How investors have rebuilt portfolios in 2021

By: Charlotte Tribley, Portfolio Consultant, BlackRock

Charlotte Tribley, Portfolio Consultant, BlackRock
Charlotte Tribley, Portfolio Consultant, BlackRock

Quick read

  • In portfolio construction consultations with our clients this year, three clear trends have emerged: An increase in portfolio consultations related to environmental, social and governance (ESG) positioning versus last year. A rethink in fixed income allocations as rates hit lower bounds. And a more strategic approach to defining nominal versus inflation-linked bonds, given the sharp rise in inflation expectations.

As we reflect on 2021 so far, we have identified three key themes where clients have sought our help in bringing them closer to their portfolio objectives.

Transforming portfolios toward ESG

We have seen a 70%[1] increase in ESG related portfolio consultations versus last year, with clients recognising the urgency to either build new sustainable propositions or evolve existing allocations.

As the space matures, engagement has evolved. Rather than focusing purely on product implementation, more and more investors want to embed sustainability across the whole portfolio construction process. They want clear sustainable objectives and strategic asset allocations (SAA) to help achieve such targets.

Incorporating climate-aware capital market assumptions allows investors to design SAAs that reflect the impact of climate change across asset classes.

Rethinking fixed income allocations

Investors have historically allocated to fixed income to meet any of three key objectives: capital appreciation, income generation and principal preservation. In recent years, some of these applications have been challenged. Policymakers are now bumping up against the effective lower bound on interest rates, leading to an asymmetric risk/return profile for the asset class in the wake of the shock from COVID-19.

We believe it’s important to redefine resilience and take a more granular approach across fixed income, with a focus on sector views. New geographies, such as China, can also be considered to replace portfolio diversifiers that have become less effective in the low-rate environment.

Alongside allocation decisions, the need for flexible and adaptable implementation is key. The increased global adoption of fixed income ETFs and the strong performance of these vehicles amid significant volatility in the first half of 2020 underscore the case that investors need to think beyond traditional implementation methods to build portfolios and generate alpha.

Repositioning for an inflationary regime

Inflation expectations have risen sharply, causing investors to take an increasingly more strategic approach to allocating to nominal versus inflation-linked bonds. Incorporating market-driven scenarios can simulate potential inflation regimes as economies reopen. This can help investors understand the potential profit and loss impact on their portfolios in the event of different inflationary scenarios – and help to reposition accordingly.

1 – Source: BlackRock Portfolio Analysis and Solutions. 70% increase compared on Q1 2020 vs Q1 2021.

Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

 Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

ESG Investment Statements This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.

Important Information

[1] Source: BlackRock Portfolio Analysis and Solutions. 70% increase compared on Q1 2020.

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