BlackRock Strategic Solutions Q4 2011 International Edition

Q4 2011

The BLACKROCK mAgAzine fOR pROfessiOnAL invesTORs OnLY

solutıons

Equity incomE: thE DEcaDE of DiviDEnDs RDR: thE unintEnDED consEquEncEssERvicEs BaD, manufactuRing gooD? WE takE issuE With REcEnt iPos

A hightime for theluxurysector?

Strategic

What's happening this quarter? 2011 Q4

STRATEGIC SOLUTIONS | 3

4 | Editor’s letter

5 |Economic overview Richard Urwin spotlights the global economy

7 | View from the sales desk Alex Hoctor-Duncan reviews recent trends

8 | Widgets or digits?Has the move away from manufacturing into services created an unbalanced economy? Not at all, argues guest writer Allister Heath

11 | Decade of dividendsEquity income strategies should pay dividends over the long term, reveals Doug Shaw

14 | Risky businessIf sovereign debt is no longer ‘risk free’, how should investors analyse it? Alex Popplewell examines the BlackRock Investment Institute’s Sovereign Risk Index

17 | High sobrietyThe luxury sector has proved resilient. But guest writer Simon Brooke asks should investors be opting for shares – or just the shoes?

20 | Tempted?Four of our Fund Managers highlight the sweetest spots in emerging markets

23 | Ironman of the markets Michael Krautzberger shares his personal and professional gains in the world of triathlon pain

24 | Floating too high?New IPOs are coming to market finally, helping to raise capital. Heather Christie asks are they being misvalued?

26 | A fair exchange?With a flurry of new, more complex ETFs on the scene, Alex Popplewell asks if the market anxiety is justified

28 | Retail Distribution ReviewA number of European regulators are monitoring the progress of RDR in the UK.Tony Stenning and Peter Hawkins discuss its consequences

30 | Fund directoryA selection of BlackRock’s funds relating to investment themes in this quarter’s magazine

34 | Field of dreamsBlackRock employees raised over $100,000 for the Tusk Trust by taking part in the Safaricom Marathon

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The price of the investments (which may trade in limited markets) may go up or down and the investor may not get back the amount invested. BlackRock Advisors (UK) Limited, is authorised and regulated by the Financial Services Authority (‘FSA’). ‘iShares’ is a registered trademark of BlackRock Institutional Trust Company, N.A. ©2011 BlackRock Advisors (UK) Ltd. All rights reserved. All calls may be monitored. Ref. 1720.

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Richard Urwin | Economist, Head of Investments, Fiduciary Mandate Investment Team

Inside this quarter: “Poor growth momentum has become evident with financial market turbulence leading to additional caution from consumers”

Sovereign debt - p14Countries overburdened with debt may find ways to breach the implicit and explicit promises to redeem at full value through the time-honoured means of ‘soft-default’

4 | STRATEGIC SOLUTIONS

2011 Editor's letter

Dear investor

ELCOME to the latest edition of Strategic Solutions, the new-look magazine for professional investors from BlackRock. We’re constantly listening to your feedback and making changes, so please keep letting us know how we can improve.

Sovereign debt is becoming a serious problem for investors as well as governments but, as I explain on page 14, the good news is that BlackRock has a practical solution to help you evaluate the different issuers. There’s more from Doug Shaw of BlackRock on why equity income investing makes great sense now (p11), plus a highly topical piece on why the recent wave of IPOs is failing to satisfy us as investors (p24).

This quarter, we are delighted to welcome some new external contributors: Allister Heath, editor of City A.M. in the UK, takes a typically robust line on the current debate about rebalancing the economy from services towards manufacturing (p8). Also inside you’ll find a report by Simon Brooke, who writes for the Financial Times, The Sunday Times and other newspapers, on how luxury goods companies are adapting to thrive in the post-recession world (p17).

We’re also bringing a more personal touch to the magazine with a look at the influences and hobbies of some of our key men and women in each issue, starting with our fixed income ironman Michael Krautzberger (p23). And we will continue to bring you insight into the global economy and developments in the fund management industry from a strategy, sales, technical and regulatory point of view – something that is particularly timely this quarter with our RDR feature (p28). As markets and investors get back to work after their summer break, the investment world seems no less complex and confusing to analyse, especially after the market volatility which characterised early August, but I wish you continued good fortune and thanks for your partnership with us.

Alex PopplewellMD, Global Head of Retail Investment Communications

EQUITY INCOMENot only is the yield on equity investments outstripping the pitiful or vulnerable yields elsewhere, but equity income investing offers further benefits.

P11

Q4

P24

IPOSChina’s answer to Facebook, Renren, went public in early May and 46% of its value has since been wiped from its market cap.

IN THIS ISSUE

P22

Emerging markets have had investors salivating in recent years, but is selection playing an ever important role?

EMERGING MARKETS

Slowingglobal

economy


URichard Urwin

puts the spotlight on the global economy

The global economy has slowed in recent months

from the robust growth rate that we witnessed around the

turn of the year, while inflation has remained stubbornly high in many

countries. In addition, ongoing concerns about the sovereign debt crisis in the

Eurozone, the political stalemate in the US surrounding the debt ceiling and the downgrade of US long-term sovereign debt by ratings agency

Standard & Poor’s, have all conspired to dent confidence and increase investor uncertainty over the

last few months. In the US, the debt ceiling was ultimately raised, but the way the issue was handled did little to inspire confidence in the management of US fiscal policy. The broad macro environment has therefore become more demanding.

Global economy 2011 Q4

Q4


Q4


Global economy 2011 2011 Global economy

Of the two significant headwinds that emerged earlier in the year - namely, the Japanese earthquake and the rise in commodity prices - the adverse impact of these shocks may now be peaking. Japanese industrial output growth is rebounding strongly, while commodity prices have been broadly stable for most of the year, until the heightened volatility in August. Nevertheless, at this more mature phase of the global cycle, any rebound is likely to be more moderate than that which occurred towards the end of 2010 and the global aggregate will be heavily dependant on emerging economies. monetary conditionS Still Supportive Global macro policy remains loose, particularly in developed economies. The exceptionally low level of real interest rates, and upward sloping yield curves, suggest that monetary conditions remain very supportive. While fiscal policy is clearly very tight on the European periphery, there has yet to be material tightening in budgetary conditions in the larger developed economies on average.

The position in emerging economies is different. There has been clear tightening over the past year in monetary conditions in China, Brazil and India, amongst others. However, these tightenings began from exceptionally loose monetary conditions, and policy has yet clearly to “normalise”, let alone become particularly tight. It is therefore too early for significant global policy tightening to be driving a material growth slowdown.

Significant policy stimulus has been required to overcome the financial excesses of the last cycle, in particular more conservative banking systems and high leverage in some private sectors – particularly amongst US consumers. However, it would be wrong to appeal to these as catalysts for the global slowdown. Global financial conditions appear to have eased modestly, with lending standards less constraining and large companies able to raise significant funds in capital markets.

inflation riSkS remain concentrated in emerging economieS Accelerating inflation has been a global theme in recent months. Inflation rates in, for example, the US, the Eurozone and the UK have moved above the respective central banks’ longer-term tolerance levels. Inflation in many emerging markets has also risen significantly. The proximate driver of this deterioration in inflation has been higher commodity prices, particularly higher food and energy prices.

Inflation risk in the developed economies remains low. There are few signs of inflation outside of commodities, with wage increases remaining muted. Inflation expectations have dropped back significantly, closer to central bank tolerance levels. Inflation risks in emerging economies are more significant. This reflects primarily the stronger economic recovery in emerging economies. This has eroded spare capacity to a greater extent, so that underlying inflation pressures have become more apparent. While a period of more subdued commodity prices could cause emerging economy inflation to drop back temporarily, the longer-term risks would still be significant.

intereSt-rate normaliSation proceedS SlowlyThe global monetary background has shifted in recent months. Tighter monetary conditions continue to be implemented in many emerging economies, but the background has also evolved in the developed economies. The European Central Bank (ECB) has raised official rates twice so far this year, taking them from 1.0% to 1.5%. While the US Federal Reserve (Fed) and Bank of England have not followed suit, quantitative easing strategies in the US and the UK have stabilised. We continue to envisage an extended period of exceptionally low short-term rates in the developed economies.

The position in many emerging economies is more finely balanced. Any reduction in inflation and more moderate growth in the second half of the year may keep additional policy tightening to relatively modest amounts, or even prompt some central banks to pause. From a longer-term perspective, however, it is premature to assert that policy rates in these economies have clearly reached cyclical peaks.

longer-term cyclical iSSueS and financial vulnerabilitieSThe case for ongoing economic recovery has three main pillars: policy stimulus, strong corporate sectors and the secular tailwinds driving growth in many emerging economies. We continue to believe that these pillars remain in place, supporting the case for a more extended economic recovery, albeit not a particularly strong one.

One of the key risks to this outcome, however, has become more prominent: the fiscal legacies from the last downturn. The fault lines here are most obvious in Europe. In the absence of significant policy action in the past year, the likelihood is that a default amongst a number of the fiscally weaker peripheral European countries would already have occurred. However, these policy changes have not provided a sustainable long-term solution for the crisis. It is highly likely that additional policy measures will be required at some stage, even after the most

“The broad macro environment has become more demanding”

recent package, and there is no guarantee that such measures will be implemented in timely fashion.

Furthermore, even beyond the Eurozone periphery, debt-to-GDP ratios in many countries are still set to rise sharply in the absence of material deficit-reduction measures. The largest policy stimulus ever delivered in a short period of time across many countries in 2008 – 2009 needs to be unwound and pressure has mounted for this to happen. It may be the case that the deleveraging process will continue to sap more from growth than the positive influences can provide.

While lower commodity prices and the diminishing impact of the Japanese earthquake can provide some relief on the growth front over the coming months, these short-term influences need to counter the very poor growth momentum which has become evident. More generally, there is the capacity for financial market turbulence to lead to additional caution on the part of consumers and companies. In general, it seems appropriate to adopt a more conservative investment stance until there is clarity that the material tail risks have begun to recede.

Written 15 August 2011

Richard Urwin, Head of Investments, Fiduciary Mandate Investment Team

view from the SaleS deSk

It's been another turbulent quarter in the markets. European sovereign debt remains embroiled in crisis and contagion fears have, not surprisingly, made investors hesitant to turn the risk back on. Inflation is creeping up, while the search for yield from bonds remains elusive, no thanks to the low interest rate environment.

During these challenging times many investors are realising that the best medicine for the stubbornly low growth and high inflation environment is an equity income fund. These funds, which invest in high-quality, cash-generative companies with competitive dividend policies, offer a steady income stream without sacrificing capital growth. In order to provide our clients with a wide range of solutions, we've recently launched a full suite of these funds which span across global equities, European equities, emerging market equities and natural resources equities. With this variety we aim to enable clients to tailor their portfolios to specific allocation needs, while continuing to receive the double upside of an above-average income with the potential for capital appreciation.

In addition to this heightened investor desire for an income from equities, we have noticed that investors are also turning increasingly to multi-asset funds in order to mitigate market risk and more finely tailor their portfolios. Though it's well known that savvy investors place their proverbial eggs in multiple baskets during periods of sustained market volatility, such as today's persistent environment, never has this well-worn phrase been more true. Because it's nigh on impossible to determine exactly where the next rally or plunge will take place, diversifying investments across asset classes, geographies and currencies is a safe way to spread the risk around, thereby maximising reward prudently.

Finally, due to the market volatility and their traditional strength in generating reliable incomes, we are not surprised to see investors keeping or adding to assets in bond funds just to be on the safe side. Over the next few months, we expect to continue seeing volatility in the global financial markets until further clarity can be reached. That said, we believe that economic growth will continue in a sustained - if sluggish - manner.

All the best with your investments,

Alex Hoctor-DuncanHead of Sales in Europe, Africa and the Middle East

Uthe case for ongoing economic recovery has three main pillars:

policy StimuluS1.

2. 3.

Strong corporate SectorS

Secular tailwindS driving growth in many emerging economieS

8 | STRATEGIC SOLUTIONS STRATEGIC SOLUTIONS | 9

Guest writer 2011

“While most serious politicians pay lip service at least to free trade, there are regular bouts of discomfort about some of the consequences”


Q4 Q42011 Manufacturing vs service sectors

29% 30%EURO FLOW

The percentage that financial intermediation and real estate contributed

to the EU's gross value output 1

STEP BACK IN TIMEThe percentage that manufacturing

accounted for of Britain's GDP in 1970. Today, the figure isn't even half that 2

It’s the hot topic of the moment: should Europe and the US ‘rebalance’ their economies in favour of manufacturing and away

from the service sector? No, says Allister Heath, editor of City A.M. in the UK – we should just focus on what we do best

Widgets or digits? he 19th-century economist David Ricardo was the first to demonstrate that free trade between nations is always mutually advantageous. Competition leads to specialisation and to the division of labour - principles at the heart of all economic progress. Countries, regions, firms and people produce the goods and services in

which they have a comparative advantage, and trade their wares with other specialists.

The result explains today’s global economic order, our unprecedented prosperity and the astonishing blossoming in recent decades of once-poor emerging economies.

But while most serious politicians pay lip service at least to free trade, there are regular bouts of discomfort about some of the consequences. The latest manifestation is the argument that the economies of many of the developed countries have become too ‘unbalanced’. They rely, it is said, too much on financial and business services and too little on manufacturing, which has fallen as a share of GDP.

