A dip in performance earlier this year saw BlackRock Absolute Return Bond fund manager Ian Winship remove some of the risk in the £73m portfolio.
The manager admits that May and June 2013 were difficult for the fund and says that “at the moment our risk levels are fairly low because of what is going on in the US”. However, he adds that since the summer, the portfolio has had “small ups every month”.
That said, he adds: “I’m actually quite optimistic, it is just picking the time for when to put risk on. We have actually been trimming back a little bit of risk because of uncertainty in Europe, specifically Italy, and also what is going on in the US with regards to the shutdown, the debt ceiling and the next Federal Reserve chair. These three factors create, in the very short term, enormous amounts of uncertainty.”
The fund, launched in September 2011, aims to achieve a positive absolute return for investors regardless of market movements and therefore, like most absolute return vehicles, it has no fixed benchmark.
Mr Winship notes his brief on joining BlackRock has been to build a fixed income product designed for more volatile times when yields go up as well as down.
He explains: “Yields have gone one way, with 10-year gilts in the past 25 years just going lower, for good reason. It is a trend that’s been there for a long time and in this long period [the industry] built products that fitted that trend.
“The world has changed in that yields are at very low levels, but [they] have started to go up. We have built a product that is designed for a market and global economic environment that is certainly a lot less predictable than the one we’ve witnessed in the past 30 years.”
The main drivers for the portfolio are to be flexible, to be diversified and to have more of a focus on liquidity. “Liquidity is at a premium and will be difficult to manage for any product, but it is something we should be massively cognisant of when managing fixed income.”
In addition, the manager notes the process behind the fund is more of a top down approach, arguing that a stockpicking approach is “too narrow and too concentrated”.
“This is basically looking at what is going on, it is turning it upside down and looking at the world from a top-down perspective – what is going on, what are the risks and what is the best asset allocation to capitalise on what is going on. “We’ve been so used to picking stocks and working our way up, we’ve missed the big picture. We are very lucky at BlackRock that we have a big fixed income platform, we have a lot of information about the global markets and global economic environments. That creates the canvas on which I can build and gives me an idea of whether I should be bullish or bearish, should I be taking on risk or taking off risk.”
Since launch, the fund has returned 7.9 per cent to October 8 2013, according to FE Analytics. Although the IMA Targeted Absolute Return sector is not a direct comparison because of the wide range of constituent funds, the BlackRock Absolute Return Bond fund still beat the sector average of 4.8 per cent.
Mr Winship acknowledges there has been a fair amount of disappointment about fixed income and particularly in the absolute return area in general, but adds: “I still believe fixed income should be boring and I’d like to bring boring back to fixed income because you don’t buy fixed income to lose 2 per cent, 3 per cent or 4 per cent in any one quarter. You buy it because it is stable, it is predictable, it is consistent and it is supposed to be safe. You allocate to risk in other asset classes not fixed income.”
He notes the portfolio is “harder to understand” but this is because fixed income is no longer simple. “I make no excuses for the fact that there are a few more moving parts in there [the portfolio]. But if you’re making a more difficult, harder to understand product you have to understand what is in it and be able to explain it to clients.”
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities:
Verdict
“Generally, absolute return bond funds have not delivered over the years, but given the outlook for fixed interest, this is the ideal scenario for them to make some waves. Admittedly, the BlackRock fund has fared better than the gilt and corporate bond sectors year to date. However, better returns have been generated by good market neutral equity absolute return funds and with similar levels of volatility. Jury’s out on this one for the moment.”
