Tag Archives: blackrock

Closed-End Target Date Muni Bond Funds Have A Good Yield And Low Interest Rate Risk

Blackrock and Nuveen target date funds pay back upon maturity. These funds hold pretty safe municipal bonds. These fund have decent yields. Blackrock (NYSE: BLK ) and Nuveen have a series of closed-end municipal bond funds that have a target date maturity. These funds have a nice yield and pay back principal in just a few years. We will look at the Blackrock Municipal 2018 Term Trust (NYSE: BPK ). As of today, it is trading at $15.50 and is almost at par with its net asset value (NAV). That means that the underlying portfolio of cash and bonds are worth what the market capitalization is. The portfolio holds 124 different issues of municipal bonds. They appear to be revenue bonds with names like: New York State Dormitory, California Waste, and Maryland Transportation. Revenue bonds are backed by the revenues generated from a certain project like a toll road or student housing. The bonds are rated: 6.9% AAA, 21.4% AA, 41% A, 18.9% BBB, 5.2% BB, 3.3% not rated, and 3.3% cash. The portfolio is only 1.5% leveraged, meaning that in a closed-end fund, that is all that has been borrowed. The fund has returned 5.8% since it was taken public in October 2001. Most of the time, it trades at par to NAV except when the markets went crazy in ’08 and then recovered. The trust yield 4.7¢ a month, so the total yield is 56.4¢ a year divided by today’s market price of $15.50 for a yield of 3.64%. The bonds will be liquidated or will have matured by December 31, 2018. That’s a pretty good yield for a bond that matures in about three years. The maturity price is $15. I assume that there could be some cash left over. The internal fee is 0.64%. It does not appear that there are many funky bonds that could go under. These include Detroit, Illinois, and Puerto Rico government obligations. As the bonds in the portfolio are backed by specific projects, they appear to be pretty safe. I must say, it’s seems like a pretty good investment for certain circumstances. As bonds are sold in $1,000 increments and the minimum that most bond brokers require is to buy in a $5,000 a lot, an investor must have quite a bit of money to hold a diversified portfolio. These Blackrock funds are good to hold smaller amounts of cash that are low risk, provided that the trade fees don’t negate the returns. These funds are traded like stocks. Other funds that fit in this category include: the Blackrock Municipal 2020 Term Trust (NYSE: BKK ), the BlackRock New York Municipal 2018 Term Trust (NYSE: BLH ), the Nuveen Intermediate Duration Quality Muni (NYSE: NIQ ), and another Nuveen Intermediate Duration Municipal Term Fund (NYSE: NID ). I have not done the research on these as I have on the Blackrock listed above. I have also not looked at the prospectus and just looked at the fact sheet. The particular closed-end fund seems to have a decent return and should do well in a rising interest rate environment. It would be nice if the fees were a little lower but what can you do? A yield of over 3% with a maturing of three years is pretty good in this environment.

Don’t Let Emerging Markets Scare You

In the spirit of Halloween, I wanted to tell you a little story about how when something may seem scary at first, a little background knowledge can go a long way. I remember visiting haunted houses as a kid and feeling especially scared when, on one occasion, the grim reaper appeared without warning from behind a darkened corner. The following year, the same reaper darted out of hiding at the same corner, and I wasn’t scared anymore because 1) I’d seen it before and 2) I figured out it was just a guy in a costume. I felt more confident because I knew what to expect, no longer possessing a fear of the unknown. While stepping outside of your comfort zone by trying something new can be scary, it can often be a good thing. My colleague Heidi Richardson recently discussed some of the potential applications for emerging markets (EM) in a diversified portfolio. Concerns over global growth and rising interest rates have pushed many out of this space, but our research indicates that there are pockets within the EM landscape that have been growing. Much like knowing which houses give out the best candy on Halloween night, it seems there are a few good opportunities out there if you know where to look. What Investors are Avoiding The latest industry data show that EM equity is headed for a third straight year of outflows globally, having shed $27 billion year to date. Market volatility in Q3 accelerated this trend. Country fund outflows of $21 billion are focused in a group of 10 locally-listed China A Shares funds due to concerns over valuations and the impact of the Shanghai-Hong Kong Stock Connect program on ETFs. Latin American countries with less of a buffer against a global downturn, such as Mexico and Brazil, have also been a drag on exchange-traded fund (ETF) flows. With all the changes in global growth uncertainties, interest rates may be spooky to investors, and we’re seeing it reflected in these select areas. Where Investors are Going While investors are wary of some EM exposures, we have found there are pockets where investors are putting their money – both in basic broad funds along with specific countries. In October, flows stabilized along with the MSCI EM Index. Specifically, China H Shares funds are seeing inflows, as are other country funds in Asia. The reason behind this: confidence in foreign reserves and the potential for long-term economic reform. Take India for example. India equity ETFs have average organic growth of 26 percent over the past three years. Prime Minister Modi’s election last May and his ambitious plans for economic reform sparked strong inflows of $5.1 billion over the last 6 quarters. Sentiment has shifted a bit since July, however, as Modi’s tax, land and labor proposals have inspired ETF redemptions of $1.3 billion in Q3 of this year, based on Bloomberg and BlackRock data. Still, inflows are net positive over the longer horizon. INDIA ETP FLOWS OVER 2 YEARS When it comes to EM, if you know where to go, you’ll find that some exposures can be less of a trick and more of a treat. This post originally appeared on the BlackRock Blog.

