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Asset Allocation and the BGF Global Allocation Fund

We all know by rote that slightly trite, age-old adage nagging us to place our proverbial eggs into more than one basket. But when it comes to saving for your retirement, your children’s education or maybe the holiday of a lifetime, just how many baskets is enough to safeguard against potentially losing your hard-earned cash?

This is where truly flexible asset allocation, such as that practised by BlackRock’s Global Allocation Fund, can help. Asset allocation describes a method of investing whereby an investor builds a portfolio by combining diverse asset categories such as stocks, bonds and cash in accordance with their specific goals, risk tolerance and investment time horizon. It is a thoughtful and scientific process, distinguished from the general concept of diversification, which means more simply to distribute a portfolio’s investment dollars among a variety of investments.


The underlying principle of asset allocation is that, on average, a portfolio of different investments will carry lower risk and generate more stable returns than any single investment within the portfolio. Take our BGF Global Allocation Fund as an example. The Fund can invest in equities, fixed income and cash from around the world. The Fund typically holds more than 700 securities diversified across asset class, geographies, sectors, and market capitalisations.


Over the years, this has contributed to higher total returns with relatively low to moderate levels of risk, returning more cumulative returns than European equities, US equities and global government bonds, returning over 220% since its launch in 1997 (based on the Fund’s A Shares). Source: BlackRock as at 30 April 2011.


That said, asset allocation is not a “set it and forget it” solution. Market movements are unpredictable and market leaders can, and often do, fall out of favour. This uncertainty can be intimidating, especially as even the most experienced investment professionals are often unable to foresee exactly where the markets will be headed.


These unforeseeable changes mean that every asset class and subclass exhibit differing risk and return characteristics over different periods. Therefore, spreading investments among several asset categories with different characteristics allows for more consistent performance under a variety of economic backdrops.


Because of these rotations, it is important that portfolios are flexible enough to maximise risk-adjusted returns during the good years, and shield against losses during the downturns. The BGF Global Allocation Fund’s flexible investment mandate is a prime example of this.


The BGF Global Allocation Fund was overweight equities for the better part of 2001 and 2002, given the depressed price levels that were witnessed following the tech bubble burst. Many high-quality stocks were less expensive relative to valuations during the bubble, and as a result, they could be bought at lower prices and held as they increased in value after the crash. On the other hand, during the recent global credit crisis, the Fund increased its fixed income allocation to better protect client assets. During 2007 and 2008, the Fund was underweight equities, most notable in the US consumer discretionary and US financial sectors. High quality government bonds were emphasised within fixed income.


This well-diversified, flexible mandate has meant that an investment of $100,000 in the BGF Global Allocation Fund in 1997 would have grown to $303,271 by the end of 2010. This compares with $226,075 for global equities (as measured by the FTSE World Index) and $221,152 for global bonds (as measured by the Citigroup World Government Bond Index. Source: BlackRock as at 31 December 2010.


So, back to our question: how many baskets is enough? If our experience with the Global Allocation Fund is any indicator, then history has shown that the more diverse and flexible those baskets are, the better.


Important notes

Performance shown as at 30 April 2011 in USD on a NAV price basis with income reinvested. Performance figures are calculated net of annual fees. Fund benchmark: Composite: 36% S&P 500 Composite: 24% FTSE World (ex-US): 24% ML US Treasury Current 5 Year: 16% Citigroup Non-USD World Government Bond Index. Data sourced from BlackRock Datastream.


Mike Trudel, Managing Director and Global Strategist - BlackRock, June 2011

Please note that these are the views of Mike Trudel, Managing Director and Global Strategist, BlackRock, and should not be interpreted as the views of RL360°.

Author

Mike Trudel

Managing Director and Global Strategist
BlackRock - June 2011

Please note that these are the views of Mike Trudel, Managing Director and Global Strategist, BlackRock, and should not be interpreted as the views of RL360°.

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