Watching market momentum and using ‘vanilla’ style derivatives is the solution to delivering better performance in the current volatile markets, according to BlackRock Investment Management director Vincent Lo Blanco.
“We have learnt to manage risk better than we did in the 90s,” Lo Blanco said. “There is a lot more momentum in the market and that has made us nimble with our investment strategies.”
He said the key to BlackRock’s investment strategy had been focusing on the economics of markets and the extreme valuation events that had been occurring.
“We don’t want to be part of a market ‘fat tail’ so we look for exit strategies in a market,” he told a Dealers’ Group conference in Melbourne. “This has seen us invest in liquid derivatives, which are under-priced in asset markets.”
Lo Banco said the use of derivatives in the portfolio had changed the way BlackRock handles risk in a portfolio.
“We can take positions in equities or cash,” he said.
“In August the market wasn’t adjusting to the negative view of the economy. The fixed income market was telling us that we were heading for a credit crunch, so we bought put options expiring in September.”
Lo Banco said the put options expired at the end of September as volatility had pushed up the price of the options.
It was a similar action in commodities, where BlackRock had a positive view of prices, especially in soft commodities.
“We did go long in commodities as soft commodities rallied, we took options,” he said. “However, when prices did begin to fall we did get caught with some options that were bought at the top of the market.”
Going ahead, Lo Banco favours US equities ahead of European markets, although the global outlook is not strong.
