EMERGING MARKET ALLOCATION FUND Performance Highlights 14
Transcription
EMERGING MARKET ALLOCATION FUND Performance Highlights 14
A LOOK INSIDE blackrock.com/ema 2 0 14 EMERGING MARKET ALLOCATION FUND Institutional: BEEIX • A: BEEAX • C: BEECX • R: MRLOX1 Performance Highlights C O M M E N TA R Y } The Fund returned 0.41% (Institutional shares) and 0.31% (Investor A shares, without sales charge) for the third quarter of 2014. The Fund’s blended benchmark (60% MSCI Emerging Market Index/40% JP Morgan Emerging Market Bond Index (“EMBI”) Plus) returned -2.91%. } The Fund outperformed its blended benchmark during the quarter primarily due to positioning within the alternatives allocation and a strategic underweight to lower quality sovereign debt in Venezuela, Argentina and Ukraine. } Within equities, the strongest returns came from the Fund’s investments in Asia, especially within South Korea, China, Malaysia and India, while performance lagged in Latin America and Europe, mostly in Brazil and Russia. } While equity market volatility remained low, EM debt markets experienced a spike in volatility in reaction to movements in US Treasury rates. Given its exposure to EM debt, the Fund’s volatility was elevated during the quarter. Gerardo Rodriguez 15 years of investment experience After posting impressive gains in July and August, EM risk assets sold off in September driven by U.S. dollar strength, increased volatility in U.S. Treasury rates and renewed fears about an economic slowdown in China. The MSCI Emerging Market Index returned -3.50% for the quarter. EMERGING MARKET EQUITY RETURNS WITH LESS RISK 10% 15 9.71 5 8.66 0 0 4Q13 1Q14 The Fund (BEEAX) 2Q14 The Fund (BEEAX) 3Q14 RETURNS 30 DAY ROLLING VOLATILITY 30% MSCI EM Index Jeff Shen, PhD 19 years of investment experience David Dali 24 years of investment experience Market Overview 3Q13 Portfolio Management -5 MSCI EM Index The Fund is expected to underperform the equity index during strong “risk-on” periods due to its high quality fixed income allocation. The daily estimated 30-day standard deviation of the fund is based on the historic volatility of securities held. Standard deviation measures the volatility of the fund’s returns. Higher deviation represents higher volatility. Data represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance. VISIT Your BLACKROCK.COM Developing Portfolio FOR ADDITIONAL With Emerging Markets INFORMATION OR TO The developing world canTO be QUARTERLY a land of SUBSCRIBE opportunityUPDATES for investors, but it PIECE. also can TO THIS be tough terrain to navigate. The BlackRock Emerging Market Allocation team discusses an approach that seeks to cut through the complexity and tap all that EMs have to offer in their latest Point of View article, A Single Vehicle for the Long Haul in Emerging Markets at blackrock.com. Allocation Strategies Debt The Fund’s fixed income exposure is constructed specifically to help offset equity risks while providing exposure to economic growth in emerging markets through exposure to attractive nominal interest rates. ASSET CLASS ALLOCATION* The Fund maintains a strategic underweight to lower-rated debt versus the benchmark as the performance of these credits tends to be more highly correlated to EM equities. This proved advantageous in the third quarter as lowerrated, high yield bonds in the JP Morgan EMBI Plus significantly underperformed investment grade credits. Equity 40% Debt 31% Alternatives 29% Equity The Fund’s equity exposure was comprised largely of traditional emerging market equities, but also held small allocations to frontier markets and developed market companies that derive a significant portion of revenues from emerging markets (“EM in DM”). Despite recent fears around a potential economic slowdown in China, emerging Asian countries have demonstrated the strongest growth in recent quarters. The Fund maintained an overweight to several countries in this region, including Taiwan, Thailand and the Philippines. In Latin America, markets have been mixed given concerns about the recent sovereign debt default in Argentina and uncertainty around the upcoming presidential election in Brazil. The Fund maintained an underweight position in Brazilian equities during the quarter. EQUITY ALLOCATION BY COUNTRY* CREDIT QUALITY ALLOCATION* † 12% AAA AA 7% A 7% INVESTMENT GRADE 12% BBB 16% 19% BB B CCC 32% 32% 7% CC C 22% 21% NONINVESTMENT GRADE 9% 3% The Fund JP Morgan EMBI Plus Alternatives 25% % OF NET ASSETS In particular, meaningful underweights to Venezuela, Argentina, Russia and Ukraine were beneficial to the Fund’s relative performance, while overweights to high quality issues in Poland, Chile and Malaysia helped offset equity risks. In order to further diversify equity risk in the Fund and opportunistically capture less correlated returns, we leverage the expertise and incorporate the views of BlackRock investment teams through the implementation of marketneutral long/short fixed income and equity strategies. 