries around the world. The foundation of BlackRock’s business is our belief that our clients’ needs are of paramount importance. Our commitment to investment excellence is anchored in a shared culture that always places a client’s interests first, from individual investors to the world’s largest institutions. We act always as a fiduciary for our clients, never trading as a principal on our own behalf. As of 30 September 2011, BlackRock’s assets under management total US$3.35 trillion (£2.14 trillion)* across equity, fixed income, cash management, alternative investments, multi-asset and advisory strategies. Through BlackRock Solutions®, we offer risk management, strategic advisory and enterprise investment system services to a broad base of clients with portfolios totalling over US$10 trillion.* † This tally of awards is correct to 15 October 2011 and does not include iShares ETF products. * Data as at 30 September 2011.
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000439-11 Nov11
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BLACKROCK GLOBAL FUNDS (BGF)
Point of View from the BGF Global Allocation Team If markets have you down, here’s a team to look up Finding value amid volatility Sharp market gyrations have investors uncertain as to where to focus their attention. The BGF Global Allocation team has the flexibility to invest in any asset class, anywhere, and even amid today’s heightened volatility, is finding no shortage of opportunities. ``Despite a slowdown in the developed world, emerging markets are bolstering the global economy. ``Equities are attractively valued relative to both developed market government fixed income and cash. ``Price matters – paying attention to price and being aware of how the market environment changes plays to investors’ advantage. ``Investors may have to weather some short-term volatility for the long-term opportunity to own good-quality stocks at valuations that have reached their lowest in a generation. ``A globally diversified, multi-asset, professionally managed portfolio can be an important cornerstone of investors’ financial goals.
The Global Allocation investment mandate allows you to invest anywhere in the world without restriction. What are your thoughts on Europe, which is making most of today’s headlines? The current situation in Europe began as a financial crisis centred on sovereign debt markets. Since then, however, the crisis has infected the banking system and has begun to expose a political crisis of tremendous consequence for the global economy. Unfortunately, the daily headlines fail to capture the true complexity of the situation. Europe is not a uniform entity and there is no centralised European government; the democratically-elected officials who sit in the European Union ultimately answer to their own local constituencies. This arrangement can create conflicts of interest as EU officials recognise both the need to keep the union together while also constructively addressing the crisis. Solving the sovereign debt problem will take time and it would be a mistake to misinterpret the amount of time required to effect the necessary change or to view the lack of short-term resolution as ineptitude on the part of EU policymakers.
Dennis Stattman, CFA, Managing Director and portfolio manager, is head of the Global Allocation team within BlackRock’s Portfolio Management Group (PMG) and a member of the BlackRock PMG Executive Committee, Leadership Committee and Central Strategy Group. His service with the firm dates back to 1989, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. He has been a manager of the BlackRock Global Allocation Fund since its inception in 1989. Prior to joining MLIM, Mr. Stattman served as the Director of Research for Meridian Management Company, and as Pension Investment Officer for the World Bank, supervising the management of US equities in the bank’s retirement plan. Dennis earned a BS degree in commerce from the University of Virginia in 1973 and an MBA degree, with honours, from the University of Chicago in 1980. He is a CFA® Charterholder. Dan Chamby, CFA, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock’s Portfolio Management Group. His service with the firm dates back to 1993, including his years with MLIM. Dan joined MLIM in 1993 as a Research Analyst for the BlackRock Global Allocation Fund and was named Associate Portfolio Manager in 2003 and Portfolio Manager 2011. Prior to joining MLIM, Mr. Chamby worked for Fujitsu Ltd. in their Tokyo headquarters as a Research Analyst. He began his investment career at Mellon Bank in 1982 as an Asia/Pacific Credit Analyst, and later managed the international money market desk. Dan received his BA degree in political science and French literature from Duquesne University in 1982, and an MBA degree from the Wharton School, University of Pennsylvania in 1988. Dan speaks Japanese and French, and is a CFA® Charterholder. Aldo Roldan, PhD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock’s Portfolio Management Group. His service with the firm dates back to 1998, including his years with MLIM, where he was a portfolio manager for various global fixed income portfolios as well as Head of Emerging Market Debt. Aldo joined the BlackRock Global Allocation Fund team as an Associate Portfolio Manager in 2006 and was named Portfolio Manager in 2011. Prior to joining MLIM, he was a Senior Vice President at Santander Investments, and earlier was a global economic analyst at JP Morgan Chase. Aldo began his investment career at Chase Econometrics, where he founded and managed the emerging markets research group. He earned a BA degree in economics from the University of Chile in 1973, and a Ph.D. in economics and econometrics from the Wharton School, University of Pennsylvania in 1978. Aldo is fluent in Spanish.