Of course, there is something in the fact that parts of the financial services and property industries had created a massive bubble and thus needed to be cut back to a more sustainable size. It is also true that misplaced government policies have actually hampered manufacturing, causing it to grow less quickly than should have been the case.

for a total 34.2% of the EU gross value output compared to financial intermediation and real estate at 29%1. In Britain the decline in manufacturing has been particularly striking; in 1970 it accounted for over 30% of GDP2. Today, it isn’t even half that.

But before we write off manufacturing in the mature economies, it’s worth remembering that the US, the world’s number one manufacturing economy, still produces 40% more goods than China, which comes in second place3. Japan is third, Germany fourth, Italy fifth and Britain remains the sixth-largest manufacturer in the world. Western nations clearly remain able to specialise successfully in high value-added production. Swiss watch manufacturing is undergoing a boom, for example, and plenty of companies are able to make money manufacturing items in rich countries.

Furthermore, those who believe that manufacturing is more stable than finance and hence a ‘better’ kind of economic activity fail to realise how cyclical manufacturing can be. As the recession of 2008–2010 kicked in, production in UK factories collapsed 14%4 from peak to trough, a drop that was over twice as large as the overall economy, despite the slump in sterling.

At the height of the crisis, during 2009, manufacturing output had fallen back to where it was in 1973; by contrast, the rest of the economy had lost less than three years of output. Manufacturing has bounced back dramatically since 2010, thankfully, but these figures show that it is wrong to believe that financial services and real estate are uniquely volatile

Manufacturing depends on trade and trade credit. It is equally untrue that banks are necessarily too risky. As long as they hold enough good quality and liquid capital, and proper resolution procedures are put in place to allow even the largest firms to fail in an orderly way, finance ought to become safer. Of course, the financial system failed disastrously during the crisis – but sensible measures can make it stronger and more resilient.

IF YOU CAN’T MAKE IT CHEAPER...In theory, there is no reason why Europe and the US cannot specialise exclusively in high-end, tradable services such as finance, marketing, design, education, architecture, and consulting.

Certainly in Europe such policies – including onerous carbon taxes, high levels of regulation and, in some cases, an over-valued currency - have all artificially reduced factory output as a share of GDP. But apart from that, to claim that an economy should not specialise in what it is best at defies economic logic. Supporters of rebalancing are right that many of these economies have not been exporting enough. They are also right that the state is too big and the private sector too small. These relationships need readjusting. But as long as the banking system is made sufficiently safe, there is no reason why Europe and the US cannot continue to grow their financial and business services sectors – or any other part of the economy at which they happen to be good. A study by Oxford Economics earlier this year shows that 34% of European deal-makers expect to see growth in the financial services sector deal volumes in 2011.

DOWN, BUT NOT OUTIn recent years, manufacturing across Europe and the US has declined, albeit slightly. Even so, last year, industry and manufacturing accounted 1 E

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“Because many of the less specialised

jobs have decamped to developing

countries, western economies will

need to move up the value-add scale”

RICHARD TURNILL

Q4 2011 Manufacturing vs service sectors


OUR VIEW | BLACKROCKRebalancing act: how will China tip the scales?

Any discussion about global manufacturing inevitably

includes China. As it shifts from the world's manufacturer to a global consumer, how will this rebalancing play out?

The bull caseThis shift would be smooth, resulting in greater Chinese financial liberalism. The renminbi will float freely, buffering the country's rapid growth and without damaging China, its trading partners and investors.

The bear caseIn a less rosy scenario, excessively loose monetary policy would lead to considerable over investment in the Chinese economy, resulting in misallocation of capital and low or negative returns on investment. Over investment is evident in the housing market but not more widely.

Our team subscribes to the bullish view. Although there will be obvious areas of stress, we believe inflation will remain well contained and growing Chinese consumption will trend positively as the country becomes self-subsistent rather than an export-based economy.

Because many of the less-specialised jobs have decamped to developing countries, Western economies will need to move up the value-add scale. This may include specialising in more research and development-intensive sectors, as well as developing niche and bespoke products that cannot be cheaply produced in developing markets. As the Chinese economy evolves, the challenge for the West is to identify its strengths – and play to them.

The European Foresight Monitoring Network, a research body funded by the European Commission, notes that as well as increasing competition, “Globalisation has also impacted European manufacturing in another way: lower production costs and the potential of new consumer markets have caused European manufacturers to increase the quality and design of their products.”

The key is to be able to produce enough exports. Before modern telecoms and the internet, goods made up virtually all exports. Services were only exported at the margins, and usually involved people having to travel. No longer.

Given that free trade is rightly not really being questioned and that much of the talk of rebalancing is merely vacuous background noise, what does this debate mean for investors?

Big firms will continue to locate their manufacturing operations wherever it suits them. Those who buy into Apple, for example, already understand that iPads are made in China and Taiwan. But some sectors are being affected. Large financial firms will become less profitable as they are made to hold more capital and abide by different kinds of rules. Energy-intensive firms will continue to be hit by carbon taxes, which will force some to shrink or to relocate operations to more favourable parts of the world.

Governments should allow markets to determine what economic activity is conducted where. It is a fair bet to assume that in ten years’ time manufacturing will account for an even smaller chunk of GDP in developed economies than it does today. Some will worry. I won’t. Like it or not, high-end services are what we do best.

Allister Heath is editor of City A.M. in the UK

MANUFACTURING | EUROPE

1 THE UPSCALE ONEPoltrona Frau is part of the great tradition of Italian leather artisans. The

company produces leather furniture for the home and office, from the sleek and practical to the fun and funky. It also creates leather seating for cars and aircraft for clients including Maserati and Singapore Airlines. While many other Italian furniture and accessories firms are moving production offshore, Poltrona Frau says that manufacturing in Italy gives it quality control and reduces lines of communication.

2 THE BIG ONEWith around 128,400 employees, including approximately 10,000

trainees, Siemens is still one of the largest private employers in Germany. It is active in areas ranging from transport to healthcare

The company builds gas turbines in Berlin, while in Krefeld-Uerdingen, near Düsseldorf, it produces its Velaro trains, the fastest series production train-set in the world, with a top speed of over 400km per hour.

3 THE HI-TECH ONEMeridian is a British company producing state-of-the-art audio and

video home entertainment systems at its workshops in Cambridgeshire, UK.

“In consumer electronics the most ubiquitous brands are all in the Far East, but Meridian has a reputation for designing and manufacturing products and systems that break from traditional concepts,” says Roland Morcom, Director of Business Development. “Having design and manufacture all under the same roof here in the UK allows us to build what we want, when and how we want to.”

Richard TurnillFund Manager and Head of the Large Cap Global Equity Team

For fund information p30

Richard TurnillFund Manager and Head of the Large Cap Global Equity Team

RelatedproductsBGF Global Equity FundBGF Global Equity Income Fund

jobs have decamped

need to move up the

The European Foresight Monitoring

Equity income 2011 Q3


The decadeof dividends

2015

2020Cash-rich businesses and low dividend forecasts make a compelling case for equity income, says Doug Shaw, Chief Operating Officer, EMEA Fundamental Equity

Q4

s we wrote in May 1, it’s a wellworn truth that income-seeking investors are struggling in the face of historic low yields on bonds and cash. Furthermore, low or negative real interest rates and sluggish global growth mean it looks likely to stay that way for some time. The yield available on equities through dividend payments is far more attractive, outstripping the pitiful or vulnerable yields seen elsewhere and offering a host of other benefits.

There are many structural and economic reasons to suggest that this looks set to be the decade of dividends. We believe that dividend equity income strategies should be an important part of any investor’s portfolio for the long run, providing a winning combination of income and capital growth.

2010

12 | STRATEGIC SOLUTIONS12 | STRATEGIC SOLUTIONS STRATEGIC SOLUTIONS | 13

6.4%Yield on global high yielding equities 4

Q4 Q3

RESEARCH |

Do you invest in equity income?BlackRock believe that dividend investing will become an increasingly important trend in asset management. We partnered with Citywire to find out how equity income strategies are perceived by leading fund selectors from ten countries across Europe. The results are in and there are some very interesting findings...

69% of respondents think equity income funds can be used in portfolios at any time, not just in specific market environments and on average 55% of investors in each country thought equity income funds were the most relevant for retail investors, rather than fund of funds managers or institutional investors.

100% of the fund selectors we asked in Austria, Italy, Luxembourg, and the Netherlands expect the market for equity income funds will either remain the same or grow over time. More specifically, taking all the countries we asked on average, 42% of our respondents expect to see their allocations in the sector to grow over the next 12 months.

2011 Equity income Equity income 2011

As the chart above highlights, equity income funds are perceived differently by different investors. Across most regions, the majority of fund selectors see these funds as equity products that achieve capital growth as well as delivering income. However, second place tends to go to a “lower volatility/more stable equity product” and some believe the strategy to be best used as a retirement vehicle.

We think that one reason for these varied perceptions is the flexibility of these products to appeal to a range of investment motivations. Some investors see these funds as a useful way to hedge against inflation, some are trying to re-allocate to equities as risk appetite increases, but are seeking lower volatility investments and there are those who are seeking yield, which seems ever elusive in the current environment.

We think that actively managed equity income funds are the best way to make the most of this market and avoid value traps, but remind investors that not all of these are created equal. As with any equity product, investment strategy and manager experience are important considerations.

BlackRock and Citywire will be publishing these results in full in September. Watch out for further details to find out more about how the industry perceives this growing trend.

NotAblE ExCEptioNSThere are some notable exceptions. Microsoft had famously become the biggest company in the US ( by market capitalisation) before it began to pay a dividend. Bill Gates’ and Warren Buffet's justification for retaining cash in a growth company that is not capital intensive is that it can be reinvested at higher rates of return than in the hands of the investor.

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income investing provides investors with exposure to the profits of some of the best companies worldwide as well as a method of investing in stocks which typically has lower volatility than many other types of equity strategy. HigH YiEldiNg, HigH quAlitY globAl EquitiES – top of tHE ClASSGlobal GDP growth is expected to remain slow paced, with rates in developed countries looking particularly sluggish. Historically, in periods of low interest rates and slow global growth similar to today, high yielding global equities have outperformed other asset classes, but that isn't the only reason why the current environment looks optimal for equity income strategies.

1 Markets are widely underestimating dividend growth, especially as corporate balance sheets look cash heavy and payout ratios are 3% below their historical average. 3

2 The unprecedented dividend cuts of 2009 and 2010 are out of the way, so companies are likely to increase their dividends as the recovery continues.

3 Our fund managers are identifying stocks which don't have high yields at the moment, but where dividends look likely to grow.

CompANiES HAvE CASH to SplASHIn the aftermath of the financial crisis, businesses were uncertain about the future and were duly cautious about spending money on new projects, tending to conserve cash in case of future problems. This means that companies have higher than usual levels of “spare” cash on their balance sheets, giving management the means to return cash to shareholders, either through increasing existing annual or semi-annual payouts, or through a one-off dividend payment, known as a special dividend. As

Doug Shaw Chief Operating

Officer, EMEA Fundamental

Equity

dividENdS dRivE loNg-tERm mARKEt CoNditioNSWhile changes in share price valuation are often the most talked about way of making money in equities, in fact dividend yield and dividend growth play a far more important role, accounting for almost 90% 2 of total return in equity markets over the long term. This startling figure shows the huge impact of sustained cash returns, coupled with the compounding effect of reinvesting dividends.

As they are paid at the discretion of the management from company profits, dividends are often viewed as sending powerful signals about a company’s health. Although the proportion of after-tax earnings distributed to share holders (pay out ratio) can vary, the stream of dividends will likely reflect the cash generative power of the business over time. This in turn means that companies with high, robust and growing dividends tend to be higher quality companies. (Some high dividend stocks may not sustain their dividends and are known as “value traps”, but expert active investment strategies are designed to avoid these pitfalls).

This is not to say that dividend-based investing is always the right strategy. There will be times when growth or value strategies do better but, over the longer run, there is some encouraging evidence to show that companies with higher dividend yields have historically outperformed the broader market. These high quality companies therefore offer equity income strategies great scope for capital appreciation alongside the robust, growing income streams.

SmootHlY doES it – lESS volAtilitY ovER tHE buSiNESS CYClEHigh quality companies have robust business models - the market knows this, and rewards it. Investors' strong conviction in these companies means their shares tend to be less volatile than others over the full market cycle.

Therefore, while they may not have the racy characteristics of a growth stock in a rising market, they are more likely to weather difficult or turbulent market conditions much better than other shares. So equity

Q4

“high yielding global equities have outperformed other asset classes in the long run”

a result, we expect there will be many positive dividend surprises, where companies exceed the market’s conservative expectations.

AS iNflAtioN REARS itS uglY HEAd, dividENdS looK AttRACtivEInflation is rumbling on in both the developed and emerging world and investors who are stuck in bonds and cash are likely to feel the corrosive effects. On the other hand, equity income investing can help safeguard your money. Dividends are a proportion of company profits and while they can fluctuate, they are linked to growth in the wider economy. As economic growth almost always outruns inflation, dividends can offer a potential hedge against elevated levels of inflation such as those we are seeing today.

