This year at Elevate, I was thrilled to take the stage with Rick Rieder, Senior Managing Director and Chief Investment Officer of Global Fixed Income at BlackRock. Leading the Fundamental Fixed Income business and Global Allocation Investment Team, Rick oversees approximately $2.7 trillion in assets. He's a member of BlackRock’s Global Executive Committee and Chairman of the BlackRock Investment Council. Rick's insights into the current market landscape—covering rates, Fed policy, winning strategies in fixed income, and inflation—are invaluable, especially for retail financial advisors.
Here are some highlights from our discussion that stood out to me, specifically around his take on fixed income investments.
Q: Given your strategic role, what's your current perspective on the markets, particularly with regard to rates, Fed policy, and navigating the fixed income landscape amidst inflation concerns?
Rick: People were predicting a hard landing for the economy last year, even a recession. But I don't think service-related economies generally go into recessions. I think we're moderating. Looking at the payroll data, if you take the last three to six months, the moving average of job hires is around 242,000 to 245,000 jobs per month. That's really stable.
From an investment point of view, this stability is a big deal. The economy is stable, employment is stable. There are some trends worth noting, though. Manufacturing, leisure, and hospitality sectors have hired a lot, while healthcare and education remain stable. My sense is that employment is pretty stable and moderately slowing, which is significant for the Fed.
Regarding inflation, today's CPI report tells a familiar story. Goods inflation is negative, with a six-month moving average at -1.5%, but services inflation is still too high. I think the Fed wants to lower the funds rate and might aim for a couple of cuts this year. The current numbers don't give a clear window for action yet, but I believe the Fed wants to move, and it will take some time.
Now, I know this might sound crazy, but I actually think that if the Fed drops interest rates, it will bring inflation down. High rates punish lower-income borrowers and benefit high-income lenders, creating a wealth transfer from the public to the private sector. This dynamic means higher-income individuals are spending more, particularly on things like entertainment, which keeps inflation up. So, I believe lowering rates could relieve some pressure on lower-income borrowers and help small businesses and local banks.
From an investment perspective, we're at a unique point. Service-level inflation is high, and the Fed's interest rates are sticky. This means you can invest in things like investment-grade credit in Europe at 5.5% or triple-A assets at 6.5%. Companies' credit quality is the best it's ever been, making this an excellent time to compound income from these assets.
In equities, despite concerns about high multiples, earnings growth is strong, and companies are announcing massive buybacks. Apple, Google, Meta, and Microsoft have authorized buybacks totaling $320 billion. This is powerful support for equities, and I believe equities will have good returns.
If you're building a portfolio now, you have an opportunity to create a balanced mix of income and equities. Yields are high relative to volatility, which is very attractive. For example, a triple-B portfolio with a three-year duration can yield 6.5% with nine volatility. This is a compelling time for investing, not without some risks, but with significant opportunities due to the good economic shape, moderate inflation, and ongoing technological advancements.
Q: What are the best ways to play the current environment and how are you doing this in your portfolios?
Rick: Well, when it comes to current risks in the market, I find it really fascinating how the traditional approach to portfolio construction is being challenged. Historically, consultants have advocated for a 60-40 split between equities and long-duration fixed income to hedge against each other. But now, with higher inflation, it's not so clear-cut.
In today's environment, a bad CPI report could impact both the rates and equity markets simultaneously, showing that the back end of the curve isn't necessarily a hedge anymore. Instead, I see opportunities in clipping coupons with a flat curve, especially considering that the Fed might start moving and steepening the curve soon.
In my portfolios, I'm leaning into this idea. For instance, I've been running some investment-grade European credit swaps with a duration of around two and a quarter years. It's all about finding those stable income opportunities while staying flexible for potential Fed actions.
Looking ahead, I believe we're entering a phase where we need to rethink traditional portfolio balancing. I'm not seeing the same attractiveness in long-duration bonds anymore, except perhaps in municipals. Instead, I'm focusing on private credit and adjusting my strategies accordingly.
Now, onto the topic of the upcoming election. In markets, it's crucial to remember that they react to the most immediate concerns. I anticipate volatility to increase as we get closer.
So, to mitigate some of that uncertainty, I've been buying some long-volatility options on the S&P 500. If anything, this is a way to lock in volatility at a relatively cheap price, especially considering that I expect volatility to rise in the second half of the year.
Ultimately, I'm not trying to predict the future perfectly. I'm focused on anticipating market movements and generating returns based on the opportunities and risks I see in the current landscape. And I believe the markets will indeed react to these factors over the coming months.
Quite candidly in our conversation, Rick admitted to not wanting to sound like a “Pollyanna,” but life can be good for investors right now, with some appropriate caveats.
Q: With the best of active and index at your fingertips, how do you think about portfolio construction?
Rick: In my approach to portfolio construction, I value both active and index strategies, recognizing their respective strengths. Index ETFs are integral to my methodology in my active mutual funds due to their efficiency and agility in navigating the market. They allow me to move quickly and capitalize on opportunities as they arise.
However, I also see the importance of active management, especially when it comes to accessing specific asset classes or seeking out opportunities for higher returns. I believe that index and active strategies can complement each other within a portfolio, each serving its purpose depending on the investment objectives and market conditions.
For me, the distinction between index and active investing isn't as crucial as identifying the most effective tools for achieving my desired outcomes. It's about using the right strategy at the right time.
Furthermore, I'm particularly interested in alternative investments such as private credit and real estate financing. I see significant potential in this space, especially given the shifts in the lending market towards private credit. I'm optimistic about the returns and stability offered by these alternative investments in the current market landscape.
Value from powerful partners
In our full conversation on stage, Rick expressed a nuanced and balanced view on the opportunities and challenges in fixed income investments, acknowledging both the potential advantages and the inefficiencies within the market. Rick's perspectives on technology's impact, the rise of active ETFs, and innovative portfolio construction, including non-traditional investments like Pre-IPO equity, offer a comprehensive view of evolving market strategies.
Envestnet recently announced that we are deepening our established strategic relationships with BlackRock, Fidelity Investments, Franklin Templeton, and State Street Global Advisors. Envestnet is working with these firms, some of the largest asset managers in the world, to build investment strategies that are custom-tailored and can be used by advisors to help meet the specific financial goals, risk tolerance, and personal circumstances of individual investors; and deliver this at scale to the more than 109,000 advisors on its platform.
We are proud to be partnering, at Elevate and beyond, with industry thought leaders from premier asset managers who sit at the forefront of the market, helping to shape and inform the market-leading technology and solutions we provide to our advisors as they continuously work to meet their clients’ unique needs. Stay tuned as we work together to build an offering that speaks to an emerging convergence point where personalization, integrated technology and solutions meet as an opportunity to invest in the trends that are shaping the future of the wealth management industry.
Visit https://www.envestnet.com/event/elevate/ and make plans to join us at Elevate 2025 in Las Vegas!