But while Europe is a big short-term worry, we shouldn’t lose sight of the fact that the world’s developing economies, including China, India and Brazil, are booming. In fact, policymakers in China and India face a completely different problem. They’re confronted with economies that are overheating and rising consumer prices and wages that are growing at a double-digit rate.
Can the relative strength of the emerging markets offset weakness in the developed world? We believe investors are concerned about both the very obvious slowing in the developed economies, as well as some slowing in the developing economies. But there is still a great deal of growth in China, in India, and in a number of other emerging economies; it’s important to remember that there are vast unmet needs in these economies. Hundreds of millions of consumers in these regions are only just beginning to get a taste for a higher standard of living, and they are not going to give up on these ambitions. They will be buying the basics of middle-class life for decades to come, and these consumption habits should continue to support the growth of developing economies. Some sceptics will argue that China’s growth is slowing. Our sense is, however, that the speed of China’s growth is reducing from a very rapid rate to merely a rapid rate. We should also bear in mind that this slower rate is not an accident; it is the direct result of Chinese government policies designed to slow the economy. With these policies, the government is trying to mitigate the effect of housing over-build in some cities, while also deploying a more restrictive monetary policy to tackle rising consumer prices and wages. As the Chinese economy slows however, there is significant scope for those policies to change and, if need be, revert to more stimulative economic measures. Overall, emerging economies do not face the same structural challenges that exist in the developed world. The pie charts below illustrate the contribution of different regions of the world to global gross domestic product (GDP) versus how their stock markets are represented in terms of market capitalisation. The emerging economies contribute far more to global GDP (nearly 50%) than is represented by their stock markets (14%). We believe these percentages will converge over the long-term. Emerging Markets: Large GDP contribution, but under‑represented on world equity stage Contribution to global stock market capitalisation
Contribution to world GDP
14%
19%
42%
49% 32%
Other developed markets
44%
Emerging markets
US
Source: International Monetary Fund (IMF), World Economic Outlook Database, MSCI World. As of 31 December 2010.
What about the US economy? The current outlook for the US economy is uncertain. One aspect that is clear to us, however, is that the so-called economic recovery since the recession of 2008-2009 has been unsatisfactory; it hasn’t created enough jobs, generated enough tax revenue for governments, or given businesses and consumers enough confidence to go out and spend. As a result, the US economy is not as strong as it would normally be following a recovery. The good news is that there hasn’t been an economic boom from which we could crash down. Instead, while unsatisfactory growth persists, companies have nonetheless been able to make money. In fact, US companies are generating record profits.
Are the major western economies entering a new recession? We will not know the answer to that question until those economies have posted negative growth figures over two consecutive quarters. We will, however, need to prepare for a prolonged period of slow growth, which contrasts with the economic environment to which the West has grown accustomed. As investors, we must be prepared to take advantage of the opportunities that arise from the current uncertainty-driven volatility, avoiding the investment pitfalls generated by slower economic growth. Investors also need to remember that stock markets and economies are not the same thing. US companies have exhibited incredible resilience amid the economic downturn, and their stocks represent tremendous value. Japan is another example. We like Japanese companies, but that doesn’t necessarily entail we are bullish on Japan as an economy. As an aside, Japan may be the only G7 country with accelerating economic growth next year, mainly as it continues to recover from the March 2011 earthquake. Japan is also home to many best-in-class operators of businesses that make goods highly demanded by consumers and industries around the world. At the moment, many investors have thrown Japan on the dust heap and we think that in doing so they are missing out on a real opportunity.
