QUARTERLY UPDATE FOCUSED INCOME ETF PORTFOLIOS 4Q 2017 Managed Portfolio Strategies Key Takeaway: The risk rally may have room to run. U.S. earnings are outpacing analyst estimate revisions. Analysts have improved their outlook for 2018 earnings, but in our opinion, they have further to go to account for tax reform, increasing confidence and strong 2017 earnings. We believe growth prospects for the United States and emerging markets (EM) lead those of non-u.s. developed regions. Lower corporate tax rates are a potential tailwind for investment grade bonds. The deduction of debt interest by U.S. corporations may have relatively less benefit in a world with lower tax rates, and the net result may be a reduction in debt issued. Basic supply and demand suggests that diminished issuance should support corporate bond prices. We remain shy on duration. We do not buy into the conventional wisdom that globalization and technological advances have killed inflation. BlackRock s own GPS measure of inflation, which incorporates big data on price trends, suggests that prices may be headed higher. Further, the end of the Federal Reserve s repurchase program could increase net available supply of Treasuries and agency mortgage-backed securities versus last year. Volatility Focused Income Rising Rates Focused Income Inflation Focused Income Weighted Average Expense Ratio 0.32% 0.37% 0.33% Treasuries 22.0% - 7.0% Mortgage-Backed Securities - - - Credit 39.0% 61.0% 37.0% Non-US Governments - - 3.0% Equity 39.0% 39.0% 53.0% As of 1/16/18. The weighted average expense ratio is the weighted average of the net expense ratios of the underlying investments. This information is not personalized investment advice or an investment recommendation by BlackRock, and is intended for use only by a third party investment advisory firm in connection with its management of its own clients accounts. BlackRock does not have investment discretion over, or place trade orders for, any portfolio or account derived from this information. Performance of any portfolio or account derived from this information may vary materially from the performance shown herein. There is no guarantee that any investment strategy illustrated will be successful or achieve any particular level of results. Please review the disclosures at the end of this document and consult your financial advisor for more information. This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) any funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisors know enough about their circumstances to make an investment decision.
Trade Rationale Volatility: Consistent with our concerns regarding interest rate risk, we are modestly reducing duration by shifting from preferred stocks into a mix of high yield positions (a combination of U.S. corporate and emerging market). We continue to have a positive outlook on emerging market asset classes generally. Rising Rate: Consistent with our concerns regarding interest rate risk, we are modestly reducing duration by shifting from preferred stocks into short-duration corporate credits. Within equities, we are modestly reallocating from mega cap stocks to global energy equities. We like the positive momentum that has been associated with that sector, and we believe it is reflective of strong fundamentals. Inflation: We are reducing our allocation to intermediate corporate credit in favor of high yield emerging market debt. We are attracted to the larger yield potential within that exposure, and continue to have a positive outlook on emerging market asset classes generally. We are also implementing a modest shift from high-yield bonds to global energy equities, with the intent of increasing portfolio inflation sensitivity. Performance Highlights 2017 was a strong year for risk assets and the fourth quarter was no exception. We experienced synchronized global growth and strong corporate earnings with almost every asset class advancing over the course of the year. Consistent with this environment, all of the portfolios delivered positive performance for the fourth quarter and delivered an income return consistent with the objective. Our preference for equities was the primary driver of positive performance, as stocks continued to outperform bonds. In particular, the portfolios benefited from exposure to U.S. stocks which rallied on the back of strong corporate earnings and the passage of tax reform. Exposure to preferred stocks weighed on portfolio returns. Additionally, an allocation to intermediate-term U.S. Treasuries was the primary detractor from performance in the Volatility Focused Income Managed Portfolio Strategy. This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) any funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisors know enough about their circumstances to make an investment decision. [ 2 ]
