Enhanced Diversification to Help Improve Your PortfolioStrategic Risk Allocation Fund
July 2015
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
2
BlackRock Strategic Risk Allocation Fund:
Seeks consistent long-term returns with protection during market downturns and reduced correlation to traditional investments
A Multi-Asset, Diversified Risk Factor Strategy
1) Growth
Seeks consistent returns throughout a market cycle
2) Lower Volatility
Seeks less volatility than global equities and protection during drawdowns
3) Portfolio Diversification
Seeks lower correlation to equities (0.57) than a traditional 60/40 portfolio (0.99)*
*Source: Morningstar as of 12/31/14. Past correlations are no guarantee of future correlations. Stocks represented by the S&P 500 Index and bonds are represented by the Barclays US Aggregate Bond Index. Based on daily returns from fund inception (12/28/12) to latest quarter end. Example for illustrative purposes only.
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Problem #1:Diversification Across Asset Classes Has Limited Benefit
Source: BlackRock. As of 12/31/14. Example for illustrative purposes only. Past correlations are no guarantee of future correlations.
The Diversification Reality of a Traditional Balanced Portfolio
A traditional 60/40 “balanced” portfolio has exhibited limited diversification benefit due to high correlations
Without adequate risk diversification, portfolios aren’t prepared to provide consistency and weather down markets
Stocks
60%
Bonds
40%Asset AllocationDrivesRisk Allocation
Asset Allocation Risk Allocation
3
Correlation
Risk DrivesCorrelations +0.93
Correlation of 60/40 portfolio to S&P 500 Index
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Stock Volatility90%
Bond Volatility
10%
4
Problem #2:Diversification Within Asset Classes Delivers Even Less Benefit
Equity Correlations Tend to Spike During Difficult Markets
Source: Morningstar, as of 12/31/14, based on monthly returns. Past correlations are no guarantee of future correlations. US Small Cap represented by the Morningstar US Small Cap Blend category average. International represented by the Morningstar Foreign Large Blend Category Average. Emerging Market Equity represented by the Morningstar Diversified Emerging Markets category average. Credit Crisis defined as 2008-2009.
Market Capitalization Geography
Correlation with S&P 500 Correlation with S&P 500
Last 5 Years Credit Crisis Last 5 Years Credit Crisis
US Large-Cap 1.00 1.00 MSCI EAFE 0.88 0.93
US Mid-Cap 0.97 0.97 MSCI EM 0.80 0.87
US Small-Cap 0.94 0.96
Correlations have continued to rise over the past decade
Diversification benefits are further reduced during periods of market stress, when investors need it the most
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
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… Because Asset Classes Are In Reality, A Composite of Risk Factors
Higher Expected
Return
For illustrative purposes only
Fundamental risk factors drive asset class returns
A risk factor approach provides a different understanding of asset class returns
Risk Factor Decomposition of Selected Asset Classes
Lower Expected
Return
Inflation-protected
bonds
Nominal bonds
Corporate bonds
EmergingBonds
Equities
Interest Rate Premium
InflationPremium
Risk Free Rate
Cash
Risk Free Rate
EmergingEquity
Risk Free Rate Risk Free Rate Risk Free Rate Risk Free Rate Risk Free Rate
Interest Rate Premium
Interest Rate Premium
InflationPremium
Interest Rate Premium
InflationPremium
Credit Premium
Credit Premium
Emerging Premium
InflationPremium
EconomicGrowth Premium
InflationPremium
EconomicGrowth
Premium
Emerging Premium
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Risk Factor Investing Offers Enhanced Diversification
Correlations between asset classes are typically high and increase during periods of volatility
Conversely, risk factors exhibit lower correlations, making them potentially more effective in enhancing diversification
Source: BlackRock. Correlations measured over the period 8/88 to 12/14. Past correlations are no guarantee of future correlations. Factor returns are annualized returns to investable portfolios (in excess of one-month T-Bills) that mimic the fundamental risk factors, adjusted to ex-ante annualized risk level of 10%. Diversification does not ensure profit or protect against a loss. Correlation is A statistical measure of how two securities move in relation to each other. A perfect correlation of +1 implies movement in lockstep, -1 implies movement in the opposite direction, while a correlation of 0 implies completely random movement. Correlations near zero (from +0.6 to -0.6) enhance diversification.