How can investors prepare for possibly prolonged slow growth? In our view, the current economic cycle differs from past cycles for several reasons. First, stock valuations are lower than at almost any other time in the history of the Global Allocation Fund. Many high-quality global companies offer dividend yields well above those offered in fixed income markets. As a result, investors do not have the ability to use fixed income as both a defensive and offensive strategy, as they were able to do at times in the 1990s. As a result, while traditional low-risk government fixed income currently functions primarily as a short-term defensive instrument, it will not satisfy an investor’s return needs over an extended period of time. So, we believe investors may have to accept a bit more short-term volatility for the long-term opportunity to own good-quality stocks at very low valuations, thereby exposing themselves to the upside that we believe is going to be evident one, two and three years down the road.
Investors absolutely should be looking closely at equities. We’re experiencing some of the lowest stock prices in decades. All measures of value – including dividend yields, price/earnings (P/E) ratios, price-to-cash flow - are at attractive levels This is not the time for investors to shun stocks, especially when cash equivalents yield zero and fixed income yields are among the lowest many of us have ever seen in our lives. As professional investors who are immersed in global markets every day, we are beginning to find a lot of interesting stocks to buy in various markets and sectors. Certain stocks, particularly when compared to the traditional fixed income markets, are almost a screaming buy. Global equity valuations US Europe Japan China India Brazil Russia
Price/EPS (2012) 10.2x 7.5x 11.7x 9.1x 12.0x 8.0x 5.0x
Proj. EPS Growth 11.6% 7.1% 14.1% 19.9% 15.5% 12.8% -2.6%
Dividend Yield 2.3% 5.5% 2.4% 2.1% 1.6% 4.5% 2.5%
Source: Bloomberg. As of 30 September 2011. Indices used are as follows: US – S&P 500 Index; Europe – Eurostoxx 50 Index; Japan – Topix Index; China – Shanghai Stock Exchange Composite Index; India – BSE Index Sensex 30 Index; Brazil – Bovespa Index; Russia – MICEX Index.
Oil demand accelerated by industrialisation of China and India 35 Per capita (barrels per year)
The daily market swings have many investors steering clear of equities. Is it wise to wait out the volatility or should investors be looking at equities now?
30 25 20 15 10 5 0
1900
20
40 US
60 South Korea
80 Japan
2000 China
2010
India
Source: BP Statistical Review of World Energy, Respective Census Bureaus, World Bank, Tristone Research. As of 31 December 2010
Where are the opportunities in fixed income today? The short answer is that there are fewer opportunities than we would like. That said, we do see opportunities in select areas of emerging market debt. We see growth in emerging economies, good balance sheets and, in many cases, declining debt-to-GDP ratios. We like to see these attributes in a bond issuer. In addition, some currencies appear poised to appreciate versus the US dollar. Within the US interest rate environment, however, we see far fewer opportunities. Global 10-year bond yields 10 8.4%
8.8%
8
What sectors and markets are you looking to add to? Europe is one area. As a result of the financial crisis, the sell-off in Europe has been fierce, and we’ve found some particularly interesting stocks amid the rubble. There are companies within the German stock index, the DAX, that have already had their earnings estimates slashed substantially, and yet, we’re still seeing the market as a whole trading at a forward P/E of roughly 8x. Some best-in-class stocks are trading sometimes at 5x or 6x earnings, representing, in our view, remarkable value. Opportunities can be found in commodities as well, particularly where emerging markets are the marginal consumer, representing a growing portion of demand. Emerging economies are not slowing down in the same way as the developed world, and they are becoming a larger part of commodity consumption. Oil prices, for example, may decrease now because of declining consumption and inventory build-up in the United States. However, other regions continue to grow. As indicated on the chart below, India and China consume far less oil than other nations. As these developing economies continue to grow at faster rates, it is likely that the demand for natural resources such as oil, coal and natural gas will continue to increase. The temporary weaknesses in some of these markets are creating excellent buying opportunities for the longerterm, in two or three years’ time.