Performance as of 12/31/2017* Volatility Focused Income Portfolio Cumulative Returns (%) Annualized Returns (%) YTD Latest Quarter 1 Year 3 Year Since Inception (9/30/14) Composite (Net) 6.46 1.13 6.46 2.84 3.12 Composite (Gross) 8.08 1.52 8.08 4.41 4.69 Benchmark 7.90 1.95 7.90 4.61 5.07 Rising Rates Focused Income Portfolio YTD Latest Quarter 1 Year 3 Year Since Inception (10/31/14) Composite (Net) 5.69 0.87 5.69 1.69 1.38 Composite (Gross) 7.30 1.26 7.30 3.24 2.93 Benchmark 7.90 1.95 7.90 4.61 4.76 Inflation Focused Income Portfolio YTD Latest Quarter 1 Year 3 Year Since Inception (9/30/14) Composite (Net) 6.34 1.38 6.34 1.30 0.84 Composite (Gross) 7.96 1.76 7.96 2.84 2.38 Benchmark 7.90 1.95 7.90 4.61 5.07 *Past performance is not indicative of future results. See back page for benchmark information and relevant GIPS disclosure. Net composite returns reflect the deduction of an annual fee of 1.50% typically deducted quarterly. [ 3 ]
Changes to holdings effective January 16, 2018 Volatility Focused Income The Volatility Focused Income strategy seeks to provide yield while minimizing portfolio volatility, and to provide longer term capital appreciation with a 25% minimum equity allocation. Ticker Allocations Current Prior Change IEI ishares 3-7 Year Treasury Bond ETF 13.0% 13.0% - IEF ishares 7-10 Year Treasury Bond ETF 9.0% 9.0% - HYG ishares iboxx $ High Yield Corporate Bond ETF 25.0% 21.0% +4.0% EMHY ishares Emerging Markets High Yield Bond ETF 14.0% 10.0% +4.0% HDV ishares Core High Dividend ETF 12.0% 12.0% - OEF ishares S&P 100 ETF 9.0% 9.0% - PFF ishares U.S. Preferred Stock ETF 9.0% 17.0% -8.0% HEFA ishares Currency Hedged MSCI EAFE ETF 5.0% 5.0% - ITOT ishares Core S&P Total U.S. Stock Market ETF 4.0% 4.0% - Rising Rates Focused Income The Rising Rates Focused Income strategy seeks to provide yield while minimizing the impact of rising interest rates, and to provide longer term capital appreciation with a 25% minimum equity allocation. Ticker Allocations Current Prior Change HYG ishares iboxx $ High Yield Corporate Bond ETF 30.0% 30.0% - CSJ ishares 1-3 Year Credit Bond ETF 14.0% 11.0% +3.0% FLOT ishares Floating Rate Bond ETF 10.0% 10.0% - EMHY ishares Emerging Markets High Yield Bond ETF 7.0% 7.0% - PFF ishares U.S. Preferred Stock ETF 15.0% 18.0% -3.0% HEFA ishares Currency Hedged MSCI EAFE ETF 8.0% 8.0% - OEF ishares S&P 100 ETF 7.0% 11.0% -4.0% ITOT ishares Core S&P Total U.S. Stock Market ETF 5.0% 5.0% - IXC ishares Global Energy ETF 4.0% - +4.0% This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) any funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisors know enough about their circumstances to make an investment decision. The portfolio holdings of the Focused Income ETF model portfolio reflects the current strategy of a fully discretionary, unconstrained account and is not the result of actual trading. Actual portfolios may differ as a result of account size, client-imposed investment restrictions, the timing of client investments and market, economic and other considerations. [ 4 ]
Changes to holdings effective January 16, 2018 Inflation Focused Income The Inflation Focused Income strategy seeks to provide yield while minimizing the impact of rising inflation, and to provide longer term capital appreciation with a 25% minimum equity allocation. Ticker Allocations Current Prior Change TIP ishares TIPS Bond ETF 7.0% 7.0% - HYG ishares iboxx $ High Yield Corporate Bond ETF 26.0% 30.0% -4.0% EMHY ishares Emerging Markets High Yield Bond ETF 7.0% 4.0% +3.0% CIU ishares Intermediate Credit Bond ETF 4.0% 7.0% -3.0% EMB ishares J.P. Morgan USD Emerging Markets Bond ETF 3.0% 3.0% - ITOT ishares Core S&P Total U.S. Stock Market ETF 20.0% 20.0% - PFF ishares U.S. Preferred Stock ETF 15.0% 15.0% - HEFA ishares Currency Hedged MSCI EAFE ETF 10.0% 10.0% - IXC ishares Global Energy ETF 4.0% - +4.0% HDV ishares Core High Dividend ETF 4.0% 4.0% - This information should not be relied upon as investment advice, research, or a recommendation by BlackRock regarding (i) any funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisors know enough about their circumstances to make an investment decision. The portfolio holdings of the Focused Income ETF model portfolio reflects the current strategy of a fully discretionary, unconstrained account and is not the result of actual trading. Actual portfolios may differ as a result of account size, client-imposed investment restrictions, the timing of client investments and market, economic and other considerations. [ 5 ]