Lower Correlation for Enhanced Diversification
Correlations among risk factors
6
Economic Credit Real Rates Inflation
Emerging Markets
Liquidity
Economic 1
Credit 0.62 1
Real Rates 0.14 -0.09 1
Inflation -0.41 -0.35 -0.16 1
Emerging Markets 0.59 0.57 0.11 -0.32 1
Liquidity 0.50 0.44 0.11 -0.33 0.44 1
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Strategic Risk Allocation Fund 2014 – Q2 2015 Monthly Performance
BlackRock Strategic Risk Allocation Fund – Performance Attribution
Source: BlackRock. Institutional shares performance as of 6/30/15Data 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.
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Factor Economic Credit Emerging Markets Liquidity Real Rates Inflation
Factor Portfolio
Developed equities, commodities, and property
Corporate bonds versus government bonds
Emerging markets versus developed markets
Small cap equity versus large cap equity
Globally diversified inflation-linked government bond portfolio
Nominal bonds versus inflation-linked bonds
Jan-
14
Feb-1
4
Mar
-14
Apr-1
4
May
-14
Jun-
14
Jul-1
4
Aug-1
4
Sep-1
4
Oct
-14
Nov-1
4
Dec-1
4
Jan-
15
Feb-1
5
Mar
-15
Apr-1
5
May
-15
Jun-
15
-6%
-4%
-2%
0%
2%
4%
6%
-0.1%
3.1%
0.5%1.0%
2.2%
1.5%
-0.7%
2.4%
-3.2%
1.6%1.3%
-0.7%
1.4%2.2%
0.6%
-0.2%
-1.1%
-2.4%
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Economic Risk Dominates An Institutional Portfolio
Typical Investor 60/40 PortfolioBlackRock Strategic Risk Allocation
Fund
6% 10%3%
10%16%
10%9%
25%3%
10%
62%
35%
A traditionally-balanced, institutional portfolio is heavily dependent on economic risk
Investing across a more diverse & balanced set of risk factors may help lower volatility through diverse markets
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Most Diversified Portfolios Aren’t Diversified From a Risk Allocation Standpoint
Source: BlackRock. As of 6/30/15. Typical Investor Portfolio consists of 46% S&P 500, 8% MSCI World ex. US, 4% Russell 2000, 2% MSCI EM, 13% Barclays Intermediate Government Bond, 9% Barclays US Aggregate Bond, 9% Barclays MBS, 2% Barclays High Yield Bond, 2% Citigroup WGBI Index and 5% cash.
Economic Credit Real Rates InflationEmerging Markets
Liquidity
VS.=
Typical Investor 60/40 Portfolio
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
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Risk Factor Exposure Capital Allocation
As of 6/30/2015. Allocation to asset classes is subject to changes through time and is left at BlackRock’s discretion. Asset classes may be added or removed over time.
BlackRock Strategic Risk Allocation Fund – Portfolio Breakdown
Real Rates; 25%
Inflation; 10%
Credit; 10%Economic;
35%
Emerging Markets;
10%
Liquidity; 10%
Sovereign
Nominal Debt37%
Real Assets
26%
Equities
12%
Credit
26%
Instrument Capital allocation Risk contribution
Developed Sovereign Debt Futures 31.37% 13.07%
Emerging Sovereign Debt Total return swaps / CDS 5.23% 8.10%
Investment Grade Credit Credit default swaps 20.09% 4.81%
High Yield Credit Credit default swaps 5.57% 6.03%
Developed Equity Futures 3.24% 7.56%
Developed Small Cap Equity Total return swaps 4.18% 12.65%
Emerging Equity Total return swaps / Futures 3.64% 14.28%
Volatility Futures 0.46% 8.63%
Inflation Linked Debt Bonds 19.34% 9.75%
Property Total return swaps 2.24% 7.51%
Commodities Ex Energy Total return swaps 3.10% 4.63%
Energy Total return swaps 1.55% 2.98%
Total 100% 100.00%
Leverage (for the 10% volatility strategy) 2.45x n/a
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Tactical Lever #1 – Tilts Across Factor Exposures
Source: BlackRock as of 6/30/2015 Red = factor is expensive Blue = factor is fairly valued Green = factor is cheap
When factors are extremely over- or under-valued: Increase or decrease an individual factor exposure
Macro-economic & risk factor valuation data help identify bubbles or buying opportunities
Risk Factor Valuations
