Ask the Expert with BlackRock Institutional: An Unconstrained Approach For Uncertain Times

Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Global Fixed Income, Head of the Fundamental Fixed Income business, and Head of the Global Allocation Investment Team. Bob Miller, Managing Director, is head of Americas Fundamental Fixed Income within BlackRock’s Global Fixed Income group and a member of the Global Fixed Income Executive Committee. David Rogal, Managing Director, is a member of the Multi-Sector Mutual Fund team within BlackRock’s Global Fixed Income Group.

Sebastian Culpan-Scott: How can an opportunistic, unconstrained approach to fixed income be beneficial to investors in the current market environment?

"It is true that rising wages have supported the consumer, but blistering inflation is hurting consumer confidence and spending."

Rick Rieder: We have seen extraordinary turmoil in the economy and markets over the past few years. Investors have faced an intensifying trade war between the U.S. and China, an ongoing multi-year global pandemic and an extremely contentious U.S. election, which held huge policy implications. More recently, soaring inflation and the associated turn in monetary policy has stoked volatility across asset classes. It is true that rising wages have supported the consumer, but blistering inflation is hurting consumer confidence and spending. While futures markets for the Fed Funds rate are pricing in several policy rate hikes over the next 6 months or so, slowing growth means it’s not clear that the Fed will be able to execute on its plan.

All of this is to say that we are witnessing maximum uncertainty on almost all fronts. That uncertainty, combined with the historically low yields in recent years and the tremendous shocks the market has faced of late, have led to dramatic drawdowns in fixed income markets (see Figure 1).

"In this kind of an environment, an unconstrained manager’s ability to actively adjust duration can be particularly valuable."

In this kind of an environment, an unconstrained manager’s ability to actively adjust duration can be particularly valuable. Compared to strategies that are tethered to a specific benchmark, such as the Bloomberg U.S. Aggregate Bond Index, unconstrained strategies can pursue additional avenues for generating return while protecting client capital on the downside.

We believe a sound unconstrained approach does not rely on taking outsized positions or betting on difficult-to-predict macro moves, but rather on seeking to earn a little money a lot of times. We favor opportunities to add more attractive yield, within a risk-aware process that attempts to keep risks modest and welldiversified. That approach is intended to provide a return that hopefully achieves the client’s portfolio goals with a path they can maintain comfortably.

The article continues on page 10 of the special report: 'Fixed Income: Winners and losers during regime change'