Blackrock Dials Back Risk Across the $131 Billion Model Portfolios

The world’s largest asset manager, BlackRock Inc., is making some strategic adjustments in its investments as markets brace for a “new phase” of volatility, driven by the anticipated Federal Reserve interest rate cuts and the upcoming U.S. presidential election. While BlackRock remains optimistic about the overall market outlook, it is scaling back its exposure to U.S. equities and growth stocks, shifting its focus towards value stocks and fixed-income assets, according to an investment report seen by Bloomberg.

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The firm’s decision to make this adjustment reflects its view that while earnings growth has been robust, the extent of positive earnings surprises and revisions to estimates may soon begin to fade. Michael Gates, the lead portfolio manager for BlackRock’s Target Allocation ETF model portfolio suite, noted that the markets are transitioning from a phase of relatively stable and predictable factors to one characterized by more uncertainty. This includes a Federal Reserve that is expected to begin cutting interest rates, along with the potential for market turbulence related to the U.S. presidential election.

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“While earnings continue to power forward, the level of surprises and estimate revisions suggest a potential moderation of the earnings-fueled advantages of the last 18 months,” Gates said. He further explained that this shift marks the beginning of a new phase in the markets, which will likely be influenced by both the Federal Reserve’s actions and seasonal and election-related factors.

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This portfolio reshuffling by BlackRock comes at a key moment for risk assets. In recent weeks, equity benchmarks have shown signs of strain, largely due to an earnings season in which investors began to question whether the artificial intelligence (AI)-driven rally, which had propelled technology giants to new highs, could be sustained. At the same time, the Federal Reserve is on the verge of an easing cycle, and the U.S. presidential election, which is just two months away, appears highly competitive, with polls indicating a close race.

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In light of these factors, BlackRock seems to be taking profits after a period of strong growth in its investment portfolios, which had leaned heavily on growth stocks earlier in the year. Even though BlackRock’s model portfolios still favor equities over bonds, the firm has reduced its overweight position in stocks from 4% to 1%. This adjustment suggests a more cautious stance moving forward.

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On the equities front, a large sum of approximately $2.7 billion was directed into the $18 billion iShares MSCI EAFE Value ETF (EFV) on Thursday. This marked the biggest one-day inflow into the fund since its creation in 2005. At the same time, a record $1 billion was pulled from the $5.6 billion iShares Currency Hedged MSCI EAFE ETF (HEFA), while the $50 billion iShares S&P 500 Growth ETF (IVW) saw an outflow of about $771 million.

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In the fixed-income space, BlackRock also made significant moves. The $33 billion iShares Core Total USD Bond Market ETF (IUSB) saw an inflow of $2.3 billion, a record amount for the fund. Additionally, Rick Rieder’s $5 billion BlackRock Flexible Income ETF (BINC) attracted nearly $1 billion in its largest single-day inflow to date.

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This shift in BlackRock’s strategy is part of a broader trend as model portfolios, which combine various funds into pre-packaged strategies for financial advisers to sell to their clients, have grown significantly in size. Broadridge Financial Solutions estimates that by the end of 2023, model portfolios likely held around $5.1 trillion in assets, and that figure could rise to $11 trillion by 2028. BlackRock, which commands roughly $131 billion in model portfolio assets, is a major player in this space.

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By reallocating its investments across value stocks and fixed-income funds, BlackRock aims to navigate the changing market conditions more effectively. The firm’s decision to trim its exposure to growth stocks comes as investors increasingly express concerns about the sustainability of the tech-driven rally, especially as AI hype has propelled valuations of megacap tech stocks to unprecedented levels. With the Federal Reserve’s expected rate cuts and political uncertainty on the horizon, BlackRock appears to be positioning itself more conservatively for what could be a turbulent period ahead.

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In summary, BlackRock’s recent portfolio adjustments reflect a cautious yet strategic approach to the evolving market landscape. While the firm remains bullish on the overall market, it is moving to reduce risk by rebalancing its portfolios away from growth stocks and toward value stocks and bonds. These moves indicate that the asset manager is preparing for a period of heightened volatility as the Federal Reserve enters an interest rate-cutting cycle and the U.S. presidential election approaches.

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