%
6 3.9%
4 2 0
1.9%
1.9%
US
Europe
4%
1% Japan
China
Brazil
India
Russia
Global 10-Year yields Source: Bloomberg. As of 30 September 2011.
Describe your investment process. How do you narrow your vast investment universe? Choosing amidst such a broad universe is a daunting challenge, but it’s also a great luxury because very few investment managers have the flexibility that we do to go wherever the opportunities are. Unlike most asset allocation funds, we don’t take a solely top-down approach. Instead of making decisions based only on which asset classes, sectors and geographies look attractive, we also approach our research from the bottom-up. This means we look for individual securities that can outperform their markets. Our team constantly searches for those individual securities that can validate the topdown view, giving us greater conviction that we have the correct investment view of the world.
Tell us about your team We built the BGF Global Allocation team very carefully over time and would venture to say there is no other team like it anywhere in the industry. In addition to three portfolio managers, the team boasts 13 senior analysts with a deep background and a great deal of experience looking for individual securities believed to be superior investments for our clients. We also have research associates supporting them, gathering data and doing analysis. In addition, we have a group that helps structure our transactions, another group that helps us with our information, and a team that specialises in communicating with our clients. The way we tend to hire people on our team is also very important. We look for people who are engaged, who have tremendous intellectual curiosity and who exhibit a certain intrepidness. In other words, people join our team with vast knowledge in their areas of expertise, but they must be willing to work outside their comfort zones, to consider opportunities across the asset class spectrum and to connect ideas that seem unrelated to arrive at some of the most compelling investment opportunities. Oftentimes, the greatest investments lurk between the seams of two apparently disparate ideas. It’s in those intersections where we often find the opportunities that the broader marketplace does not. This, we believe, is our opportunity to realise profits for our shareholders.
What role does risk management play in your investment process? Risk is the other side of the return coin, and we seek to balance those two sides out. We are always trying to achieve abovemarket return with controlled risk and we manage risk in a multidimensional manner. We apply risk management techniques from the broader BlackRock organisation by using our in-house, industryleading quantitative risk group. Broad diversification is our second key risk management tool, as different asset classes respond differently to various market movements. We have 600-700 distinct names in the portfolio.
To what do you attribute the Global Allocation Fund’s performance success? First is flexibility. Not only is our mandate flexible, but the team is flexible, experienced, and willing to take their knowledge and apply it anywhere in the investment universe. We foster constant dialogue that involves sharing ideas and questioning one other; this often uncovers the most interesting ideas. The second thing that is very important to our team is price. Price matters, and we never want to overpay for a security. A finelytuned price consciousness as well as an awareness of the shifting environment is quite advantageous.
Thirdly, conviction. Volatility can make investors behave irrationally. The panic roused by market gyrations can cause an investor to sell something that may otherwise be an excellent investment. We are very disciplined and we realise that sometimes it’s necessary to sustain some of the pain of an investment to reap its rewards. We buy when we see value and when we are confident in the factors supporting a particular investment: is it the right country, the right sector, the right management and the right point in the company’s capital structure? When the answers to those questions are “yes,” we then have the conviction to maintain an investment through volatility and, ultimately, realise the value that we hypothesised was there. As investors, we are careful to separate our emotional from rational behaviour. The bottom line is that we’re blessed with flexibility, we maintain diversification and we’re very value-oriented. Price matters.
Any final advice for investors? No one, including us, knows exactly what the stock market is going to do tomorrow, next week or in the next three months. However, we do have a good grasp on how things are priced and what value you can expect for your money. At the moment, the value for money is pretty good in the stock market and less good in the bond market. When prices are low and securities are on sale, the same amount of money can buy more. As a result, in today’s environment, price favours the equity investor.