Conservatism in the investing community in the aftermath of the financial crisis saw many people take their money out of risk assets, notably equities. However, with low yields and the threat of inflation looming over traditional ‘safer’ assets such as government bonds, these investors are now in danger of being stuck with low or even negative returns on their money. We expect capital to start to flow out of low yielding fixed income strategies and into high yielding equities. Equity income investing combines income and capital appreciation and is set to be a compelling strategy for the long run. Today’s market conditions offer a perfect opportunity to take advantage before this trend takes off.

Equity income funds are also known as dividend equity funds.

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Jargonbuster

Related productsBGF Asia Pacific Equity Income FundBGF Emerging Markets Equity Income FundBGF European Equity Income FundBGF Global Equity Income FundBGF World Resources Equity Income Fund


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A lower volatility/more stable equity product?

12 | STRATEGIC SOLUTIONS12 | STRATEGIC SOLUTIONS STRATEGIC SOLUTIONS | 13

6.4%Yield on global high yielding equities 4

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RESEARCH |

Do you invest in equity income?BlackRock believe that dividend investing will become an increasingly important trend in asset management. We partnered with Citywire to find out how equity income strategies are perceived by leading fund selectors from ten countries across Europe. The results are in and there are some very interesting findings...

69% of respondents think equity income funds can be used in portfolios at any time, not just in specific market environments and on average 55% of investors in each country thought equity income funds were the most relevant for retail investors, rather than fund of funds managers or institutional investors.

100% of the fund selectors we asked in Austria, Italy, Luxembourg, and the Netherlands expect the market for equity income funds will either remain the same or grow over time. More specifically, taking all the countries we asked on average, 42% of our respondents expect to see their allocations in the sector to grow over the next 12 months.

2011 Equity income Equity income 2011

As the chart above highlights, equity income funds are perceived differently by different investors. Across most regions, the majority of fund selectors see these funds as equity products that achieve capital growth as well as delivering income. However, second place tends to go to a “lower volatility/more stable equity product” and some believe the strategy to be best used as a retirement vehicle.

We think that one reason for these varied perceptions is the flexibility of these products to appeal to a range of investment motivations. Some investors see these funds as a useful way to hedge against inflation, some are trying to re-allocate to equities as risk appetite increases, but are seeking lower volatility investments and there are those who are seeking yield, which seems ever elusive in the current environment.

We think that actively managed equity income funds are the best way to make the most of this market and avoid value traps, but remind investors that not all of these are created equal. As with any equity product, investment strategy and manager experience are important considerations.

BlackRock and Citywire will be publishing these results in full in September. Watch out for further details to find out more about how the industry perceives this growing trend.

NotAblE ExCEptioNSThere are some notable exceptions. Microsoft had famously become the biggest company in the US ( by market capitalisation) before it began to pay a dividend. Bill Gates’ and Warren Buffet's justification for retaining cash in a growth company that is not capital intensive is that it can be reinvested at higher rates of return than in the hands of the investor.

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income investing provides investors with exposure to the profits of some of the best companies worldwide as well as a method of investing in stocks which typically has lower volatility than many other types of equity strategy. HigH YiEldiNg, HigH quAlitY globAl EquitiES – top of tHE ClASSGlobal GDP growth is expected to remain slow paced, with rates in developed countries looking particularly sluggish. Historically, in periods of low interest rates and slow global growth similar to today, high yielding global equities have outperformed other asset classes, but that isn't the only reason why the current environment looks optimal for equity income strategies.

1 Markets are widely underestimating dividend growth, especially as corporate balance sheets look cash heavy and payout ratios are 3% below their historical average. 3

2 The unprecedented dividend cuts of 2009 and 2010 are out of the way, so companies are likely to increase their dividends as the recovery continues.

3 Our fund managers are identifying stocks which don't have high yields at the moment, but where dividends look likely to grow.

CompANiES HAvE CASH to SplASHIn the aftermath of the financial crisis, businesses were uncertain about the future and were duly cautious about spending money on new projects, tending to conserve cash in case of future problems. This means that companies have higher than usual levels of “spare” cash on their balance sheets, giving management the means to return cash to shareholders, either through increasing existing annual or semi-annual payouts, or through a one-off dividend payment, known as a special dividend. As

Doug Shaw Chief Operating

Officer, EMEA Fundamental

Equity

dividENdS dRivE loNg-tERm mARKEt CoNditioNSWhile changes in share price valuation are often the most talked about way of making money in equities, in fact dividend yield and dividend growth play a far more important role, accounting for almost 90% 2 of total return in equity markets over the long term. This startling figure shows the huge impact of sustained cash returns, coupled with the compounding effect of reinvesting dividends.

As they are paid at the discretion of the management from company profits, dividends are often viewed as sending powerful signals about a company’s health. Although the proportion of after-tax earnings distributed to share holders (pay out ratio) can vary, the stream of dividends will likely reflect the cash generative power of the business over time. This in turn means that companies with high, robust and growing dividends tend to be higher quality companies. (Some high dividend stocks may not sustain their dividends and are known as “value traps”, but expert active investment strategies are designed to avoid these pitfalls).

This is not to say that dividend-based investing is always the right strategy. There will be times when growth or value strategies do better but, over the longer run, there is some encouraging evidence to show that companies with higher dividend yields have historically outperformed the broader market. These high quality companies therefore offer equity income strategies great scope for capital appreciation alongside the robust, growing income streams.

SmootHlY doES it – lESS volAtilitY ovER tHE buSiNESS CYClEHigh quality companies have robust business models - the market knows this, and rewards it. Investors' strong conviction in these companies means their shares tend to be less volatile than others over the full market cycle.

Therefore, while they may not have the racy characteristics of a growth stock in a rising market, they are more likely to weather difficult or turbulent market conditions much better than other shares. So equity

Q4

“high yielding global equities have outperformed other asset classes in the long run”

a result, we expect there will be many positive dividend surprises, where companies exceed the market’s conservative expectations.

AS iNflAtioN REARS itS uglY HEAd, dividENdS looK AttRACtivEInflation is rumbling on in both the developed and emerging world and investors who are stuck in bonds and cash are likely to feel the corrosive effects. On the other hand, equity income investing can help safeguard your money. Dividends are a proportion of company profits and while they can fluctuate, they are linked to growth in the wider economy. As economic growth almost always outruns inflation, dividends can offer a potential hedge against elevated levels of inflation such as those we are seeing today.

Conservatism in the investing community in the aftermath of the financial crisis saw many people take their money out of risk assets, notably equities. However, with low yields and the threat of inflation looming over traditional ‘safer’ assets such as government bonds, these investors are now in danger of being stuck with low or even negative returns on their money. We expect capital to start to flow out of low yielding fixed income strategies and into high yielding equities. Equity income investing combines income and capital appreciation and is set to be a compelling strategy for the long run. Today’s market conditions offer a perfect opportunity to take advantage before this trend takes off.

Equity income funds are also known as dividend equity funds.

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Related productsBGF Asia Pacific Equity Income FundBGF Emerging Markets Equity Income FundBGF European Equity Income FundBGF Global Equity Income FundBGF World Resources Equity Income Fund


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A retirement vehicle?

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A lower volatility/more stable equity product?

Sovereign debt is no longer seen as a risk-free asset. So we have introduced the BlackRock Sovereign Risk Index. It is rational, simple, and above all, actionable, as Alex Popplewell explains

2011 The Blackrock Investment Institute Sovereign debt 2011 Q4


Q4


Since its debut in June, the BlackRock Sovereign Risk Index has attracted attention because it moves away from an issuance-weighted approach to indexing, and because it is constructed from the best insights of some of BlackRock's most talented individuals.

Countries issue debt obligations that in normal circumstances tend to be highly rated. After all, a government can be relied upon to redeem its debt because it can raise taxes, cut expenditure or even start rolling the printing presses (although this last option is not available in the Eurozone to individual countries). But current circumstances can scarcely be described as normal, except perhaps in Germany, where the economy is relatively strong. However, Germany is facing calls to bail out its southern European neighbours to preserve a currency increasingly less popular than the old Deutsche Mark.

When “all bets are off” and financial markets assess that a country will in some way fail to meet its full obligations, how can investors judge value? After all, it is hard enough to manage bond portfolios when value at redemption is assured in nominal terms, but rates, inflation and other factors may radically change valuations through time. Countries

overburdened with debt may find ways to breach the implicit and explicit promises to redeem at full value, through the time-honoured means of “soft default”. Politicians may also look at methods to create demand for assets irrespective of their likely return –through legislation or taxation – that could distort the value of bonds. By forcing financial institutions to hold sovereign bonds as a reserve requirement, rather than by choice, the government may be able to issue more than the market might otherwise want, or on better terms than the market might have demanded.

So how can we identify the likely good and bad credits in the sovereign debt space? What will determine the balance between ability and willingness to pay? And how can we translate that into a policy in which allocation of funding is based on where it is likely to get rewarded rather than simply allocating it to those who have issued the most debt instruments?

BlackRock put its investment experts and economists onto the case. Following our Investment Institute Forum in Spring 2011, work commenced on how we could better model, describe and exploit the relative vulnerability of sovereign debt issuers for our clients. We began by examining the way

Risky business?

Can countries go bust? No, creditors just suffer long-term degradation...

in which investors had previously analysed these issues. By looking back to a time when Italian paper yielded less than German, one could perhaps question whether Eurozone investors had ever really done this in a systemic way.

We dug deeper into debt vulnerability using both quantitative and qualitative analysis. We then blended the two, allocating numerical values to our qualitative judgements, allowing us to synthesise a large number of relevant factors to create a unified framework. The fundamental drivers of debt vulnerability were analysed in four areas that we felt would offer insight as follows:

1 fiscal space The sustainability of a country's fiscal dynamic, including the amount of additional debt that would

lead to a default and the required fiscal adjustment to ensure sustainability in the future.

2 The exTernal financial posiTion How sensitive a country is to macroeconomic trade or policy decisions elsewhere.

3 financial secTor healTh The degree to which a sovereign state's creditworthiness may be threatened by the financial

sector through the possibility of bank nationalisation and the likelihood of such an event.

4 willingness To pay Factors considered include qualitative cultural, institutional and political traits that may influence

the ability or willingness to meet external obligations. Weights were assigned to these scores and we then back-tested the sensitivity of the index to see whether it had any relevance to market behaviour. We found a convincing level of correlation between changes in scores on the metrics we examined and the level of movements in credit default swap prices for the relevant sovereigns. So it appears that this index has something to say at least about the relative likelihood of vulnerability to drawdowns across borrowers. We would stress that as most of the scoring was based on rankings, there may be less predictive power over absolute risk of loss.

2011 The Blackrock Investment InstituteQ4


The findings

Some of our findings might be regarded as intuitive, some less so. In the first camp, one might expect to see Norway, Sweden and Switzerland leading the pack for lack of vulnerability given their strong fiscal positions. Conversely, Greece, Ireland and Portugal would be in the most vulnerable camp. But we highlight three other borrowers where vulnerabilities could be greater than current ratings agency assessments might suggest:

uk | Marginally weaker than expected, largely due to the size of the financial sector and a weak fiscal situation, despite being relatively insulated from external shock.

belgium | Another interesting case where disaggregation of its scoring reveals a proximity to distress, given that 38% of debt requires rollover in the next two years and a weak fiscal position needs a 3.4% adjustment per annum over ten years to bring debt back to 60% of GDP.

iTaly | The country has high net debt and needs to roll over bonds worth around 43% of GDP over two years. So while a primary surplus is seen in the fiscal space, a high future interest burden does impede a clear route to stability, particularly with an anaemic growth path and an ageing demographic.

One key advantage of our research-driven index is that it does not favour the weaker credits with higher portfolio representation. Most bond indices reward failure (giving high weights to heavy users) and penalise success. This index rewards success and penalises failure putting it on a par with equity-based indices.

What the index is not is a predictor of returns. An active approach to selection – balancing price and risks in a valuation based framework – is still essential. But this index and its findings can support portfolio management and the assessment of risk and return. We have had some initial interest in the use of this system to provide a non-issuance weighted index for re-assessing existing portfolios of sovereign debt. We are also finding that investors want to use this process as an overlay to their traditional market index-based investment strategies. And, as these findings become better known, we expect to be using this ranking system to help shape our investment strategies for clients in the future.

Alex Popplewell Global Head of Retail Investment Communications

Please visit:http//tinyurl.com/3vlreh4 to find the BlackRock Investment Institute's white paper describing the Index in more detail

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BlackRockInvestment Institute

New customers and new challenges – it’s all change in the luxury sector. So, asks Simon Brooke, a journalist specialising in the area,

should investors be buying the shares – or just the Swiss watch?

High sobrietyLuxury, post-recession

STRATEGIC SOLUTIONS | 17STRATEGIC SOLUTIONS | 17

Luxury goods 2011 Q4

Luxury goods 2011

our view | blackrock

Europe has the last word in luxury We believe the emerging market consumer is only going to become more powerful and that the best way to access this growth is through world-class European companies.

With younger populations, expanding work forces and high wage growth in the developing world, there is plenty of scope for consumption levels to increase over the coming years.

While it is one thing to say there is rising consumer demand, it is another to find the best opportunities to make the most of this trend. Emerging market middle-class consumers are turning to European luxury goods.

These are established brands with global recognition and a long-standing reputation for quality. While China may be able to make bags, coats or cars more cheaply than Europe, it cannot replicate the legacy and kudos associated with such brands.

For example, Swiss-made watches have been a long-standing symbol of wealth in developed countries, and with penetration still quite low in emerging markets, there is scope for expansion.

