BlackRock Global Multi Asset Income Fund (Aust) (Class D Units) (BLK0009AU) Report & Performance

Key Contributions to Portfolio Outcome:

Broad markets delivered positive returns despite banking sector woes and additional interest rate hikes from developed central banksd. The fund delivered a positive return this quarter.

Key contributors to portfolio income this quarter were high yield, covered calls, and CLOs. High yield, global ex-U.S. equities, and interest rate management positions were the largest contributors to total return this quarter offset by U.S. equities, preferred stock, and global REITs which detracted from returns.

Main Portfolio Changes:

We have maintained a more cautious positioning and modestly reduced equity risk in light of the banking turmoil and the potential for broader contagion. We had already been managing the fund with moderate levels of risk but felt additional downside was possible.

Within equities, after shifting some exposure from the U.S. to EM earlier in the quarter, we have more recently reduced our EM exposure in favor of the U.S.

Early in February, we reduced exposure to preferred stock and high yield following less attractive opportunities after year-to-date rallies at the time, and increased exposure to covered calls, quality dividend stocks, investment grade fixed, and agency mortgages.

We also reduced duration after the rate rally and to adjust positioning for rates to potentially grind higher.

Key Contributions to Portfolio Outcome:

Stocks fell and interest rates rose as higher than expected inflation and strong employment triggered concerns over further central bank tightening ahead. The fund delivered a negative return this month. Key contributors to portfolio income this month were high yield, covered calls, and CLOs. High yield, interest rate management positions, and investment grade were the largest detractors from total return this month offset by currency management positions and CLOs which contributed to returns.

Main Portfolio Changes:

We tactically added back duration after cutting it in January to capitalize on the spike in yields last month. We also reduced exposure to preferred stocks and high yield given less compelling valuations, choosing instead to own modestly more in covered calls, quality dividend stocks, investment grade bonds, and agency mortgages.

Positioning & Outlook:

Markets gave back some year-to-date gains as stocks experienced their worst week of the year in February. Weakness was relatively widespread with both stocks and bonds moving lower. The Core PCE price index – the Federal Reserve’s preferred measure of inflation – came in higher than expected in January, surging 0.6% in January from 0.4% in December. Meanwhile, the U.S. Labor Department said the number of Americans filing new claims for unemployment benefits unexpectedly fell, signalling tighter labor market conditions. In Europe, inflation was also higher driving Eurozone short- and long-rates to new cycle highs and raising European Central Bank terminal rate expectations.

Volatility has continued into March. Markets looked poised to claw back some of February’s losses, until Fed Chairman Powell’s comments during his semi-annual monetary policy testimony to Congress. He remarked the Fed may need to be more aggressive in its efforts to bring down stubbornly high inflation. Rate markets reacted quickly as additional interest rate hikes were priced-in and the terminal rate moved closer to 6%.

Key Contributions to Portfolio Outcome:

Key contributors to portfolio income this quarter were high yield, covered calls, and CLOs. High yield, covered calls, and global ex-US equities were the largest contributors to total return this quarter offset by currency and interest rate management positions and mortgages which detracted from returns.

Main Portfolio Changes:

Over the quarter, we added a position in short-dated treasuries. Investors can achieve compelling income today in many bond markets by taking only modest duration and credit risk and at an absolute level of yield of over 4% for 2-year treasuries (vs. less than 1% at the start of the year) looks compelling in our view, especially when factoring the uncertainty still plaguing markets.

Earlier in the quarter, we tactically added to equities to position for a potential short-term relief rally. We also reduced real estate investment trusts (REITs) after the bounce earlier in the quarter as well as shifted some high yield bond exposure into investment grade bonds.

In December, we modestly reduced risk. The rally seen earlier in the quarter left risk positioning exposed to potential downside, in our view, and we wanted to close the year with more conservative positioning. As such, we reduced exposure to U.S. equities and covered calls. Lastly, we tactically increased duration in December given we felt the back up in yields offered attractive diversification benefits.

Key Contributions to Portfolio Outcome:
Key contributors to portfolio income this month were high yield, covered calls, and CLOs. Global ex-US developed equities, high yield, and investment grade were the largest contributors to total return this month offset by currency management positions.

Main Portfolio Changes:
We tactically added equities at the start of the month to position for a potential short-term relief rally. We also reduced real estate investment trusts (REITs) after the recent bounce and shifted some high yield bond exposure into investment grade bonds.
Overall, we maintain a relatively cautious view as the recent rally may leave risk assets vulnerable to the downside.

Positioning & Outlook:
The recovery in global equity and fixed income markets continued in
November. Risk assets rallied amid further speculation that monetary tightening by global central banks is set to moderate, positive policy developments in China, and softer inflation data across key economies.
U.S. core bonds returned over 3% on the month for the best monthly return since 2008. Emerging market assets also saw a sharp reversal after a prolonged period of weakness.

Notably, numerous Fed members, including Chair Powell, indicated a step down in rate hikes in their upcoming meetings from the recent trend of 75bps hikes. However, inflation remains well above the Fed’s 2% target, and incoming employment and wage data are still too strong relative to their objectives. Somewhat surprisingly, financial conditions have moved back to the level seen before the
Fed started more aggressive rate hikes. So, while the Fed may soften their tightening grip, we believe recent data supports them getting to a terminal rate of near 5% and staying there for longer. Elsewhere,
Chinese authorities rolled out new measures to support the property market and incrementally relaxed zero-COVID policies which helped improve market sentiment.

Key Contributions to Portfolio Outcome:

Key contributors to portfolio income this month were high yield, covered calls, and CLOs. High yield, covered calls, and US equities were the largest contributors to total return this month offset by interest rate management positions, emerging market debt, and currency management positions.

Main Portfolio Changes:

We expect markets to remain volatile in the near-term and maintain a more cautious stance. That said, we recognize sentiment is very poor and investor risk appetite extremely depressed. Should inflation and jobs data weaken towards the Fed’s intended goals and the chances of a rate pivot increase, we could see the potential for a shorter-term relief rally.

Investors can achieve compelling income today in many bond markets by taking only modest duration and credit risk. With this in mind, we added a position in short-dated treasuries during the month. An absolute level of yield of over 4% for 2-year treasuries (vs. less than 1% at the start of the year) looks compelling in our view, especially when factoring the uncertainty still plaguing markets.

Positioning & Outlook:

Global equities staged an impressive rebound in October after a gruelling September. Speculation that central banks are nearing a policy pivot helped spark the turnaround. All in all, developed global stocks returned over 7% on the month while interest rates continued their upward trend. An exception to the rally in stocks was technology related names which saw extreme moves from weaker earnings. Asian and broader emerging markets assets also struggled as the conclusion of China Communist Party congress resulted in more concerns around the direction of future policy in the world’s second largest economy.

Key Contributions to Portfolio Outcome:
Key contributors to portfolio income this quarter were covered calls, high yield, and CLOs. Currency management positions were the largest contributors to total return this quarter offset by global ex-US developed market equities, covered calls, and global infrastructure equites.

Main Portfolio Changes:
Over the quarter, we continued to take down portfolio risk. We increased the Fund’s duration to add more ballast in the portfolio. We believe current treasury yields offer more portfolio protection than what was available at the start of the year. We also further reduced exposure to equities.