About BlackRock BlackRock is one of the world’s pre-eminent asset management firms and a premier provider of global investment management, risk management and advisory services to institutional, intermediary and individual investors around the world. BlackRock offers a range of solutions – from rigorous fundamental and quantitative active management approaches aimed at maximising outperformance to highly efficient indexing strategies designed to gain broad exposure to the world’s capital markets. Our clients can access our investment solutions through a variety of product structures, including individual and institutional separate accounts, mutual funds, investment trusts and other pooled investment vehicles, and the industry-leading iShares® ETFs. This offering has been recognised so far in 2011 with 118 first-placed industry awards received globally.† BlackRock is a truly global firm that combines the benefits of worldwide reach with local service and relationships. We manage assets for clients in North and South America, Europe, Asia, Australia and the Middle East. The firm employs more than 9,700 professionals and maintains offices in 29 countries around the world. The foundation of BlackRock’s business is our belief that our clients’ needs are of paramount importance. Our commitment to investment excellence is anchored in a shared culture that always places a client’s interests first, from individual investors to the world’s largest institutions. We act always as a fiduciary for our clients, never trading as a principal on our own behalf. As of 30 September 2011, BlackRock’s assets under management total US$3.35 trillion (£2.14 trillion)* across equity, fixed income, cash management, alternative investments, multi-asset and advisory strategies. Through BlackRock Solutions®, we offer risk management, strategic advisory and enterprise investment system services to a broad base of clients with portfolios totalling over US$10 trillion.* † This tally of awards is correct to 15 October 2011 and does not include iShares ETF products. * Data as at 30 September 2011.
This material is for distribution to Professional Clients and should not be relied upon by any other persons. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The Fund invests a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment. The fund typically invests in smaller company shares which can be more unpredictable and less liquid than those of larger company shares. BlackRock Global Funds (BGF) is an open-ended investment company established in Luxembourg which is available for sale in certain jurisdictions only. BGF is not available for sale in the US or to US persons. Product information concerning BGF should not be published in the U.S. It is recognised under Section 264 of the Financial Services and Markets Act 2000. BlackRock Investment Management (UK) Limited is the UK distributor of BGF. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. A limited range of BGF sub-funds have a reporting fund status A sterling share class that seeks to comply with UK Reporting Fund Status requirements. Subscriptions in BGF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Simplified Prospectus which are available on our website. Prospectuses, Simplified Prospectuses and application forms may not be available to investors in certain jurisdictions where the Fund in question has not been authorised. Issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Services Authority). Registered office 12 Throgmorton Avenue London EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Issued in Switzerland by the representative office, BlackRock Asset Management Switzerland Limited Claridenstrasse 25, PO Box 2118, CH-8022 Zurich, Switzerland, from where the Company’s Prospectus, Simplified Prospectus, Articles of Association, Annual Report and Interim Report are available free of charge. Paying Agent in Switzerland is JPMorgan Chase Bank, National Association, Columbus, Zurich Branch Switzerland, Dreikonigstrasse 21, CH-8002 Zurich. For further information, the prospectus, simplified prospectuses, annual report and semi-annual report can be obtained free of charge in hardcopy form from the Austrian paying agent: Raiffeisen Zentralbank Österreich AG, A-1030 Vienna, Am Stadtpark 9. Issued in Hong Kong by BlackRock (Hong Kong) Limited. In Singapore, this information is issued by BlackRock (Singapore) Limited. The Fund is only available to institutional and accredited investors as permitted under the Singapore Securities and Futures Act and not to the retail public in Singapore. This factsheet is for information purposes only and does not constitute an offer of shares in the Fund in Singapore. For your protection, telephone calls are usually recorded. This material is for information purposes only and does not constitute an offer of shares in any of the BlackRock Global Funds. You should consider carefully whether the investment is suitable for you. BGF has been registered on the official list of the Financial Supervision Commission (Komisja Nadzoru Finansowego) for distribution in Poland. Issued in Poland by the representative office BlackRock Investment Management (UK) Limited, Oddzia w Polsce. Paying agent in Poland is Bank Handlowy w Warszawie SA, ul. Senatorska 16, 00-950 Warsaw, Poland.
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