Why you might want to cover your assets from volatility now

Why you might want to cover your assets from volatility now
BlackRock chief investment strategist says prospect of stocks and bonds moving in tandem means higher risks for investors.
JUL 14, 2015
BlackRock Inc.'s top investment strategist warned Monday of the prospect of stocks and bonds moving in tandem, an added risk in volatile markets, and suggested investors should devote more of their portfolios to illiquid investments. “If the bond market volatility spills into equity market volatility, another way of saying that is that these asset classes become more correlated ... investors are no longer getting that nice natural hedge they've had the last five years in their bonds hedging out their equity exposure,” said Russ Koesterich, global chief investment strategist at the world's largest money manager, with $4.8 trillion. “That's something I think would reverberate throughout the portfolio.” Mr. Koesterich, who spoke Monday at a press briefing in New York, said some illiquid investments, such as so-called real assets like property and infrastructure, are offering a healthy premium. “One of the places we still think there's an opportunity, is to take illiquidity risk,” Mr. Koesterich said. “An example of that would be looking at physical real estate, rather than REITs,” or real estate investment trusts. While acknowledging the downside is that you “can't sell that as quickly,” Mr. Koesterich said the yields are richer than publicly traded real-estate trusts. “When investors think where can they take risk and adequately be compensated, we think one of the places to consider, for longer-term investors, is looking for more illiquid investments where you still might be getting paid for taking on that risk.” BlackRock has been forecasting higher bond yields and volatility in the U.S. this year. Those rates won't move dramatically, Mr. Koesterich said, instead “grinding higher.” But he said investors are not getting paid well for taking risks in many liquid investments, a consequence of the U.S. Federal Reserve's loose monetary policy. “They get paid for taking equity risk, they get paid for taking credit risk, they get paid for taking term risk, [but] some of these are not particularly well-compensated right now,” Mr. Koesterich said. “You're not really compensated for buying longer-term bonds.”

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