Companies such as Richemont, which owns several world-leading watch brands such as Cartier and Jaeger leCoultre, and Swatch, owners of Omega and Breguet, are great examples of the emerging market consumer’s fascination with well-established European luxury brands.

A rapidly rising proportion of sales and revenues of these companies now comes from Asia, and we expect these numbers to keep growing. Despite this compelling trend, both companies are trading on attractive valuations. Europe has the last word in luxury and, with rising emerging market demand, we think there are compelling opportunities in the sector.

First, some of the biggest groups posted exceptionally good results, despite the recession. Second, there has been a rash of acquisitions and flotations, with the increasing possibility of hostile takeover bids. In the first half of this year, mergers and acquisitions in the luxury sector amounted to nearly $6bn1, double the amount for the whole of 2010.

Altagamma, the Italian luxury goods association, recently predicted sales in the US would rise by 9% this year, 7% in Europe and 12% in Latin America, while it’s anticipated that Asian sales will see growth of a remarkable 20%.

The luxury secTor – as hard as diamondsThese events have not gone unnoticed by the wider financial community. “People have been impressed by the resilience of the luxury sector and how it has not suffered in the recession,” says Milton Pedraza, CEO of the New York-based consultancy the Luxury Institute. “The new markets also mean that luxury brands are fast acquiring new customers. Customers of luxury products are very loyal, too – around 70 to 80% of them stick with a particular brand, so there’s plenty of opportunity for cross-selling and up-selling.”

“Luxury has made a faster recovery than many other sectors, and quite a number of luxury brands are now looking for capital to expand with new stores and greater production capability, ready for the next wave of growth,” says Marc-André Kamel, head of European Retail, Luxury and Consumer Goods at consultancy Bain & Company.

With demand for luxury goods set to grow by 56% in China and 159% in India 2 over the next five years, and the number of high net worth individuals in China projected to rise to 585,000 in 2011 (nearly twice as many as in 2008) 3, the future – both for brands and their potential investors – looks exciting.

Flood oF counTerFeiTsThe successful ones will be those who are most focused on their customers, says Kamel. Beautiful products are a given, but matching them with deep consumer understanding and excellent customer service is now the

real challenge, something Milton Pedraza calls “clientelling.”

Luxury brands also face challenges to their brand image and profits. They are having to prove their environmental credentials to a new audience of affluent but ethical consumers and make online luxury shopping as much of a special occasion as being cosseted in one of their stores. They are also fighting off a deluge of counterfeit products, assisted to a great extent by the growth of online shopping. According to the Federation of the Swiss Watch Industry, around 40 million fake Swiss watches are sold worldwide each year, more than double the genuine article. don'T ForgeT your rooTsEmerging economies are enjoying many structural benefits, such as lower debt levels for consumers and governments, favourable demographics, growing working populations and increasing literacy rates. 1.7 billion people in the emerging world now earn between $5,000 - $20,000 a year and wage growth remains high4. This combines to make a powerful force in the shape of a new generation of consumers with rising incomes. Private consumption growth in emerging markets outstrips that in the developed world, giving luxury brands great scope to expand.However, there are even concerns about brands putting all their eggs in the Chinese basket. “They also need to renew themselves in their traditional markets in Europe and the US because there are new consumers in these markets,” says Pedraza. Kamel points out that, despite its spectacular growth rates, greater China was still worth only about 10% of the global luxury market last year, with the mature markets of Europe, Japan and the US accounting for nearly 80%. While this

highlights the low penetration and scope for growth in emerging markets, it is a reminder that developed markets still need to be addressed by luxury companies. Warnings aside, given the great figures that luxury houses generate, there are more people now interested in investing in them. Investors wanting to benefit from the remarkable growth in this business can buy shares in the growing number of fast expanding and very profitable established conglomerates. The second, longer term approach, which is potentially riskier, but could yield a higher return, is to invest directly in an up and coming brand. Whichever option investors take, and despite the challenges it faces, the future looks bright for the luxury sector.

Simon Brooke is a freelance business and lifestyle journalist writing for the Financial Times and The Sunday Times, among others. He specialises in the luxury sector

Related productsBGF European Fund ��BGF European Focus Fund


- luxury -Very high-end, highly exclusive craftsman-

made products as well as labour-intensive

services.

- Premium -Top-of-the-range

products, which are more widely accessible than the luxury ranges.

- mass-aFFluenT -Upmarket designer-

label products at a lower price point than premium but

higher than their mass equivalent.

- massTige -Identified by Harvard

Business Review in 2003, these are

products that have a certain prestige but

are produced in high volumes.

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luxury brands | winners

2The sum for which richemont bought luxury online retailer Net-a-Porter. Many luxury groups are cash rich and looking to spend it

€245m

€3.7

he past year has been something of a high-octane trip in the usually sedate and discreet world of luxury goods.

burberry: Has reported first quarter

double digit revenue growth in all regions and product categories. Total

revenue was up 27% for y/e 31 March 20115

daimler: Sold 1.9 million vehicles

in 2010.Booming sales of Mercedes-Benz cars in

China helped Daimler post strong first quarter results 6

Prada: Pre-tax profits have

doubled in the last three years driven by new store

openings 7

billionLVMH announced

a friendly takeover of Bulgari, the jewellers,

in March for €3.7bn - considered by many

commentators to be a generous sum

Nigel Bolton Fund Manager, Head of the European Equity Style Diversified Team

Q4


Q4


2011 Guest writer

Tempted?Emerging markets have had investors salivating in recent years, but is selection playing an ever important role? The market is changing, argue four BlackRock Fund Managers

Q4


Q4


Emerging markets 2011 2011 Emerging markets

Imran Hussain Catherine Raw Jeff Shen Sam Vecht

global economy, then rates will continue to come down. For that reason, I would favour countries with high real

interest rates, such as Brazil, South Africa or even a flat to neutral rate in a country such as Mexico. I would also favour high quality credits and potentially even currency exposures on a tactical basis. From a medium to long-term basis, I would say that the best opportunities lie in the Mexican peso and some of the Asian currencies.

Jeff Shen: I think the world is at a stage where it's very important to take a global cross-border approach. If you think about a stock that has emerging market exposure versus a pure emerging market stock, the difference in between creates a very interesting alpha opportunity. For an unconstrained manager who can look at the world in a somewhat less segmented way, it presents a very interesting active return.

It's too simple to say, “emerging markets are just about China.” We certainly spend a fair amount of our time debating China and I think that the economic growth it has experienced over the past two decades has been an enormous achievement and its importance in the global stage is clearly substantial. But, at the same time, I think there are plenty of countries and regions outside China that can potentially take a very interesting leadership role in the emerging market economy.

Catherine raw: As with anything, you need to pay attention to what China is doing, and this is especially true within the commodities sector. In fact, with respect to many of the bulk commodities, including nickel, aluminium, copper, zinc, iron ore and steel, China’s demand outweighs that of all the other emerging markets combined, at roughly 40% of global demand. In fact, for iron ore, China’s 2010 demand accounted for 59% of global demand. As a result, if you have a bullish view on China and its growth prospects, you will also have a bullish view on these commodities.

imran huSSain: It’s interesting that we always talk about China "and the other emerging markets". While we tend to lump the latter together under one umbrella term, it’s important to make clear distinctions, both macroeconomically and politically, between each of these economies. Each one does stand on its own. Sure, you can look at some of the basic macro indicators and compare them across nations and draw some conclusions perhaps from that on a relative value level, but what's important for one country is not necessarily important for the others too. You can't really embrace a cookie-cutter approach while looking at indicators such as sovereign risk across the globe. Each sovereign is unique.

"It's a question of whether we have faith in

the politicians, in the central banks and the

ministries of finance to do the right thing."

imran huSSain

xciting, slightly mysterious and full of potential - it's no wonder that emerging markets have created such interest among investors. But is that initial excitement cooling as investors become more selective? During a discussion run by BlackRock’s Investment Institute in June, four of our Fund Managers shared their views about how emerging market investment has changed.

Sam VeCht: Over all, I think too much money has been chasing too few assets within certain segments of emerging markets, particularly within domestic consumption. That has been a popular investment story for the last 20 or 30 years. When you have too much money chasing too few stocks, overvaluation occurs, and with it, some potential corporate challenges. As a result, the greatest opportunities are likely to be off the beaten track, and it’s well worth spending a little time to find those opportunities. Security selection is key.

imran huSSain: Similarly, one of the features I've observed from an asset allocation perspective is that people are generally under-allocated to fixed income. The bias towards equities has been profound in people's portfolios for quite some time. In the current environment, the developed world is attempting to de-lever and it faces deflationary forces while short-term inflationary forces are rearing up in emerging markets. It’s my belief that if we can't achieve some form of strong economic stability in the

“I always say there are three things that are important about China: government, government, government.”Jeff Shen

Please visit:http://tinyurl.com/3vlreh4 to find the BlackRock Investment Institute paper, "Are Emerging Markets the New Developed Markets?"

Q4


2011 Emerging markets

BlackRockInvestment Institute

Sam VeCht: It's also interesting to think that today, despite the buzz that emerging markets have generated and the progress they’ve made, their total index weight in the MSCI All Country World index is 13.8% and China is just 2.4%, compared to 8.3% for the UK and 43.2% for the US 2. I think some of the frontier markets are very interesting.

There are markets such as Nigeria, Ukraine and Saudi Arabia that are not yet even emerging markets and have quite an interesting long-term future ahead of them despite their obvious challenges. While there is much attention focused at a sector level on the domestic consumption theme, I think healthcare across emerging markets is a key long-term story. The sector is quite small within the indices and it's pretty illiquid, but it's clear with an ageing population around the world, healthcare is a good place to be.

Jeff Shen: Absolutely. To retrace a little bit, emerging market equities are definitely under-represented in overall global equity market indices. We are fairly confident, however, that the market cap is most likely to increase when these economies grow more.

Catherine raw: On the subject of growth, concerns have been raised recently over the tightening of China’s monetary policy and its negative impact on the country’s growth. However, China only needs to continue to grow by 5% p.a. – which falls well below the country’s current pace of 9% p.a. – in order for the environment to remain supportive for bulk commodity prices and, by extension, equity valuations for the producers of these commodities.

It’s also important to remember that demand-side dynamics are only half the story. In the last year, many commodity supplies have experienced and suffered shortages. Infrastructural and geopolitical challenges, fewer mine discoveries, skilled labour shortages and longer lead times on securing equipment have all contributed to rising prices and valuations. These conditions may be supportive over the long-term, but they are also catalysing supply shocks, which can inhibit growth in the short-term and squeeze company margins. China has experienced both these supply shocks and their effects first hand due to its voracious appetite for coal and the shortage of supply.

The interplay here between Chinese power companies and government is interesting. As global energy prices rise, the Chinese government continues to cap retail energy prices. Without a means to pass on the rising cost of electricity to consumers, many power plants are posting losses: 43% of coal-fired power plants did so last year. 3

Jeff Shen: I always say there are three things that are important when considering China: government, government, government. In the next year or so, it is certainly going to be quite important for that government to transition into the next phase of growth. The future leadership's agenda will shape the future growth and inflation story in China in a significant form and fashion. I think economic GDP growth and inflation almost become a bit of a secondary factor once you figure out what the government's trying to do.

imran huSSain:I think it’s a credibility issue. It’s a question of whether we have faith in the politicians, in the central banks and the ministries of finance to do the right thing over time. As a result of the crisis, some rules of the game have changed. The response in the developed world has in some cases been the quasi-nationalisation of banking systems; we never expected we would see that. We witnessed a transformational event in 2008 that I think helped to redefine the notion of risk in the global economy.

Jeff Shen:How developed and emerging markets deal with corporate governance and the role of government in the economy is very much a continuum. From both a historical perspective and also in the comparative perspective, emerging markets have made a tremendous amount of progress along the way. There are more nuances between each country, rather than to say an emerging market is here, or a developed market is there.

Sam VeCht:Going back to companies, I think we would all agree that ten years ago the majority of emerging markets companies were managed in a far worse manner than they are now. With respect to the whole range of items that management entails - the production of timely accounts, meeting investors, how business operations are managed - in each of those regards, I think we’d all agree that standards have improved in emerging markets. In certain areas, in fact, I would argue that these standards have fallen in the developed world. So, if one had to generalise, I think corporate governance standards across emerging markets, are still not quite at those of the US or the UK, but they're definitely moving in that direction. Jeff Shen: We certainly have seen a lot of companies make the transition and become global leaders. But at the same time, there are plenty of companies that don't become successful making that transition. And that's where it's not only about the index. It's also about looking at this stock by stock doing a detailed analysis.

Related productsBGF World Mining FundBGF Emerging Markets FundBGF Local Emerging Market Short Duration Bond Fund For fund information p30

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Imran HussainFund Manager, Head of Emerging Market Debt Portfolios

Catherine RawFund Manager, Natural Resources Team

Jeff SheenFund Manager, Head of Asia Pacific and Emerging Market Equity

Sam VechtFund Manager, Co-Head of Global Emerging Markets Portfolios

Q4Fund Manager profile 2011


"There's an interesting connection between triathlons and fund management - they're about consistent performance."