Indexes are unmanaged and used for illustrative purposes only and are not intended to be indicative of any fund or the managed model s performance. It is not possible to invest directly in an index. The firm claims compliance with GIPS. For a complete list and description of the firm s composites and/or a presentation that adheres to the GIPS standards, contact smamarketing@blackrock.com. For purposes of compliance with the Global Investment Performance Standards (GIPS ), the firm refers to the investment adviser and national trust bank subsidiaries of BlackRock, Inc., located globally, This definition excludes: i)blackrock subsidiaries that do not provide investment advisory or management services, ii) the Absolute Return Strategies (funds-of-hedge-funds) business unit under the BlackRock Alternative Advisers platform, iii) BlackRock Capital Investment Corporation, LLC, and iv) FutureAdvisor, Inc. BlackRock Volatility Focused Income ETF Portfolio SMA Composite: This investment strategy seeks primarily current income, and to a lesser extent, long-term capital appreciation. The strategy aims to generate income while minimizing portfolio volatility through exposure to equity and fixed income asset classes. It invests exclusively in ishares Exchange Traded Funds, which may pay fees and expenses to BlackRock that are in addition to the fees payable to BlackRock for managing the account. More detailed information on this strategy is available upon request. The performance results from September 30, 2014 to the end of the most recent calendar year represent the performance of one fully discretionary, unconstrained, proprietary separate account managed in this style for one month that did not pay any fees. The creation date of the composite is May 1, 2015. New accounts and accounts that have changed their investment mandate to that of the composite are included in the composite upon the completion of the first full month under management. Closed accounts and accounts that change their investment mandate are included in the composite through the completion of the last full month under management or the last full month under the old strategy. BlackRock Rising Rate Focused Income ETF Portfolio SMA Composite: This investment strategy seeks primarily current income, and to a lesser extent, long-term capital appreciation. The strategy aims to generate income while mitigating the impact of rising interest rates through exposure to equity and fixed income asset classes. It invests exclusively in ishares Exchange Traded Funds, which may pay fees and expenses to BlackRock that are in addition to the fees payable to BlackRock for managing the account. More detailed information on this strategy is available upon request. The performance results from October 31, 2014 to the end of the most recent calendar year represent the performance of one fully discretionary, unconstrained, proprietary separate account managed in this style for one month that did not pay any fees. The creation date of the composite is May 1, 2015. New accounts and accounts that have changed their investment mandate to that of the composite are included in the composite upon the completion of the first full month under management. Closed accounts and accounts that change their investment mandate are included in the composite through the completion of the last full month under management or the last full month under the old strategy. BlackRock Inflation Focused Income ETF Portfolio SMA Composite: This investment strategy seeks primarily current income, and to a lesser extent, long-term capital appreciation. The strategy aims to generate income while mitigating the impact of rising inflation through exposure to equity and fixed income asset classes. It invests exclusively in ishares Exchange Traded Funds, which may pay fees and expenses to BlackRock that are in addition to the fees payable to BlackRock for managing the account. More detailed information on this strategy is available upon request. The performance results from September 30, 2014 to the end of the most recent calendar year represent the performance of one fully discretionary, unconstrained, proprietary separate account managed in this style for one month that did not pay any fees. The creation date of the composite is May 1, 2015. New accounts and accounts that have changed their investment mandate to that of the composite are included in the composite upon the completion of the first full month under management. Closed accounts and accounts that change their investment mandate are included in the composite through the completion of the last full month under management or the last full month under the old strategy. *The benchmark index shown is composed of: 75% BBG Barclays U.S. Aggregate Bond Index, 25% S&P 500 Index. [ 6 ]
