BlackRock Fixed Income Portfolio Management Group, shed lights on topics such as their team structure, how various risks have affected their investment decisions, and the major portfolio changes over last year.
Category Winner: Best High-Yield Bond Fund – Global High Yield Bond Fund A1RF USD
Key Stats
Inception Date: 2002 Aug 02
Morningstar Rating (as of 2015-03-31): 
Total Net Assets (Mil, as of 2015-03-31): 2,076.16 USD
Manager: James Keenan, Michael Phelps, David Delbos, Jose Aguilar, Mitchell S. Garfin
Manager Start Date: 2007 Jun 01, 2015 Feb 18
M: Morningstar B: BlackRock Fixed Income Portfolio Management Group
M: Could you highlight any major changes you made to the portfolio over the course of 2014? Were there any particular holding that drove the fund’s performance for the year?
B: In 2014, the portfolio’s general credit/issuer themes remained centered around cash flows views, specific catalysts and idiosyncratic risks. 2014 was an up year for the high yield market, but one that was also punctuated with a great deal of volatility. There were a series of global macro risks that contributed to these market gyrations, but largely high yield valuations were driven by technicals, and towards the end of the year, a sharp correction in energy assets (15% of the US High Yield Index) on the back of plummeting oil prices. To manage this market volatility, hedges played a big role in the portfolio during 2014, particularly against our tactical equity and equity-like positions - risk positions we view relative to owning higher-beta CCC-rated high yield bonds. From an energy perspective, the fund came into 2014 underweight the sector, but as conditions worsened we reduced our exposure further. This positioning positively contributed to results for the year, predominantly in the fourth quarter when the energy market fell sharply.
M: What is your economic outlook for 2015 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
B: We continue to see value in the high yield sector in 2015, but the risk-reward paradigm of the market continues to evolve. Absolute valuations remain cheap to the comparable period last year and, while our base case return projection is 4-6% in 2015, high single-digit to low double-digit gains for the year is not a longshot, especially if volatility remains subdued. On a relative value basis, high yield remains attractive versus other fixed income assets given its high coupons and limited duration profile. Although risk premiums have compressed from the wider levels seen earlier in the cycle, we continue to think spreads today are attractive relative to benign default expectations that should persist through the beginning of 2017. Valuations should continue to be driven by market technicals, as corporates and investors react to a series of momentum shifters. We mentioned elevated energy risk in the back half of 2014 and, while the market has recently exhibited more stability, the sector will likely remain a dominant focus for high yield investors this year.
Our high yield platform remains well positioned to capitalize on market opportunities in 2015. Similarly, we are confident in our ability to manage potential market risks and generally we expect these risks to emanate from more macro-based factors rather than the high yield issuer base. In the implementation of our strategy, we seek to outperform across both market and credit cycles. This means we must be flexible and dynamic across the risk spectrum and take the right amount and right types of risk for the respective environment. If risk is appropriately priced in the market, we seek to position ourselves to benefit from any ensuing rally. Conversely, when we have less conviction and believe markets could experience correction, we have the ability to position ourselves more defensively and mitigate our investors’ downside.
M: Can you comment on the macro risks facing the global economy, including potential US rate hikes, QE programs in the Eurozone and Japan, and the growth headwinds facing the emerging world? How do these risks affect your investment decisions?
B: As we alluded to earlier, the risk in high yield for 2015 is not a story of balance sheet deterioration and a significant default wave; it’s a story of a complex global macro backdrop where market technicals fluctuate and the broader bid for risk assets ebbs and flows based on the severity of those risks. In the US, healthy jobs data, moderate growth, and less dovish rhetoric from the Fed have increased the probability of rate hikes this year, and we expect the central bank to move in 2H 2015. While the US is growing, the rest of the globe seems to be slowing and more than 20 central banks have already cut rates with more expected to act. This growth divergence coupled with deflationary pressures abroad has the potential to fuel bouts of volatility this year. An appreciating US dollar and low commodity prices could place additional pressure on global economies, particularly in the emerging world. Geopolitical risks are currently subdued, but will likely re-emerge and test market conditions further. The developments and outcomes surrounding these risks will ultimately help us shape our top-down view, and determine the optimal risk positioning. Depending on where we want to be positioned across that risk spectrum as highlighted above, we then need to decide the most capital-efficient way to express that view.
M: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?
B: James Keenan is the lead portfolio manager for BlackRock’s Fundamental High Yield mandates (mutual funds and segregated accounts). In this capacity, James acts as the Chief Investment Officer, where he is largely responsible for setting the broad investment direction of the strategy – risk-on or risk-off, long duration versus short duration, and/or underweight/overweight specific sectors and industries based on those convictions. As a top-down input into the investment process, James seeks to optimize the deployment of risk capital through comprehensive macro analysis, and a deep understanding of global capital markets and the securities that constitute it. James is supported by additional portfolio managers (US and non-US domiciled), who focus more directly on portfolio construction and work with credit analysts to ensure our highest conviction bottom-up single-name credit ideas make it into the portfolios. Once an investment decision has been made, portfolio managers work with traders to ensure the investment idea is properly executed, taking into consideration valuations, pricing levels, as well as market and/or issuer liquidity.
James Keenan remains the lead portfolio manager of the BGF Global High Yield Bond Fund, but the fund’s investment team did experience changes in February of 2015. We do not view these changes as significant; however, they were critical for maintaining the consistency and execution across our high yield mandates. We do not anticipate any additional changes during the year, and importantly, remain committed to delivering performance as well as our philosophy and process without interruption.
M: Can you highlight any areas where you feel that the investment team or the investment process can be improved upon?
B: Following the aforementioned changes to the investment team, we are comfortable with our current investment roster. We did not make any changes to our investment process in the last year, and do not envision any in 2015. There are always areas in which managers we can improve, and that requires us to re-evaluate not only our resources, but also our investment approach from time to time. Occasionally, the market and/or opportunity set can dictate that. If we feel that our processes or structure inhibits our ability to drive alpha for our clients, we will immediately take action.
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