Considerations For Building A Currency Hedged Strategy

By Jane Leung It’s been nearly impossible to ignore the news about the dollar, especially for those of us who are taking advantage of the upcoming vacation season to travel overseas. The greenback’s movement also has implications for investors. One of the things I’m hearing most from colleagues and clients is that investors know they need to have a view on the dollar – whether it will go up or down – and also be very aware of their investing time horizon. Unfortunately, they’re still unsure of how to implement a currency hedged strategy in their portfolio. Of course, predicting exact currency movements is impossible, especially in today’s environment. On one hand, you have the Federal Reserve angling to boost interest rates, while on the other, central banks in Europe and Japan continue efforts to lower rates, thus weakening their respective currencies. So let’s focus on the variable that’s easier to measure: time horizon. Why Time Matters Investors seeking to limit the effects of currency risk on their portfolios have a number of hedging strategies to consider, but what to do depends on the investment horizon. A quick review of the numbers shows that there is a big difference in the risk/return ratio of hedged and unhedged strategies depending on how long you remain invested. The chart below shows developed market return/risk ratios and reveals that results vary significantly over time. Of course, it’s important to remember that currency returns are generally viewed, over the long term, as a zero-sum game. And, as we can see, over a 15-year period, hedged and unhedged strategies, as measured by MSCI (daily index returns from April 1, 2005 to March 31, 2015) produced nearly the same results. However, applying some form of currency hedged strategy may help reduce volatility. In the example below, at 10 years, there was a higher return/risk ratio for a hedged v. unhedged index. The differences keep becoming more pronounced as you look at shorter time periods. Over a 1-year time period, a 100 percent hedged portfolio would have resulted in a 0.8 risk/return ratio while 100 percent unhedged would have resulted in a -0.6 risk/return ratio. EAFE HEDGING How to Build a Hedged Strategy When deciding how much of your portfolio should be hedged for currency risk, a good rule of thumb is to think about developing an asset allocation and hedging “policy” at the same time. To clarify my point, I’m including a simple risk-and-return illustration. Low risk/low return investments such as cash and U.S. bonds reside in the left corner and the potentially high risk/high return investments such as unhedged international equities in the upper right corner. The orange dot is where a hypothetical investor may indicate her risk tolerance. HYPOTHETICAL RISK TOLERANCE Considerations for Investing Overseas When you think about international investing, it is also important to recognize the distinct characteristics of each country that makes up a foreign region. Some of these features may or may not be correlated with the U.S., and this can affect the decision of whether or not to hedge and, if so, how much. Take a look at the annualized volatility over 10 years for a variety of single countries and international regions, as represented by MSCI: ANNUALIZED VOLATILITY: 10 YEARS We can see from the graph above that the annualized volatility over 10 years was consistently higher for unhedged positions than hedged positions and that different countries and regions had different levels of volatility relative to each other. In short, your asset allocation should depend on how much risk you’re willing to take on any given investment. If you have a portfolio that is heavily weighted toward international investments, has high currency volatility or high correlation between the currency and the underlying assets, a higher proportion of currency hedged investments might be appropriate. If you are more risk averse, and your portfolio is more heavily weighted towards U.S.-based investments, has lower currency volatility, or low correlation between the currency and the underlying asset return, you may consider having a lower proportion of currency hedged investments. Whatever your risk tolerance, you may want to consider a currency hedge as a way to help minimize the effects of volatility over the long term, regardless of short-term dollar movement. This post originally appeared on the BlackRock Blog.