Number of standard deviations away from the long-term average risk factor as of 6/30/15
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Lever #1:
Factor-Level Tilts
Example: Real Rates
• Currently underweight Real Rates exposure vs. our long-term strategic allocation
Real Rates
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
-3
-2-1 0 1
2
3
Eco-nomic
-3
-2-1 0 1
2
3
Liquid-ity
-3
-2-1 0 1
2
3
Credit
-3
-2-1 0 1
2
3
Emerg-ing
Mar-kets
-3
-2-1 0 1
2
3
Inflation
-3
-2-1 0 1
2
3
Tactical Lever #3 - Reduce Overall Volatility
Non-market / cash exposure
For illustrative purposes only
When diversification fails: Reduce risk pro-rata across the whole portfolio to limit drawdown
A proprietary risk tolerance indicator help guide risk exposures
Reduce Overall Volatility In The Portfolio
C A S H
Lever #3:
Reduce Overall Volatility
Example: De-Risk
11FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
So What Do I Do With My Money?®
Investors are using this strategy for:
Equity Substitute Seek to reduce risk without sacrificing long-term
returns
Add diversification to an existing portfolio
Designed to lessen the blow from extreme drawdowns
Liquid Alternative Differentiated source & pattern of risk-adjusted returns
Returns driven by beta, not alpha
12
Blending a Risk Factor Strategy into a Traditional Portfolio Increased Risk-Adjusted Returns
Hypothetical Risk Parity
Portfolio 50%
Traditional 60/40 Portfolio
Replacing 20% of Equities with Hypothetical Risk Factor Strategy
Return = 8.84%
Volatility = 7.64%
Return & risk 12/31/89 – 12/31/14
Return = 8.52%
Volatility = 8.82%
Equity40%
Fixed Income
40%
Hypo. Risk
Factor Strategy
20%Tickers A: BSTAX C: BSTCX I: BSTIX
Source: BlackRock as of 12/31/14. The hypotheticals are provided for illustrative purposes only as the results are not based on a single actual investment. Performance data quoted represents past performance and does not guarantee future results. US Federal Reserve, Ibbotson, Datastream, Bloomberg, Standard & Poor’s, Goldman Sachs, National Bureau of Economic Research. The hypothetical strategy is a 22%/62%/16% allocation of the S&P 500, Ibbotson Intermediate-Term Treasury Index and the GSCI Commodity Index with notional exposure of 1.8x capital invested. The strategy targets a risk level of 10% and equal risk allocation among all three components, assuming zero correlations at volatilities of 15%/5%/20%. Thirty percent of capital is invested in T-bills to meet margin calls. Notional exposure is greater than capital invested. We assume a 50-bps spread over T-bills for derivatives financing. Index performance is for illustrative purposes only. You cannot invest directly in an index. Performance returns for strategies do not reflect any management fees, transaction costs or non-financial expenses.
Equity60%
Fixed Income
40%
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
13
Source: Envestnet, as of 9/30/14
Large Institutions Outsource This To Firms Like BlackRock
Risk factor strategies are increasingly gaining the attention and assets of institutional investors
BLK’s Market Advantage Team has run risk-factor strategies for over 5-years with over $9B in AUM. See prospectus
Firms Offering Risk Factor Approach Client Types / Examples
1. Bridgewater - $81B
2. AQR - $31B
3. Invesco - $10B
4. BlackRock - $9B
Texas Teachers Retirement System
Adopted a new 5% strategic allocation of their $130B portfolio to risk-parity strategies
Pensions & Investments 9/14
It takes advanced research, technology, infrastructure & expertise to identify & access discrete risk factor exposures & blend them in an optimal portfolio
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
BlackRock Strategic Risk Allocation Fund - Performance
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1 Performance is cumulative, not annualized. 2. The Blended Benchmark represents 60% MSCI World Index/40% Barclays U.S. Aggregate Bond Index.