Ironman of the marketsThe Ironman Triathlon is not for the faint-hearted,

but Michael Krautzberger, a veteran of the circuit, enjoys the thinking time it gives him

Related productsBGF Euro Bond FundBGF Short Duration Euro Bond Fund BSF Fixed Income Strategies Fund For fund information p30

I’ve always been into sport. As well as running, I played football quite a bit when I was

younger, but it’s often difficult with a busy work schedule to arrange to train with a team. Then, in 1995, I injured my knee and the doctor urged me to do some swimming. I was already a good runner and keen on cycling, so that’s really how I got started.

Triathlons are a good mix with work because the training can be flexible. With endurance sports your mind can run free while you’re doing them – that’s why I find triathlons so relaxing. I do think about work, but it’s not because I’m feeling stressed about it. More likely I’ll have a problem and then an idea will come into my mind while I’m running, cycling or swimming.

The Ironman Triathlons usually involve a 3.8km swim, a 180km cycle ride and a 42km run. I’ve done one a year for the past decade. People ask me why I'd want to be so cruel to myself, but it’s the sense of achievement you get when you’ve finished.

Recently I did a triathlon while on holiday in New Zealand. I’d been training in the snow in Germany, but the race was in New Zealand’s summer. I was out on the track for ten hours, so I got terribly sunburnt.

My best time for an Ironman is around 10.5 hours. The best time ever recorded is about eight hours. One of the great things about triathlons is they’re open to all age groups – almost anyone can do them if they want to.

One of my favourite events is Race the Train in mid-Wales. You run against a steam train while your family and friends scream at you to go faster. You can hear the train behind you and you have to jump over fences and run through meadows as you race against it.

There’s an interesting connection between triathlons and fund management. You need endurance in both because investing is a long-term activity. There’s an element of ambition and competition with each of them, but they’re also about consistent performance – about doing your best each time.

Michael Krautzberger, Fund Manager, CIO of BlackRock Asset Management Deutschland AG and Head of the Euro Fixed Income Team

Luke Chappell and James MacPherson,

Fund Managers, co-heads of UK Equities

Q4


Q4IPOs 2011 2011 IPOs


fairer flotations | what chappell and macpherson want to see

GettinG to know you…We think it's both useful and important to get to know companies at an earlier stage, rather than leaving research to a single one-hour meeting. These multiple meetings can be used to establish a framework for valuation, as well as discussing an appropriate peer group.

We expect to value companies seeking to float at a discount to their peer group in order to reflect the lack of a public trading record, not least because any new idea has to compete for capital within existing holdings. Our practice is also to value companies on an ongoing basis, even before the receipt of any primary issuance.

too many cooksWe are concerned that companies have been appointing advisers based on unrealistic indications of valuation. Furthermore, the formation of large syndicates of firms to bring the float to market does not appear to benefit the

process of price formation and, as a firm, we are likely to be less constructive on IPOs with large syndicates.

Fee to chooseWe have voiced our concerns about the structure of incentive fees that maximise returns for the price achieved on the first day of trading rather than at a more distant date. Such fees do not represent an alignment of interests with investors and seem to drive increasingly aggressive behaviour from syndicates.

GettinG the balance riGhtThere also remains a disparity between the expectations of governance standards and balance sheet structures between investors and syndicates. The former will be more nuanced depending on specific circumstances, but we will consider all the above factors when reaching a preferred valuation.

high and dry?Despite this seemingly healthy scenario, some of the deals that have come to market have swan-dived almost immediately after opening. For example, China’s answer to Facebook – Renren – went public in May, but over 40% of its value has since been wiped from its market cap. US internet radio company, Pandora, initially lost 17%, and has regained some value but continues to hover some 11% below its offer price. Since 1 January 2011, only 22% of companies that have listed1 are trading within 5% of their initial offer price.

So if stocks were valued properly at the time of the float, why such dramatic price changes during the first few weeks of trading, all other things being equal?

These inefficient pricing practices have been so common, particularly in the UK, that Luke Chappell and James Macpherson, both fund managers within our UK Equity teams, wrote a letter detailing the problems within the current environment for IPOs (see panel, right). The letter has opened the doors to what we believe is a healthy discussion around the issue, which will hopefully garner some positive developments within the market.

Ultimately, while we are keen for London to remain at the centre of a thriving capital market, recent developments within the IPO market have been frustrating for investors, argue Chappell and Macpherson. Their contention has clearly resonated with many other investors and companies.

dicey pricingThis frustration with how investment banks assemble IPOs – in a manner that incentivises high share prices on day one of trading – is not the only concern. Other complaints come from the companies themselves, who argue that banks price IPOs too low, catering to their favoured institutional clients, who then reap a massive reward in the days following the float. Such was the case

resh new issues are coming to market. Finally. But while this batch of new publicly traded stock seems to indicate improving global corporate health, research suggests that many of these issues are mispriced, often deflating by 10% or more following their flotation. This has caused a number of investors to question whether the processes in place to bring initial public offerings (IPOs) to market are really in their best interest?

to market, to marketIn the past six months the number of issues has increased by 15%1 on a year-on-year basis, with 877 IPOs either announced or brought to market. The amount of capital raised has also ballooned, totalling $125.2bn USD, with an average size of $141.1m per deal. While this figure is a far cry from some of the $50bn deals seen in 2007, it indicates that corporate health is beginning to improve again.

New issues within the consumer services sector have been among the superstars, reporting a 138% increase in capital raised. The basic materials sector has also outperformed most sectors, raising 99% more capital than the same period last year. The volumes of these deals, however, remain capped by uncertainty over the outlook for the global economy and the continuing Eurozone debt crisis, among other concerns.

with LinkedIn, which rocketed by more than 100% in value on its first day of trading before falling back.

In fact, a December 2010 study conducted by a group of researchers at Oxford’s Saïd Business School found that, on average, issues brought to market in the US are underpriced 14% of the time, while in Europe it’s 9%.2 Surprisingly, the study also found that while US institutions bringing issues to market tend to underprice issues more frequently, they also tend to charge about 3% more in fees than their European counterparts and this gap is widening.

a developing trendThese mispricings, while frustrating for both sides of the IPO transaction, could be resolved by a third unmistakable trend – the decision to list in Asia, where demand is high and fees are low. Following on from Samsonite’s lead, Prada’s recent attention-getting IPO in Hong Kong garnered the company a 27x price-to-earnings ratio, thanks to the burgeoning Asian middle class consumers’ thirst for luxury goods. Furthermore, the underwriting fees for this offer were likely not inflating the price either as these were capped at 1.9% of the total offer. A further clutch of non-Asian companies, including Fitness First, is set to IPO in Asia later this year.

As a result, unless they want to further exacerbate their listings losses, Western advisers and investment banks may need to take stock of how they bring their issues to market if they want to keep their share of this business.

Although new issues offer a raft of new investment opportunities, some of this new stock is systematically being mispriced when brought to market. Earlier this year, BlackRock opened up the debate. BlackRock investment writer, Heather Christie, investigates...

Floating on air

high... BUt not so mighty

The percentage value wiped from the

market cap of Renren – China's answer to Facebook – since it went public in May Heather Christie, Investment Writer Luke Chappell and James Macpherson, Fund Managers and

Co-Heads of the UK Equities Team

46%

1 Bloo

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rg, 2

Aug

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ark A

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0.Renren Inc 04/05/2011 743.4 -25.0 -46.2Pandora Media Inc 14/06/2011 235.0 -10.5 -28.4Kinder Morgan Inc/Delaware 10/02/2011 2864.0 -4.4 -9.5Samsonite International SA 16/06/2011 1250.3 16.1 29.5Prada SpA 24/06/2011 2145.6 23.5 23.5LinkedIn Corp 18/05/2011 352.8 131.2 25.3

COMPANY NAME

TRADINg DATE

SIZE OF FLOAT ($m)

OFFER TO DATE

1st OPEN TO DATE %

Source: Bloomberg. Data as at 2 August 2011

Luke Chappell and James MacPherson,

Fund Managers, co-heads of UK Equities

Q4


Q4IPOs 2011 2011 IPOs


fairer flotations | what chappell and macpherson want to see

GettinG to know you…We think it's both useful and important to get to know companies at an earlier stage, rather than leaving research to a single one-hour meeting. These multiple meetings can be used to establish a framework for valuation, as well as discussing an appropriate peer group.

We expect to value companies seeking to float at a discount to their peer group in order to reflect the lack of a public trading record, not least because any new idea has to compete for capital within existing holdings. Our practice is also to value companies on an ongoing basis, even before the receipt of any primary issuance.

too many cooksWe are concerned that companies have been appointing advisers based on unrealistic indications of valuation. Furthermore, the formation of large syndicates of firms to bring the float to market does not appear to benefit the

process of price formation and, as a firm, we are likely to be less constructive on IPOs with large syndicates.

Fee to chooseWe have voiced our concerns about the structure of incentive fees that maximise returns for the price achieved on the first day of trading rather than at a more distant date. Such fees do not represent an alignment of interests with investors and seem to drive increasingly aggressive behaviour from syndicates.

GettinG the balance riGhtThere also remains a disparity between the expectations of governance standards and balance sheet structures between investors and syndicates. The former will be more nuanced depending on specific circumstances, but we will consider all the above factors when reaching a preferred valuation.

high and dry?Despite this seemingly healthy scenario, some of the deals that have come to market have swan-dived almost immediately after opening. For example, China’s answer to Facebook – Renren – went public in May, but over 40% of its value has since been wiped from its market cap. US internet radio company, Pandora, initially lost 17%, and has regained some value but continues to hover some 11% below its offer price. Since 1 January 2011, only 22% of companies that have listed1 are trading within 5% of their initial offer price.

So if stocks were valued properly at the time of the float, why such dramatic price changes during the first few weeks of trading, all other things being equal?

These inefficient pricing practices have been so common, particularly in the UK, that Luke Chappell and James Macpherson, both fund managers within our UK Equity teams, wrote a letter detailing the problems within the current environment for IPOs (see panel, right). The letter has opened the doors to what we believe is a healthy discussion around the issue, which will hopefully garner some positive developments within the market.

Ultimately, while we are keen for London to remain at the centre of a thriving capital market, recent developments within the IPO market have been frustrating for investors, argue Chappell and Macpherson. Their contention has clearly resonated with many other investors and companies.

dicey pricingThis frustration with how investment banks assemble IPOs – in a manner that incentivises high share prices on day one of trading – is not the only concern. Other complaints come from the companies themselves, who argue that banks price IPOs too low, catering to their favoured institutional clients, who then reap a massive reward in the days following the float. Such was the case

resh new issues are coming to market. Finally. But while this batch of new publicly traded stock seems to indicate improving global corporate health, research suggests that many of these issues are mispriced, often deflating by 10% or more following their flotation. This has caused a number of investors to question whether the processes in place to bring initial public offerings (IPOs) to market are really in their best interest?

to market, to marketIn the past six months the number of issues has increased by 15%1 on a year-on-year basis, with 877 IPOs either announced or brought to market. The amount of capital raised has also ballooned, totalling $125.2bn USD, with an average size of $141.1m per deal. While this figure is a far cry from some of the $50bn deals seen in 2007, it indicates that corporate health is beginning to improve again.

New issues within the consumer services sector have been among the superstars, reporting a 138% increase in capital raised. The basic materials sector has also outperformed most sectors, raising 99% more capital than the same period last year. The volumes of these deals, however, remain capped by uncertainty over the outlook for the global economy and the continuing Eurozone debt crisis, among other concerns.

with LinkedIn, which rocketed by more than 100% in value on its first day of trading before falling back.

In fact, a December 2010 study conducted by a group of researchers at Oxford’s Saïd Business School found that, on average, issues brought to market in the US are underpriced 14% of the time, while in Europe it’s 9%.2 Surprisingly, the study also found that while US institutions bringing issues to market tend to underprice issues more frequently, they also tend to charge about 3% more in fees than their European counterparts and this gap is widening.

a developing trendThese mispricings, while frustrating for both sides of the IPO transaction, could be resolved by a third unmistakable trend – the decision to list in Asia, where demand is high and fees are low. Following on from Samsonite’s lead, Prada’s recent attention-getting IPO in Hong Kong garnered the company a 27x price-to-earnings ratio, thanks to the burgeoning Asian middle class consumers’ thirst for luxury goods. Furthermore, the underwriting fees for this offer were likely not inflating the price either as these were capped at 1.9% of the total offer. A further clutch of non-Asian companies, including Fitness First, is set to IPO in Asia later this year.

As a result, unless they want to further exacerbate their listings losses, Western advisers and investment banks may need to take stock of how they bring their issues to market if they want to keep their share of this business.

Although new issues offer a raft of new investment opportunities, some of this new stock is systematically being mispriced when brought to market. Earlier this year, BlackRock opened up the debate. BlackRock investment writer, Heather Christie, investigates...

Floating on air

high... BUt not so mighty

The percentage value wiped from the

market cap of Renren – China's answer to Facebook – since it went public in May Heather Christie, Investment Writer Luke Chappell and James Macpherson, Fund Managers and

Co-Heads of the UK Equities Team

46%

1 Bloo

mbe

rg, 2

Aug

ust 2

011

2 M

ark A

brah

amso

n, T

im J

enki

nson

and

Howa

rd J

ones

, "W

hy d

on’t

US is

suer

s dem

and

Euro

pean

fees

for I

POs?

" Dec

embe

r 201

0.