20 15 10 During the quarter, the Fund’s alternative investments contributed positively to the Fund’s total return and helped to offset the negative market performance of EM equities. 5 The Fund Malaysia Thailand Russia Turkey India So. Africa Brazil So. Korea Taiwan China 0 MSCI EM Index * % of net assets as of 9/30/14. † The fund itself has not been rated by an independent rating agency. Credit quality ratings on underlying securities of the fund are received from S&P, Moody’s and Fitch and converted to the equivalent S&P major rating category. This breakdown is provided by BlackRock and takes the median rating of the three agencies when all three agencies rate a security the lower of the two ratings if only two agencies rate a security and one rating if that is all that is provided. Unrated securities do not necessarily indicate low quality. Below investment-grade is represented by a rating of BB and below. Ratings and portfolio credit quality may change over time. Outlook Looking forward, we believe the primary driver of EM risk assets over the medium term will be monetary policy in developed markets followed by fundamentals in emerging economies. Central bank policies are increasingly divergent as the U.S. Federal Reserve has begun to retract liquidity while the European Central Bank and the Bank of Japan have continued to add stimulus. In the United States, anticipation for the normalization of interest rates has led to the recent flattening of the U.S. Treasury yield curve and increased rate volatility. This gave the U.S. dollar a boost against the euro and Japanese yen, and ultimately resulted in EM currency weakness and a steep sell-off in EM equities during the month of September. While the sell-off was broad-based, the sharpest declines were seen in Latin American markets, especially in Brazil, where the local equity index lost nearly 12% and the currency fell more than 8% in September alone. Going into the fourth quarter, cheaper valuations resulting from weaker EM currencies and wider credit spreads should help support EM risk assets, especially EM equities. We expect the weakness in EM equities and currencies to be contained as we believe the uncertainty around U.S. rates and dollar strength has already been largely factored into asset prices. EM equity valuations remain cheap relative to the historical norm at 11.06 times the forward price-toequity ratio and EM policy makers have demonstrated their willingness to act in the event of external shocks. OPPORTUNITIES RISKS } Reduced financial vulnerabilities. The countries most vulnerable to changes in global liquidity—Brazil, India, Turkey, So. Africa and Indonesia (known as the “Fragile Five”)—have improved their current accounts and increased their hard currency reserves while their local currencies have become more competitive. } U.S. rates reverse sharply upward. Continued U.S. growth combined with a healthy labor market could convince the central bank to increase the federal funds rate sooner than previously anticipated. Such action could cause another spike in short-term rates and further strengthen the U.S. dollar against EM currencies. } Continued abundance of global central bank liquidity. Even as the U.S. is tapering stimulus, the European Central Bank and Bank of Japan are likely to continue their accommodative posture well into 2015. } China undershoots its GDP growth rate target. Chinese officials are orchestrating a measured cooling down of the economy with a lower target annual GDP growth rate of 7% for 2015. Should GDP growth fall below that level, commodity prices would be likely to fall, to the detriment of EM exporters, and expectations for weaker corporate earnings would drive down EM equity prices. } Resilience after U.S. curve flattening. Although initially painful for EM currencies, U.S. Treasury yield curve flattening has historically been only a temporary headwind for EM risk assets. Positioning As the third quarter came to a close, we increased the Fund’s exposure to countries where particularly poor performance in September led to compelling valuations. Specifically, we added to equity positions in Brazil. We also increased equity exposure in Korea, where fundamentals continued to improve. We took profits on Thai stocks on the back of their recent strong performance, thereby reducing the Fund’s overweight to Thailand. In fixed income, the Fund continues to maintain a strategic bias toward higher quality issues. We believe the benefits of greater diversification against EM