Average annual total returns (%)(as of 6/30/15) 2Q151 YTD 1-year
Since inception(12/27/12)
BLK Strategic Risk Allocation Fund (Institutional) -3.60% 0.51% 1.13% 2.88%
Morningstar World Allocation Category Average -0.68 1.21 -2.34 -
Blended Benchmark2 -1.10 2.44 5.72 -
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Refer to website at www.blackrock.com to obtain performance data current to the most recent month-end. Returns include reinvestment of dividends and capital gains. Morningstar category returns are based on total return and do not reflect sales charges. Total/net expenses including investment related/net excluding investment related expenses as stated in this fund’s most recent prospectus are 1.66%/1.10%/1.00% for Institutional shares as of the fund's most recent prospectus. Investment dividend expense, interest expense, acquired fund fees and expenses and certain other fund expenses are included in the Net, Including Investment Related Expenses and excluded from the Net, Excluding Investment Related Expenses. Institutional share class has a contractual waiver with an end date of 12/1/15 terminable upon 90 days’ notice.
Important Notes
Please ask your clients to 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 at www.blackrock.com/funds. The prospectus and, if available, the summary prospectus should be read carefully before investing.
Important Risks: The fund is actively managed and its characteristics will vary. Holdings shown should not be deemed as a recommendation to buy or sell securities. 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. 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. 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. Investing in commodity-linked derivatives and commodity-related companies may increase volatility. 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. 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.
1 Institutional shares are sold to a limited group of investors, including certain retirement plans. Institutional shares also are sold to certain investment programs. See prospectus for details. Since inception performance less than one year not annualized. 2 The Blended Benchmark is 60% MSCI World Index and 40% Barclays US Aggregate Bond. The unmanaged, market-capitalization weighted Morgan Stanley Capital International (MSCI) World Index consists of a representative sampling of stocks of large-, medium- and small-capitalization companies in 23 countries, including the United States. The unmanaged, market-weighted Barclays US Aggregate Bond Index comprises investment-grade corporate bonds (rated BBB or better), Mortgages and US Treasury and government agency issues with at least 1 year to maturity.
Prepared by BlackRock Investments, LLC, member FINRA.
FOR MORE INFORMATION: www.blackrock.com
©2015 So What Do I Do With My Money?® 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.
USR-6921
15FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Multi-Asset Strategies
() reflects years investment experience. Team is based in San Francisco and London
Portfolio ManagementInvestment Strategy ResearchRQA — Risk and
Quantitative Analysis
Risk & QuantitativeAnalysis
+500 professionals partner with investment teams to monitor and analyze risk
Multi-assetResearch
+150 investors dedicated to multi-asset investing
Global Investment Teams
+1,600 investment professionals with specialties
across all asset classes
BlackRockSolutions
Proprietary Aladdin® platform integrates portfolio
management, risk analytics, trading and operations
BlackRock Global Investment Platform
BlackRock
Investment Institute
Internal forum facilitates idea sharing and debates insights
Chief Risk Officer
Ked Hogan, PhDManaging Director (30)
Team HeadPhilip Hodges, PhDManaging Director (8)
Head of Research
Vincent de Martel, CFA Managing Director (16)
Head of Investment Strategy
Ben Golub, PhDBlackRock
Chief Risk Officer (30)
Kristin FergisAssociate (3)
+ 2 TBAsRobert Holmes, CQFVice President (6)
Shinda BickhamDirector (15)
Kris KeltnerAssociate (7)
Ted DavermanVice President (8)
Garth FlanneryDirector (16)
Stefan SlukeVice President (5)
Justin PetersonAssociate (4)
Ron Ratcliffe, PhD Director (25)
Nicky LaiAssociate (5)
Paolo MirandaAssociate (3)
Jack DaviesAssociate (4)
Drawing From Specialized Knowledge & Market Insights Across BLK
16FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Traditional Portfolios Appear Diversified
Diversification seeks to provide consistency through diverse markets
A traditionally 60/40 institutional portfolio appears diversified from a capital allocation standpoint
17
Capital Allocation of a Traditional 60/40 Institutional Portfolio
Source: BlackRock.
