Investors need to look for true diversification: BlackRock

Diversification can provide one of the most effective methods of limiting risk, while maximising returns lies in adjusting portfolios to take advantage of the best current global opportunities. But how do you hit that sweet spot between true diversification among all asset classes and opportunity? According to BlackRock Australia’s David Redford-Bell, CFA, it’s the ultimate question without a definitive answer.

“Not only must investors first identify the opportunities, they need to be able to access them – and from there must be able to continually make the kind of portfolio adjustments that keep them in the sweet spot between risk and return,” he said.

“History shows that equity markets can perform well over the long term, but when big shocks like the global financial crisis come along, investors are left vulnerable unless they have genuinely diversified in a manner that can limit the damage to their portfolios.

“To paraphrase former United States Secretary of Defence, Donald Rumsfeld, there are ‘unknown unknowns’ out there, possible black swan events that can affect portfolio performance unless intelligent exposure to the range of asset classes is achieved.”

Mr Redford-Bell went on to explain that the issue for Australian investors has been that gaining exposure to the kinds of global markets and securities that can provide true diversification has not been easy. They often don’t have access to the information they need or the local knowledge required to make informed decisions about offshore investments. Nor is it easy to invest in foreign currencies or share markets.

“A number of offerings available in Australia are rigid in their asset allocations. Investing in three different equity funds based on the same index would not appear to be true diversification, yet many investors believe that they are ‘covered’,” he said. “To achieve true diversification they need to start looking wider and thinking more deeply than that.”

According to Mr Redford-Bell, the BlackRock Global Allocation Fund (Aust) has been developed over time with the aim of addressing precisely these issues.

“By being flexible in what we do, being patient with investors’ capital and looking for value across an incredibly diverse array of securities, it is our aim to provide investors with a truly diversified global investment.”

BlackRock runs approximately US$90 billion globally in the Global Allocation strategy, which has been operating for some 24 years. In Australia, the BlackRock Global Allocation Fund (Aust) provides exposure to the Global Allocation strategy and the fund is open to both retail and institutional investors.

Since the Global Allocation Fund’s (GAF) inception in Australia in July 2005 to the end of October 2013, Class D units in the fund have returned around 8.5% a year, net of fees (and distributions reinvested), with approximately a third less volatility than the MSCI World ex-Australia Index (hedged). In fact, the portfolio’s Sharpe ratio, which measures the risk-adjusted performance of the portfolio as a means of determining whether returns should be attributed to good investment decisions as opposed to excess risk, was 0.71 for the 3 years to 30^th September 2013. A positive Sharpe ratio indicates lower levels of risk.

Mr Redford-Bell went on to explain the rationale and investment philosophy that underpins the fund. “While our “neutral” asset allocation is a 60% allocation to equities and a 40% allocation to fixed income and cash, the fund is incredibly flexible,” he said. “There are very few hard and fast allocation rules, so as market conditions vary it can hold anywhere between 0-100% of its investor’s capital in equities, fixed income or cash and cash equivalents.

“We are currently allocated 63% to equities, 19% to fixed income and 18% to cash, because our view is that equity valuations are still attractive compared with fixed income, where we see issues with both duration and credit quality. We are also cautious about the potential effect of the winding back of quantitative easing in the US.

“The GAF is managed by a team of over 40 investment professionals, has a portfolio of over 400 securities and the three most senior portfolio managers have 80 years of investment experience between them. That can’t be easily replicated – and we think it set the funds apart,” he said.

Investment decisions in the fund are driven by extensive bottom-up research, with long-term themes explored and overlaid onto specific stock research.

“Our ability to make portfolio adjustments in line with our view of market dynamics demonstrates the value of running a flexible, global fund,” he said. “We can generally go anywhere we see opportunity and value, which, in reality, is something that the majority of investors can’t achieve on their own.”

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