Renren Inc 04/05/2011 743.4 -25.0 -46.2Pandora Media Inc 14/06/2011 235.0 -10.5 -28.4Kinder Morgan Inc/Delaware 10/02/2011 2864.0 -4.4 -9.5Samsonite International SA 16/06/2011 1250.3 16.1 29.5Prada SpA 24/06/2011 2145.6 23.5 23.5LinkedIn Corp 18/05/2011 352.8 131.2 25.3

COMPANY NAME

TRADINg DATE

SIZE OF FLOAT ($m)

OFFER TO DATE

1st OPEN TO DATE %

Source: Bloomberg. Data as at 2 August 2011

Q4


Q4


Exchange traded funds 2011 2011 Exchange traded funds

“Synthetic” or “swap based” replication approaches gained greater prominence as investment banks entered the European ETF market. Instead of buying the underlying securities of the index, the fund enters into an index swap agreement with a counter-party, committing the counter-party to provide the performance of the index.

There are two models. With the unfunded swap model the fund pays a fee (the swap spread) to the counter-party and also provides the return of the holdings of the fund. These holdings will not necessarily be related to the index constituents and may be purchased from the investment bank providing the swap. They’re not collateral.

New regulations, fluctuating markets and concerns about complex financial instruments are adding to investors’ anxieties about risk. Alex Popplewell asks David Bower, Marketing Director for BlackRock iShares EMEA, whether Exchanged Traded Funds (ETFs) are part of the solution – or part of the problem.

AP: There’s been a lot of press comment recently about the

growth of the ETF market and whether it’s leading us into some sort of a bubble. What’s the iShares view?

DB: Today, over $1.3 trillion is invested in ETFs and the proportion of investors using ETFs within their portfolios continues to rise. Because of this success, regulators are showing greater interest. They want the phenomenal growth of this range of products to continue in a “safe and sustainable” manner.

iShares launched the first ETFs in Europe in 2000. With 168 European domiciled funds we are continuing to develop solutions for investors that are still robust, transparent, liquid and offer low-cost exposure to the world’s financial markets. But does a relatively new financial innovation need to be stress tested? We’ve come through arguably the worst financial crisis in 100 years and our products continue to perform and continue to deliver what we said they would.

AP: Investors have expressed concerns about “physical” versus “swap-based” ETFs and in particular the rise of “leveraged” and “inverse” ETFs. Some people fear that a “good” product is morphing into an “evil” product in the hands of people who don’t understand their use, reminiscent of securitised credit. Can you talk more about physical and synthetic replication?

DB: iShares delivers the index performance in all but three of our funds through an index replication approach known as physical replication. Our portfolio managers simply buy the securities represented by the index and their performance then delivers the performance of the index.

Fair exchange? Increasingly complex new ETFs are worrying the markets. Alex Popplewell asks David Bower of iShares if the anxiety is justified

effective, liquid, transparent and should deliver a predictable outcome. As the industry has expanded, these characteristics are not shared by all ETF promoters. Synthetic ETFs have in particular brought to market a lack of transparency in the underlying activities of the fund.

AP: Does this lack of transparency mean all swap-based ETFs will be tarred with the same brush as the leveraged or inverse ETFs? Would it be simpler to use the jargon of “Delta One” for ETFs which move in-line with the index?

DB: Inverse and leveraged ETFs have come in for criticism. Here the ETF tracks either the inverse of an index or a multiple of an index. The majority of these products follow indices that re-set daily and therefore over the longer term, particularly in volatile markets, the cumulative daily movements diverge significantly from the long-term performance of the underlying market index performance.

AP: Non Delta One ETFs are clearly designed for sophisticated investors, so what can the regulators do to prevent them falling into the wrong hands?

DB: iShares made the decision early on not to extend our product set to provide inverse and leveraged ETFs. We believed these products would only be suitable for professional investors implementing short-term trading strategies. This has proved to be the case, with the products enjoying extensive trading volumes across Europe, while assets under management have remained low.

AP: We all remember when specialist credit products proliferated in the hands of the unwary and became enormous relative to the assets of the banking system. So, relative to the overall ETF market, how big are leveraged and inverse ETFs?

“We've gone through arguably the worst financial crisis in over 100 years and our products continue to perform and continue to deliver”

DB: A very small percentage in respect to assets under management. But it’s important that promoters of these products are very clear with investors what these funds will deliver, both short and long term. Otherwise, there’s a risk of heavy handed regulation of all ETFs.

AP: It sounds clear and simple. So why then are commentators discussing the risk caused by ETF trading to the investment markets as in the “Flash Crash”?

DB: Every great story requires a hero and villain. For many years, the ETF strengths of low cost, transparency and liquidity

have held the spotlight. When market dislocations occur, they may impact ETFs, and commentators are quick to jump to conclusions. In the case of the Flash Crash, ETFs were subsequently identified as a victim of the market dislocation, not the cause.

As the market develops further, we’re seeing differentiation between the strength and approach of each promoter of ETFs. Back in 2008, when ETFs started to proliferate, we started an education series called ‘Not all ETFs are Created Equal’. I believe that this is more relevant than ever.

AP: Where is iShares focusing efforts now?

DB: There remains extensive demand for us to continue to expand our fund range. Following the launch earlier in the year of the local currency emerging market debt fund, we’ll continue to focus on our fixed income funds, as well as expanding our commodity and equity offerings.

For fund information p30Ill

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: n

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a B

ar

David BowerMarketing Director,

iShares EMEA

“Today, over $1.3 trillion is invested in ETFs”

In the funded swap model, the swap counter-party delivers collateral to the fund - usually over collateralised to 120% - in return for which the fund pays over the investments to the swap counterparty which pays the index return. This model will typically use several unconnected swap counterparties and will dictate the quality and liquidity of the collateral received. The latter model will typically offer more transparency as to collateral and fund holdings, swap spread and counterparties engaged.

AP: So, where there is a very concentrated index with, say, 20 constituents which might breach UCITS rules on the concentration within a fund, a swap-based ETF would replicate that return without actually owning the underlying securities?

DB: Exactly. UCITS III enabled regulated funds to use derivatives in more than efficient portfolio management, and in the case of the synthetic ETFs, the holdings of the fund are unlikely to have any relationship to the index. iShares believes an ETF should be cost

- SYNTHETIC ETFs -These are ETFs that

use some form of derivative, such as a swap arrangement, rather than actually

owning shares

- DELTA ONE -A product that changes

in value by the same percentage as its

underlying security or index

- FLASH CRASH -On 6 May 2010 the

US stock market fell about 900 points –

dubbed the Flash Crash – but recovered its

losses minutes later

Jargonbuster

2011 Retail Distribution Review Retail Distribution Review 2011

to future trail commissions on the assets. Rather unwisely, this may provide a disincentive to advisers to engage in any active management of legacy assets post 2013 almost certainly to the detriment of investment performance.

Investment bonds and other life-wrapped products better protect advisers from the risk that their legacy assets are drawn into the new charging regime post 2013 as the nature of the relationship between the product provider and client is one of contract. Therefore, there is more scope to engage in active management of the assets without necessarily changing the nature of the product post January 2013. We fear that this could create a market distortion in the run up to the implementation of the new Rules which could result in advisers favouring products with arguably unwanted life cover.

Another serious risk with the current RDR proposals is that many experienced advisers faced with having to sit exams for the first time in many years will simply leave the industry. Take the case of someone who has been working successfully as a financial adviser for the last 30 years or so. These people have seen the oil price shocks of the seventies, the inflation of the eighties and the tech boom and bust at the turn of this century, to name but a few challenges. They’ve had to guide investors through this constantly changing environment while taking into account different taxation scenarios.

Many of us accept that some type of cut off is needed for the new qualifications. We also agree that it’s necessary to have exams that actually mean something. But we believe, as does the Treasury Select Committee, that there needs to be some transitionary period rather than a “cliff edge”. We hope the FSA will consider more generous transitional provisions.

Waiting on the platformThe FSA also believes that some funds that don’t pay such attractive commissions - these might be passively managed funds or Investment Trusts and ETFs - have been at a disadvantage and consequently used less extensively as they otherwise might. We would contend that although any disadvantage could be partly related to commission, it’s more connected with how they are bought and sold. Over the last decade or so, advisers have been outsourcing their back and middle office functions to platforms. Those platforms have hitherto only allowed the facilitation of mutual funds and, latterly, some pension products.

But very few of them offer share dealing functionality – an essential requirement in order to be able to buy and sell ETFs and Investment Trusts. An adviser is simply not going to have 95% of his or her assets held on a platform while he or she administers just 5% directly. Moreover, passive funds have not been used greatly in the past simply because there haven’t been many of them. However, that’s changing. The first quarter of this year saw the biggest rise ever in the use of passive funds according to the Investment Management Association and all indications suggest that as choice increases this trend is set to continue.

Another instance of the FSA possibly achieving the opposite effect of the one it’s aiming for concerns the effects of the RDR on less well-off investors. At the moment, renewal commissions from affluent clients provide revenue stability for advisers enabling them to offer their services to less well-off clients, naturally in the hope that the clients will become wealthier and therefore more profitable in the future. Banning commission will force advisers to adapt their business models concentrating on their more affluent and profitable clients, casting aside less well-off investors who may be either unable or unwilling to pay up-front for the full cost of advice. The FSA seems to believe that simplified advice will somehow fill this ‘advice gap’. But it has not offered any real guidance on what it means by simplified advice – quite a serious question when you consider that we’re only five quarters away from implementation.

The law of unintended consequences is a remarkable thing – as the UK Financial Services Authority’s (FSA) planned shake up of UK investment advice clearly demonstrates. The aims of the Retail Distribution Review (RDR) are certainly to be applauded. After all, who could argue with a goal of increased transparency and an improvement in the standard of advice that clients receive? Unfortunately, the FSA may be on course to achieve the very opposite of many

of its laudable aims. One of our most serious reservations concerns the creation of a

vast legacy book of business in the UK. The RDR proposes a ban on commission on advised sales of financial products to retail clients but the FSA appears to be sympathetic to the fact that the only real value in many IFA businesses is the present value of their future revenue streams from trail commission. As a result, the FSA is saying that renewal commission can continue to be paid on all business written up to the implementation of the new rules on 1 January 2013.

In effect, they’re ‘ring-fencing’ this existing book of business reportedly worth a massive £560bn in the UK.

In order to meet one of the key pillars of the RDR - enhanced

transparency regarding the cost of advice - it is absolutely vital that we obtain consistency across product types, so that consumers understand precisely what will happen to these assets and how they will be charged wherever they are invested.

out With the oldThe question is: how do we administer these old and new books of business each with their different charging regimes? We will almost certainly have to create new unit classes for new business post 1 January 2013 as well as ‘clean fee’ unit classes meeting the requirements of ‘factory gate pricing’. So, rather than simplifying things as the FSA intended, a profusion of new unit classes could well add a whole new layer of complexity for the industry and consumers alike.

Advisers will also have to be careful about how they service their own legacy books. If they provide new advice on legacy assets, perhaps because of the need to switch investments or as a result of an event forced on them like a fund merger, there is a real danger that their actions could bring these assets into the new, post-2013 charging regime. In other words, the adviser will have to agree fees up-front and charge the client for this new advice thereby giving up all rights

The FSA is planning major changes to improve the services offered by IFAs in the UK – but it risks doing the opposite of what

it intends, say Tony Stenning and Peter HawkinsTony Stenning, Head of UK Retail BusinessPeter Hawkins, Head of EMEA Funds Compliance Advisory Team

Q4 Q4


more could be lessThe FSA has also said that it wants IFAs to look at ‘the whole of market’ on behalf of their clients. But, realistically, how can one IFA be familiar with this very broad spectrum of products and services? Many already have specialisms and more will choose to do so, offering restricted advice, while others might simply opt for execution-only platforms. As a result, there could be less advice available.

So, as a result of these proposals, perversely, we might see less advice given on all kinds of investments, especially legacy assets while more experienced advisers leave the market and the people who need advice the most get excluded.

Leading clients down the path of simplified advice and guided architecture, execution-only solutions seems to be juxtaposed to leading thought coming from the European Commission. The formal consultation underway on the review of the Markets in Financial Instruments Directive (MiFID) is examining whether more UCITS schemes should be treated as complex products which would mean that they could no longer be sold without advice. The Commission is also reviewing the regime for execution-only and advised business as well as inducements. A number of European regulators are monitoring the progress of the RDR closely and so all eyes are now on the UK.

The FSA’s latest Policy Statement on Platforms (PS11/09) has done little to clarify the direction of the final rules and even signalled a U-turn on the bundling of platform fees within product management fees - at a time when we all need certainty so that we can commence work designing RDR compliant systems. Thankfully, the FSA has acknowledged that a number of unintended consequences do exist and has wisely called for further industry consultation.

Given the many uncertainties ranging from unintended consequences, to the potential impact of various European initiatives (MiFID II and PRIPs), it would be prudent to consider, at least in part, the Treasury Select Committee's recommendation that the RDR implementation be delayed. After all, what is another few months within a process that is already over five years old? Taking a bit longer to give more certainty and transparency to consumers rather than turning sharply right or left further down the road must make sense.

Whatever system we end up with has to be simple and easy to understand. The biggest unintended consequence would be that we create a transparent framework that is so complex, consumers don't understand the charging structure. We are deluged with confusion in other sectors already. Think about utility bills: they are so complex now that many simply give them a cursory glance assuming they are correct. This is what we want to avoid at all costs; what is provided to the consumer must make sense and not baffle them.

One thing you can be certain of, though, is that BlackRock, along with the rest of the industry will continue to lobby the FSA aggressively to ensure that it’s the laudable intended consequences, not the destructive, unintended ones that flow from the Retail Distribution Review.