equity risk continue to outweigh the cost of sacrificing the slightly higher yields available in lower credit quality tiers. At the end of the third quarter, the Fund’s fixed income portfolio has an aggregate credit rating that is materially higher than that of the benchmark, with over 15% of the portfolio rated single A or higher. As we head into the fourth quarter, the Fund’s overall level of portfolio risk remains similar to that of the blended benchmark. % AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/14 3Q14 YTD (not annualized) (not annualized) 1 Year 3 Years 5 Years 10 Years Since Inception2 Institutional1 0.41 6.11 6.47 — — — -1.33 Investor A (Without Sales Charge) 0.31 5.90 6.19 — — — -1.60 -4.96 0.34 0.61 — — — -5.39 Lipper Emerging Market Funds Avg. -3.42 2.10 4.80 7.76 4.28 9.81 — Morningstar Diversified Emerging Markets Funds Avg. -3.47 2.08 4.81 7.92 4.28 9.83 — Blended Benchmark4 -2.91 4.38 5.80 — — — — Investor A (With Sales Charge) 3 Data represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance. Share classes have different sales charges, fees and other features. Returns with sales charge reflect deduction of current maximum initial sales charge of 5.25% for Investor A shares. Institutional shares have no front- or back-end load. Minimum initial investment for Institutional shares is $2 million. Institutional shares also are available to clients of registered investment advisors with $250,000 invested in the fund, and offered to participants in various wrap fee programs and other sponsored arrangements at various minimums. Expenses for Institutional shares: Total 1.92%; Net, Including Investment Related Expenses (dividend expense, interest expense, acquired fund fees and expenses and certain other fund expenses) 1.52%; Net, Excluding Investment Related Expenses 1.40%. For Investor A shares: Total 2.64%; Net, Including Investment Related Expenses 1.77%; Net, Excluding Investment Related Expenses 1.65%. Institutional and Investor A shares have contractual waivers with an end date of 3/1/15 terminable upon 90 days’ notice. Expenses stated as of the fund’s most recent prospectus. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Want to know more? blackrock.com Important Risks: The fund is actively managed and its characteristics will vary. The fund may invest in other funds and therefore is subject to the risks associated with the underlying BlackRock funds in which it invests. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. Investments in emerging markets may be considered speculative and are more likely to experience hyperinflation and currency devaluations, which adversely affect returns. In addition, many emerging securities markets have lower trading volumes and less liquidity. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities. Asset allocation strategies do not assure profit and do not protect against loss. Non-diversification of investments means that more assets are potentially invested in fewer securities than if investments were diversified, so risk is increased because each investment has a greater effect on performance. Short selling entails special risks. If the fund makes short sales in securities that increase in value, the fund will lose value. Any loss on short positions may or may not be offset by investing short-sale proceeds in other investments. The fund may use derivatives to hedge its investments or to seek to enhance returns. Derivatives entail risks relating to liquidity, leverage and credit that may reduce returns and increase volatility. The opinions expressed are those of the fund’s portfolio management team as of September 30, 2014, and may change as subsequent conditions vary. Information and opinions are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. 1 Institutional and Class R shares are not available to all investors. Please see prospectus for details. 2 Fund Inception: 5/16/13. 3 Lipper category is as of 9/30/14 and may not accurately represent the current composition of the portfolio. 4 The Blended Benchmark represents 60% MSCI Emerging Markets Index/40% JP Morgan Emerging Market Bond Index Plus. The free float-adjusted, market capitalization-weighted MSCI Emerging Markets Index measures equity market performance of emerging markets. The JP Morgan EMBI Plus tracks total returns for US dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities including Brady bonds, loans and Eurobonds. You should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus should be read carefully before investing. ©2014 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. Prepared by BlackRock Investments, LLC, member FINRA. Not FDIC Insured • May Lose Value • No Bank Guarantee Lit. No. EMA-EXP-COM-0914 OE31403T-1014 / USR-4820