23% U.S. Large-Cap Growth
23% U.S. Large-Cap Value
2% U.S. Small-Cap Growth
2% U.S. Small-Cap Value
8% International Developed
2% International Emerging
13% Treasuries, CDs & GSEs
9% Mortgage Backed
9% Investment Grade Corporate Bonds
2% High Yield
2% International Bonds
5% Cash
5%Cash
35% Bonds
60%Stocks
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Research-Driven Investment Process
Risk factor tilts (under / over
weights)
Optimal combination of
fundamental risk factors
Identify fundamental risk factors
Implementation of risk factors
Economic
Credit
Emerging Markets
Liquidity
Real Rates
Inflation
Investment Process
Strategic Allocation Tactical Overlay
Extreme risk Management to
lower overall volatility
Inflation Linked Debt
Developed Equity
Infrastructure
Developed Sovereign Debt
Developed Small-Cap Equity
Property
Investment Grade Debt
Emerging Equity
Commodities Ex-Energy
Emerging Sovereign Debt
Volatility Strategies
Energy
High Yield Credit
Private Equity
14 different asset classes24 DMs & 21 EMs
18
Cash
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Risk Factors Drive Investment Returns…
Risk Exposures
Inflation Bearing inflation exposureExample: Supply shock causes expected inflation to rise
Economic Economic growthExample: US GDP unexpectedly rises
EmergingMarkets
Investing in EM equities, bonds & currenciesExample: Modi implements reforms in India
CreditLending money to corporationsExample: High yield default rates remain low
Liquidity Financial market & asset class liquidityExample: Small-caps trade at a premium to large-caps
Real Rates Lending money for a period of timeExample: Fed lowers interest rates
The returns of every asset class are driven by a combination of multiple sources of risk
Diversifying the sources of risk is key to more effective portfolio construction
19
What Drives Risk
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
20
Solution: Diversify Risk Factors for Better Risk-Adjusted Returns
GA_2
Hypothetical Risk Factor Strategy Combined With a Traditional 60/40 Portfolio
Add a different approach to asset allocation that breaks down investments by their sources of return
This approach can complement a traditional portfolio to enhance overall diversification
Performance data quoted represents past performance and does not guarantee future results.As of December 31, 2014. Sources: BlackRock, US Federal Reserve, Ibbotson, Datastream, Bloomberg, Standard & Poor’s, Goldman Sachs, National Bureau of Economic Research. The hypothetical strategy is a 22%/62%/16% allocation of the S&P 500, Ibbotson Intermediate-Term Treasury Index and the GSCI Commodity Index with notional exposure of 1.8x capital invested, respectively. The strategy targets a risk level of 10% and equal risk allocation among all three components, assuming zero correlations at volatilities of 15%/5%/20%. Thirty percent of capital is invested in T-bills to meet margin calls. Notional exposure is greater than capital invested. We assume a 50-bps spread over T-bills for derivatives financing. Index performance is for illustrative purposes only. You cannot invest directly in an index. Performance returns for strategies do not reflect any management fees, transaction costs or non-financial expenses.
4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%5.0%
6.0%
7.0%
8.0%
9.0%
10.0% 100% Stocks
Traditional 60% / 40%Balanced
100% Bonds
Standard Deviation
An
nu
aliz
ed R
etu
rn
Risk and Returns over 25 years (12/31/89 to 12/31/14)
Sourcing 20% from stocks Hypothetical
Diversified Risk Factor Strategy
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
Diversifying Risk Factors To Enhance Performance
Source Blackrock. Chart is for illustrative purposes only. Pie charts indicate portfolio risk exposures and are for illustrative purposed only.
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Diversified Beta Frontier
Risk Free Cash
Exp
ecte
d R
etu
rn
Risk (standard deviation)
Some LeverageBetter risk/return trade-offtargeted for equity return
No LeverageBest risk/return
trade-off portfolio
Capital Market Line
Equity portfolio
Unnecessary risk
We define an optimal portfolio as the one with the highest expected Sharpe Ratio
A truly diversified portfolio with modest leverage is more efficient
Concentration Risk vs. Leverage Risk
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.
22
Tactical Lever #2 – Tilts Within Factor Exposures
Real Rates Tactical Allocation Change by Geography
When implementation methods are over/under priced: Tilt factor exposures to assets, geographies & vehicles that offer better valuations
Risk factor exposures utilize 14 different asset classes in 24 DMs & 21 EMs
Lever #2:
Tilts Within Each Factor
Example: Real Rates
• We are currently underweight JGBs versus our long-term strategic allocations
Underweight Japanese Government Bonds
• Low yields; with a curve that is not any more attractive than other major markets
• Large tail risk; skewed return distributions issued by a country that is committed to raising the inflation rate
• Return exposure; when the yield offered is more in-line with the associated risks
Source: BlackRock as of 9/30/14
FOR FINANCIAL PROFESSIONAL USE ONLY. Not to be shown or distributed to the general public.