The rightchange?

Funds 2011 2011 FundsQ4 Q4


Fund directoryA selection of BlackRock funds relating to the investment themes in this quarter’s magazine

Michael KrautzbergerFund Manager

FIXED INCOME

�BGF Euro Bond Fund and BGF Euro Short Duration Bond Fund• MichaelKrautzbergerishighly

experienced,HeadoftheEuroFixedIncometeamandCIOofBlackRockDeutschlandAG.

• Combiningcredits,ratesandcurrencyexperiencethroughanine-strongteamofinternationalinvestmentprofessionals,theBlackRockEuroFixedIncometeamoffersextensive,wide-rangingexpertise.

• Theteamadoptsanactive,risk-controlledapproachtoaddingvalueacrossthefullrangeoffixedincomeopportunities.

• TheBGFEuroBondFundseekstoconsistentlycreateanannualalphainexcessof100basispointsbysourcingawidearrayofactivestrategies,whilealsomaintainingalowleveloftrackingerror.

• TheBGFEuroShortDurationBondFundoffersaportfolioofEuropeanbondswithanaveragedurationofthreeyears.

• Weexpectvolatilitytoremainhigh;however,weareconstructiveoncreditandcontinuetoseeopportunitiestoaddvaluethroughsectorselectionandcurvepositioning.

BGF Euro Short Duration Bond Fund

BGF Euro Bond Fund

Michael KrautzbergerFund Manager

FIXED INCOME

BSF Fixed Income Strategies Fund• Withfullflexibilitytotakebothlongand

shortpositionsusingderivatives,theFundisamoreflexibleversionoftheestablishedBFGEuroBondandBGFEuroShortDurationBondFunds.

• TheFundisdesignedtotakeadvantageofanticipatedopportunitiesincreditmarkets,aswellasapplytraditionalstrategies.

• TheFundisnottiedtoabenchmarkandcanexplorethefullglobalopportunityset.

• Overarollingthree-yearcycle,theFundseekstogenerate3%(annualised)aboveEONIAforeuro-basedinvestorsbysourcingawidearrayofactivestrategies.

• Byhavingapatientanddiversifiedstartingpointandonlybecomingmoreaggressivewhenconvictionishigh,theaveragefactorriskwillbelowerthanindedicatedbondproductswithsimilarreturnexpectations.

Imran Hussain Fund Manager

FIXED INCOME

�BGF Local Emerging Market Short Duration Bond Fund• TheFundseekstomaximisetotal

returnbyinvestinginlocalcurrency-denominatedfixedincometransferableswithadurationoflessthanfiveyearsissuedbygovernments,agenciesandcompaniesdomiciledorexercisingmostoftheiractivityinemergingmarkets.

• Anactivemulti-disciplinaryapproachaimstotakeadvantageofopportunitiesinallmarketenvironmentsbyfocusingoncountryselection,relativevalueanalysisandtacticaltrading.

• Theinvestmentprocesscombinestop-downmacroeconomicanalysiswithabottom-upapproachtoportfolioconstruction.

• BlackRockhasextensiveinvestmentcapabilitiesandresourcesdedicatedtomanagingemergingmarketdebtportfolios.IntheJuly2010report,Standard&Poor’scommentedon“theexperienceandstabilityoftheteam”.

• Emergingmarketgrowthisexpectedtobehigherthandevelopedeconomies,whichwillbeakeydriverforcapitalinflows.

• TheFundprovidesauniqueopportunitytobenefitfromemergingmarketforeignexchangeappreciation,whileitsshortdurationnatureprotectsinvestorsfromarisinginterestrateenvironment.

Evy Hambro and Catherine RawFund Managers

COMMODItIEs

BGF World Mining Fund• TheFundseekstomaximisetotalreturn

byinvestingintheequitiesofminingandmetalcompaniesworldwide,predominantlythosewhosemainactivityistheproductionofbasemetalsandindustrialminerals,althoughtheFundmayalsoinvestingoldorotherpreciousmetalormineralminingcompanies.

• InitsMay2010report,Morningstarcommented:“ThisFundhasdonewhatitshould–anddoneitwell.”

• Usingacombinationoffundamentalin-depthcompanyresearchandamacroeconomicoverlay,theFundismanagedinaflexiblestyle,formingawell-constructedportfolioof‘bestideas’fromacrosstheworld.

• Theteamfocusesonvalueinvestments,whichofferthebestexposuretometalsandmineralspriceswithanacceptablerisklevelandcompanieswithgrowthpotential.

• Theportfolioistypicallycomprisedof50-80stocksacrossarangeofsmalltolargecapitalisationcompanies,withamaximumholdinginonestockof10%.

• Sectorfundsofferinvestorsawaytodiversifyportfolios.Demandgrowthinmanyregions,especiallyemergingmarkets,isaddingtothealreadyfavourablelong-termfundamentalsfortheminingsector.

COMMODItIEs

Richard Davis, Joshua Freedman and Thomas HollFund Managers

BGF World Resources Equity Income Fund• TheFundaimstogenerateabove-average

incomefromitsequityinvestments,whilealsomaximisingtotalreturn.

• TheFundinvestsincompanieswhosepredominantactivityisintheNaturalResourcessector,includingthoseengagedinmining,energyandagriculture.

• Thisbreadthallowsthemanagerstoselectthebestopportunitiesinthesectorandtheybelieveayieldof150%oftheS&PGlobalNaturalResourcesIndexisareasonabletarget.

• BlackRock’sdedicatedNaturalResourcesteamisoneofthelargestandmostexperiencedintheindustry,withover120years’cumulativeexperienceandarangeofacademicandindustrybackgrounds.

• Theinvestmentprocesscombinesabottom-upapproachwithamacrooverlay,resultinginawell-diversifiedportfolio.Theteamplacesgreatemphasisonmeetingcompanymanagement.

• Favourabledemandandsupplyfundamentalsarelikelytosupporthighercommoditypricesoverthelongterm.Inaddition,therisingpriceofcommoditieshasmadeNaturalResourcesahighlycash-generativesector,providinggoodopportunitiesfordividendstrength.

Fund launch date: 15.04.2011

EtFs

iShares•33BlackRock’siSharesplatformisthe

dominantforceinglobalexchange-tradedfunds(ETFs),with474fundsthatcombinedhouse43%oftheworld'stotalETFassetsundermanagement.

•33ETFsofferflexibleandeasyaccesstoawiderangeofmarketsandassetclasses.

•33iShareshaverevolutionisedtheinvestmentlandscape,withtheireasytradabilityandampleliquidity,allowinginvestorstoharnessthediversificationbenefitsofbuyinganentireindexinasinglefund.

Our ETFs include: iShares Barclays Capital Emerging Market Local Govt Bond (SEML)•TheFundinvestsinphysicalindex

securities,offeringexposuretoemergingmarketsgovernmentdebtfromeightcountriesinlocalcurrency.

iShares Markit iBoxx £ Corporate Bond 1-5•ThisFundprovidesinvestorswithcost-

effectiveaccesstoinvestmentgrade,sterling-denominatedcorporatebondswithtargetedexposureintheshort-termtomitigateagainstinterestraterisk.Furthermore,short-maturitycorporatebondsaregenerallylesssensitivetochangesinyields.

For more information see ishares.com

Funds 2011 2011 FundsQ4 Q4


Fund directoryA selection of BlackRock funds relating to the investment themes in this quarter’s magazine

Dan TubbsFund Manager

EquItIEs

BGF Emerging Markets Fund• TheFundaimstomaximisetotalreturn

byinvestinggloballyinequitiesofcompaniesdomiciledormainlyoperatingindevelopingmarkets.

• Theteamcombinesadynamicandflexiblestockselectionprocesswithmacroeconomicperspectives.

• Ourskilledinvestmentteamisabletouncoveropportunitiesthroughoutthemarketcycle,reflectedinaportfolioofitshighestconvictionideas.

• Robustriskmanagementensuresthehighconvictionviewsareappropriatelyscaledintoadiversifiedandconsideredportfolio.

• Globalemergingmarketsallowinvestorstoaccessthefastest-growingeconomiesintheworld,withdomesticconsumptionpoisedtobecomeanincreasinglyimportantdriverofglobalgrowth.

• Corporateearningsgrowthremainsrobustinemergingmarketsandtherearemanystockstradingatattractivevaluations.

Nigel Bolton and Zehrid OsmaniFund Managers

EquItIEs

BGF European Fund• TheFundaimstomaximisetotalreturn

byinvestingintheequitiesofcompaniesdomiciledorexercisingmostoftheiractivityinEurope.

• NigelandZehridhave25and12yearsofindustryexperiencerespectively.Thepairaresupportedbya12-strongteamofinvestmentprofessionals.

• TheMorningstarreport(February2011)commented:“BGFEuropeanFund’smanagerscontinuetodemonstratetheirabilitytonavigatedifficultmarketenvironments.NigelBoltonisaveryexperiencedmanager.”

• Withnopermanentsize,styleorcountrybias,theFundismanagedwithaflexibleinvestmentstyle,allowingthemanagerstoadapttochangingmarkets,withtheaimofoutperforming,irrespectiveofmarketconditions.

• TheFundcombinesastructured,efficientresearchprocesswithsophisticatedconstructionandriskmanagementtogeneratealpha.

• Europeishometomanyworld-leadingcompanies,whichareexposedtocompellinginvestmenttrends,suchasstrongdomesticgrowthincoreEuropeandthegrowingemergingmarketconsumer.

Alice Gaskell and Andreas ZoellingerFund Managers

EquItIEs

BGF European Equity Income Fund• TheFundseeksanabove-average

dividendyield,withoutsacrificinglong-termcapitalgrowth,byinvestingintheequitiesofcompaniesdomiciledorexercisingmostoftheiractivityinEurope.

• TheFundaimstogenerateanaverageyieldofatleast110%oftheaveragemarketyieldofMSCIEuropeIndexandalsotooutperformtheindexoverarollingfive-yearperiod.

• AliceandAndreashaveover25yearsofcombinedexperienceandhaveforgedastrongandsuccessfulpartnership,workingtogetherforovernineyears.

• Theteamhasanactiveapproachtodividendinvesting,providinginvestorswithacompellingincomeopportunityandrealgrowthpotentialovertime.

• Insteadoflookingatyieldinisolation,theteamseekstoidentifyundervaluedstocksinthehighyieldand/orqualityspacethatoffersustainabledividends,potentialdividendgrowthandinflationprotection.

• ThedividendyieldavailableinEuropeanequitiesisthehighestinthedevelopedworldatthemomentandwethinkthatfuturedividendforecastsintheregionareunderestimated.

Fund launch date: 03.12.2010Fund Launch Date : 18.09.2009

Richard Turnill and Andrew Williamson-JonesFund Managers

EquItIEs

BGF Global Equity Fund• TheFundaimstomaximisetotalreturn

bypredominantlyinvestingintheequitysecuritiesofcompaniesdomiciledormainlyoperatingindevelopedmarkets.

• Investmentsspanallsectorsandcountriesandthestrategyisbuiltaroundaflexible‘bestideas’approach,withastrongemphasisonriskmanagement.

• Theexperiencedteamseekstoidentifyandexploitinefficienciesbyusingacombinationofstock-specificandeconomicanalysis,lookingacrosstheequityuniverseandmacroenvironment.

• InitsFebruary2011report,Morningstarcommented:“Solidreturnsin2010reaffirmourpositiveviewonBGFGlobalEquity.Co-managersRichardTurnillandAndrewWilliamson-Jonesarebackedbyanexperiencedteam.”

• Investorscanmaximisetheirreturnsandminimisetheirrisksbydiversifyingacrossstocksindifferentcountries.

• Aglobalmandateoffersopportunitiestoinvestinthebestcompaniesintheworld,regardlessoftheirgeographiclocation,potentiallyprovidingstrongerreturns.

Richard Turnill and Stuart ReeveFund Managers

EquItIEs

BGF Global Equity Income Fund• TheFundseekstogenerateanabove-

averageincome,comparedtotheMSCIWorldIndex’syield,withoutsacrificinglong-termcapitalgrowthbyinvestinginglobalequities.

• TheFundaimstocombineglobaldiversification,above-averageincomeandgrowthpotentialbyseekinghigh-qualitycompanieswiththepotentialtopayandgrowtheirdividendsovertime.

• Theteamdoesnotfocusonyieldsinisolation,butidentifieshigh-qualitystockswitharobustdividendpolicyintermsofyieldandgrowth.

• ThehighqualityanddiversifiednatureoftheportfoliomeansthattheFundshouldhavelowerthanaveragepotentialvolatility,withanaimtohaveabetaof0.75comparedtothebenchmark.

• Equitiesofferattractiveyieldsandgrowthprospects,especiallyinthecurrentenvironment,whereyieldsontraditionalfixedincomeproductsareathistoriclows.

• Slowglobalgrowthandlowinterestratescreateanoptimumenvironmentforhigh-yieldingequities.

Fund launch date: 12.11.2010

EquItIEs

Joshua Crab Fund Manager

BGF Asia Pacific Equity Income Fund•3 3TheFundseeksanaboveaverageand

growingincomefromitsequityinvestmentswithoutsacrificinglongtermcapitalgrowth.

•3 3TheFundinvestspredominantlyinequitysecuritiesofcompaniesdomiciledorexercisingmostoftheireconomicactivityintheAsiaPacificregion,excludingJapan.