Investing involves risk. Information concerning portfolio allocations and holdings is representative of the target portfolio for this strategy and does not necessarily reflect an actual account. Actual portfolios may differ as a result of account size, client-imposed investment restrictions, the timing of client investments, market, economic and individual company considerations. Futures and options may not be used in the portfolio to create leverage or for any other reason. Past performance does not guarantee or indicate future results. Any performance information included herein represents the performance achieved by BlackRock as a discretionary investment manager with trade implementation responsibility for the accounts included in the performance composite. The performance shown does not reflect the performance of Model-Based Program accounts managed by a Sponsor or OPM utilizing BlackRock s non-discretionary investment recommendations. In Model-Based Programs, although it is generally contemplated that the Sponsor or OPM will implement BlackRock s investment recommendations in Program accounts, the performance of such accounts may differ from the performance shown for a variety of reasons, including but not limited to: the Sponsor or OPM, and not BlackRock, is responsible for implementing trades in the accounts; differences in market conditions; client-imposed investment restrictions; the timing of client investments and withdrawals; fees payable by Model-Based Program accounts; and/or other factors. The performance results to the end of the most recent calendar quarter represent the performance of one fully discretionary, unconstrained, proprietary separate account that did not pay any fees, managed in this style by the firm for at least one month. Composite and benchmark/index performance results reflect realized and unrealized appreciation and the reinvestment of dividends, interest, and/or capital gains. Taxes have not been deducted. Gross composite returns do not reflect actual performance because they do not reflect the deduction of any fees or expenses. Certain performance figures do not reflect the deduction of investment advisory fees (please refer to Part 2 of BlackRock s Form ADV) in the case of both separate investment accounts and mutual funds; but they do reflect commissions, other expenses (except custody), and reinvestment of earnings. Such fees that a client may incur in the management of their investment advisory account may reduce the client s return. The net of fees performance figures reflect the deduction of actual investment advisory fees but do not reflect the deduction of custodial fees. All periods longer than one year are annualized. Net composite returns reflect the deduction of an annual fee of 3.00% typically deducted quarterly. Due to the compounding effect of these fees, annual net composite returns may be lower than stated gross returns less stated annual fee. Index returns do not reflect transaction costs or the deduction of fees and it is not possible to invest directly in an index. This material has been created by BlackRock and the information included herein has not been verified by your program sponsor and may differ from information provided by your program sponsor. This material must be preceded or accompanied by the manager profile, which you can obtain from your Financial Advisor. For financial professionals: BlackRock s role is limited to providing you or your firm (collectively, the Advisor ) with non-discretionary investment advice in the form of model portfolios in connection with its management of its clients accounts. The implementation of, or reliance on, a Managed Portfolio Strategy is left to the discretion of the Advisor. BlackRock is not responsible for determining the securities to be purchased, held and sold for a client's account(s), nor is BlackRock responsible for determining the suitability or appropriateness of a Managed Portfolio Strategy or any securities included therein for any of the Advisor's clients. BlackRock does not place trade orders for any of the Advisor's clients' account(s). Information and other marketing materials provided to you by BlackRock concerning a Managed Portfolio Strategy - including holdings, performance and other characteristics - may not be indicative of a client's actual experience from an account managed in accordance with the strategy. For end users: BlackRock s role is limited to providing your Advisor with non-discretionary investment advice in the form of model portfolios in connection with its management of its clients accounts. The implementation of, or reliance on, a Managed Portfolio Strategy is left to the discretion of your Advisor. BlackRock is not responsible for determining the securities to be purchased, held and sold for your account(s), nor is BlackRock responsible for determining the suitability or appropriateness of a Managed Portfolio Strategy or any securities included therein. BlackRock does not place trade orders for any Managed Portfolio Strategy account. Information and other marketing materials provided to you by BlackRock concerning a Managed Portfolio Strategy - including holdings, performance and other characteristics - may not be indicative of a client's actual experience from an account managed in accordance with the strategy. This material has been created by BlackRock and the information included herein has not been verified by your Advisor and may materially differ from information provided by your Advisor.. 2018 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners. [ 7 ]
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