• Thecoreinvestmentstrategy,withasuccessfultrackrecord,isdrivenbyasystematic,proprietaryscreeningtechniquewhichallowstheteamtouncoverthebestopportunitiesthroughoutthemarketcycle.

• Joshuaisanexperiencedandlocalmanager,supportedbyaskilledteam.Hehas15yearsofinvestmentexperience,tenofwhichhavebeenspentinAsia.

• Althoughthebulkoftheportfolioisdrivenbystockswithacurrenthighdividendyield,theteamalsolookforthegreatdividendplaysoftomorrow,seekingcompanieswiththeabilitytogrowearningsanddividends.

• Asiahasacompellingcombinationofbettergrowthrates,betterdemographicsandbetterbalancesheetsthanmostothermarkets,offeringgreatinvestmentopportunities.

F or the past five years BlackRock staff have taken part in the Safaricom Marathon in Kenya in aid of Tusk Trust, a charity that promotes conservation and community

development programmes right across Africa.

This year’s marathon, in June, saw 12 BlackRock people take part in what is considered to be one of the toughest marathons in the world, through some of East Africa’s most dramatic scenery. Here, they share some of their own marathon trials and tribulations.

Jeremy Roberts: “The visits to the projects were inspiring and humbling. Often you just give money and don't see where it goes but we saw classrooms that were built with the money raised last year and the water projects with lush green vegetation around them.”

Alastair McCarmick: “Before the run we saw how the children were benefiting from the Tusk projects, and that helped create a link with the practical benefits of what we were doing. Some of the kids walk 12km to school, so they’re practically doing a half marathon every day – but without the smart trainers and water bottles.”

Alan Lawrence: “I was born in Kenya on 25 July 1971. With the run happening in the

same country exactly a month before my dreaded 40th, it just seemed too big a coincidence to ignore.”

Claudia Ripley: “When we got up at 5am on the day of the marathon it was still dark and freezing cold. We had to wear head torches as we queued up for our breakfast of pancakes and other carbs. I must admit I did think at that stage: ‘Why am I doing this?’ But I was still determined to see it through.” Alan Lawrence:“I was very nervous the night before, so that morning there was some comfort in knowing that this was it. Sitting around the campfire having breakfast in the dark was very special.”

Barbara Vintcent: “"Moved by the projects we'd seen during the days before the run, I made the rash decision - at the 8km mark - to run the full marathon having signed up for the half. On the second lap of the course there were naturally very few runners around so at time it was just me and the

wildlife - baby elephants and buck jumping out in front of me. Amazing."

Adrian Lawrence: “We were running on a dirt track with dust, stones and boulders, plus enormous piles of elephant dung – it wasn’t easy. There was huge elation when we’d finished, though, and that evening we went to a smart lodge for a drink. There was an infinity pool overlooking the plains beyond – it was an incredible sight.”

www.tusk.org

Fit club Back row from left: Claudia Ripley, Jeremy Roberts, Adrian Lawrence, Alan Lawrence, Barbara Vintcent and Kevin Walsh. Bottom row, from left: Christian Mango, Michelle Gans, Julia Clarke, Annie Longley, John Longley and Alastair McCarmick

Field of dreamsA marathon's a marathon, right? Not when it's run on a dirt track under the blistering African sun. Some of BlackRock's 12 participants share the pain and pleasure of their own incredible journeys

$100,000the run oF their lives

The 12 BlackRock runners from the UK and US have raised an incredible $100,000 for

Tusk Trust. Well done, everyone!


Q4 2011 Inside BlackRock

Important information Q4


Research in this document has been produced and may be acted on by BlackRock for its own purposes. The views expressed do not constitute investment advice and are subject to change. This material is for distribution to Professional Clients and should not be relied upon by any other persons. The number of shares for each Fund is indicative and actual numbers may fall outside the ranges shown. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. The funds invest a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment. BlackRock Global Funds (BGF) is an open-ended investment company established in Luxembourg, which is available for sale in certain jurisdictions only. BGF is not available for sale in the US or to US persons. Product information concerning BSF should not be published in the US. BlackRock Investment Management (UK) Limited is the UK distributor of BGF. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. A limited range of BGF sub-funds have a reporting fund status A sterling share class that seeks to comply with UK Reporting Fund Status requirements. Subscriptions in BGF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Simplified Prospectus which are available on our website. Prospectuses, Simplified Prospectuses and application forms may not be available to investors in certain jurisdictions where the Fund in question has not been authorised. It is recognised under Section 264 of the Financial Services and Markets Act 2000. BlackRock Strategic Funds (BSF) is an open-ended investment company established in Luxembourg which is available for sale in certain jurisdictions only. BSF is not available for sale in the U.S. or to U.S. persons. Product information concerning BSF should not be published in the U.S. It is recognised under Section 264 of the Financial Services and Markets Act 2000. BlackRock Investment Management (UK) Limited is the UK distributor of BSF. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. A limited range of BSF sub-funds have a reporting fund status A sterling share class that seeks to comply with UK Reporting Fund Status requirements. Subscriptions in BSF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Simplified Prospectus which are available on our website. Prospectuses, Simplified Prospectuses and application forms may not be available to investors in certain jurisdictions where the Fund in question has not been authorised. BSF Fixed Income Strategies Fund invests in fixed interest securities such as corporate or government bonds which pay a fixed or variable rate of interest (also known as the ‘coupon’) and behave similarly to a loan. These securities are therefore exposed to changes in interest rates which will affect the value of any securities held. The fund invests in high yielding bonds. Companies who issue higher yield bonds typically have an increased risk of defaulting on repayments. In the event of default, the value of your investment may reduce. Economic conditions and interest rate levels may also impact significantly the values of high yield bonds. The fund may invest in structured credit products such as asset backed securities (‘ABS’) which pool together mortgages and other debts into single or multiple series credit products which are then passed on to investors, normally in return for interest payments based on the cash flows from the underlying assets. These securities have similar characteristics to corporate bonds but carry greater risk as the details of the underlying loans is unknown, although loans with similar terms are typically packaged together. The stability of returns from ABS are not only dependent on changes in interest-rates but also changes in the repayments of the underlying loans as a result of changes in economic conditions or the circumstances of the h older of the loan. These securities can therefore be more sensitive to economic events, may be subject to severe price movements and can be more difficult and/or more expensive to sell in difficult markets. The strategies utilised by the Fund involve the use of derivatives to facilitate certain investment management techniques including the establishment of both 'long' and 'synthetic short' positions and creation of market leverage for the purposes of increasing the economic exposure of a Fund beyond the value of its net assets. The use of derivatives in this manner may have the effect of increasing the overall risk profile of the Funds. Investors in this fund should understand that the Fund is not guaranteed to produce a positive return and as an absolute return product, performance may not move in line with general stock market trends as both positive and negative share movements affect the overall value of the fund. The Manager employs a risk management process to oversee and manage derivative exposure within the Fund. Investors in the BGF Asia Pacific Equity Income Fund, BGF European Equity Income Fund BGF Global Equity Income Fund and BGF World Resources Equity Income Fund should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed. The BGF Asia Pacific Equity Fund invests in economies and markets which may be less developed. Compared to more established economies, the value of investments may be subject to greater volatility due to increased uncertainty as to how these markets operate. The fund utilises derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk and volatility. The BGF Emerging Markets Fund and BGF Local Emerging Markets Short Duration Bond Fund invest in economies and markets which may be less developed. Compared to more established economies, the value of investments may be subject to greater volatility due to increased uncertainty as to how these markets operate. The fund typically invests in smaller company shares which can be more unpredictable and less liquid than those of larger company shares. The BGF Euro Short Duration Bond Fund and BGF Euro Bond Fund invest in fixed interest securities issued by companies which, compared to bonds issued or guaranteed by governments, are exposed to greater risk of default in the repayment of the capital provided to the company or interest payments due to the fund. The fund invests in fixed interest securities such as corporate or government bonds which pay a fixed or variable rate of interest (also known as the ‘coupon’) and behave similarly to a loan. These securities are therefore exposed to changes in interest rates which will affect the value of any securities held. The fund may invest in structured credit products such as asset backed securities (‘ABS’) which pool together mortgages and other debts into single or multiple series credit products which are then passed on to investors, normally in return for interest payments based on the cash flows from the underlying assets. These securities have similar characteristics to corporate bonds but carry greater risk as the details of the underlying loans is unknown, although loans with similar terms are typically packaged together. The stability of returns from ABS are not only dependent on changes in interest-rates but also changes in the repayments of the underlying loans as a result of changes in economic conditions or the circumstances of the holder of the loan. These securities can therefore be more sensitive to economic events, may be subject to severe price movements and can be more difficult and/or more expensive to sell in difficult markets. The BGF Local Emerging Markets Short Duration Bond Fund may make distributions from capital as well as income or pursue certain investment strategies in order to generate income. Whilst this might allow more income to be distributed, it may also have the effect of reducing capital and the potential for long-term capital growth. Certain developing countries are especially large debtors to commercial banks and foreign governments. Investment in debt obligations (sovereign debt) issued or guaranteed by developing governments or their agencies involve a high degree of risk. The BGF World Mining Fund and BGF World Resources Equity Income Fund typically invest in smaller company shares which can be more unpredictable and less liquid than those of larger company shares. The fund invests in a limited number of market sectors. Compared to investments which spread investment risk through investing in a variety of sectors, share price movements may have a greater affect on the overall value of this fund. The funds invests in economies and markets which may be less developed. Compared to more established economies, the value of investments may be subject to greater volatility due to increased uncertainty as to how these markets operate. The funds can invest in mining shares which typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities. The BGF World Resources Equity Income Fund may make distributions from capital as well as income or pursue certain investment strategies in order to generate income. Whilst this might allow more income to be distributed, it may also have the effect of reducing capital and the potential for long-term capital growth. The fund utilises derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk and volatility. The BGF European Focus Fund typically invests in a concentrated portfolio of investments and should a particular investment decline in value, this will have a pronounced effect on the overall value of the fund.

Issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Services Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Issued in Switzerland by the representative office, BlackRock Asset Management Switzerland Limited, Claridenstrasse 25, Postfach 2118 CH-8022 Zürich from where the Company's Prospectus, Simplified Prospectus, Articles of Association, Annual Report and Interim Report are available free of charge. Paying Agent in Switzerland is JPMorgan Chase Bank, National Association, Columbus, Zurich Branch Switzerland, Dreikönigstrasse 21, CH-8002 Zurich. Issued in Hong Kong by BlackRock (Hong Kong) Limited. BGF has been registered on the official list of the Financial Supervision Commission (Komisja Nadzoru Finansowego) for distribution in Poland. Issued in Poland by the representative office BlackRock Investment Management (UK) Limited Oddział w Polsce, Rondo ONZ 1, 00-124 Warszawa. Paying agent in Poland is Bank Handlowy w Warszawie SA, ul. Senatorska 16, 00-950 Warsaw, Poland. Issued in Singapore by BlackRock (Singapore) Limited. BlackRock Global Funds has appointed BlackRock (Singapore) Limited (company registration number: 200010143N) as its Singapore representative and agent for service of process (Website:www.blackrock.com.sg and Tel:+65 6411 3000). This is for distribution to Professional Intermediaries only.

For more information

Tel: +44 (0)20 7743 3300Email: [email protected]

1246

8BR

/Ri

ver

S36 20301 Client BlackRock Ins date 00/00Campaign Global Allocation Operator DEZ Page 1

Date 01.08.11 12:26 Title Concepts Trim 297x210mmProof 9 File S36 20301 BRK Global Alloc A4 Master TA/SA –Agency XXX 00 XX0000 Colour CMYK Spots - Bleed 3mm

Awards include the Lipper Mixed Asset USD Balanced - Global Award. 1st place over 3, 5 and 10 years as at March 2010. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. All fi nancial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. The Fund invests a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment. The Fund typically invests in smaller company shares which can be more unpredictable and less liquid than those of larger company shares. BlackRock Global Funds (BGF) is an open-ended investment company established in Luxembourg which is available for sale in certain jurisdictions only. BGF is not available for sale in the U.S. or to U.S. persons. It is recognised under Section 264 of the Financial Services and Markets Act 2000. BlackRock Investment Management (UK) Limited is the UK distributor of BGF. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. A limited range of BGF sub-funds have a reporting fund status A sterling share class that seeks to comply with UK Reporting Fund Status requirements. Subscriptions in BGF are valid only if made on the basis of the current Prospectus, the most recent fi nancial reports and the Simplifi ed Prospectus which are available from our website. Issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Services Authority). Registered offi ce: 33 King William Street, London, EC4R 9AS. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

When it comes to choosing a global

fund, you can demand the world.

Demand more from your investments. Go to blackrockinternational.com/globalallocation

BlackRock Global Funds – Global Allocation FundBlackRock’s award-winning Global Allocation Fund gives you access to the world

through a single fund. The fund is highly diversifi ed, with over 700 securities, and offers

outstanding fl exibility. Our fund managers can choose from asset classes from across

the world. And, because there are few limits on asset allocation, we can adapt quickly

to changing markets. All in all, this helps to give you the stability you need at the heart

of your investments.

PROFESSIONAL VERSION

BlackRock Strategic Solutions Q4 2011 International Edition

Documents

Transcript of BlackRock Strategic Solutions Q4 2011 International Edition