An asset allocation-based analysis is a common way advisors measure risk in client portfolios. But simplifying risk to the asset class level can create blind spots in decision-making — especially for investors who own individual stocks. In fact, there is often a wide dispersion of risk across different holdings within an asset class that can go unnoticed without reviewing individual security risks.
When only looking at asset allocation, advisors are not able to dissect each holding into its common drivers of performance such as market beta, industry tilts, style factors, interest rates, credit spreads and so on. These risk factors are what really explain the sources of risk in a portfolio. For clients who have concentrated stock positions — often 5%, 10% or more of the total portfolio — highlighting these company-specific risks through a bottoms-up analysis is critically important.
Let’s take Microsoft and Twitter for example. They are both large cap tech companies in the S&P 500. If we performed an analysis using U.S. large cap equities as the asset class — or even technology as a sector — they would be assigned the same level of risk. We know this is not an accurate picture and relying on it could lead to unintended consequences. A bottoms-up analysis of the individual securities provides transparency into the different risks that Microsoft and Twitter actually have.
Same asset class, different risk
Example for illustrative purposes. Source: BlackRock, Aladdin portfolio risk tools. Data as of 9/30/20. See important notes at end for additional information on the S&P 500.
As shown in the chart above, the annualized volatility of the S&P 500 over the past 10 years, which includes Microsoft and Twitter, is 15%. But if you look at the individual securities, you’ll see that Microsoft’s risk is actually 20% and Twitter’s is more than double that at 44%. This means Microsoft and Twitter have the potential to perform very differently within a portfolio — in fact we might expect them to perform differently — yet an asset class analysis alone would tell you they should act the same (15%), effectively ignoring this meaningful difference.
Food for thought
Protein is an important part of our diet. But you don’t ask for “protein” when you want chicken because you could end up with tofu, which changes the entire meal. An asset allocation analysis is like asking for protein — why not just ask for chicken? A bottoms-up analysis offers a more specific and accurate view of risk, which helps prepare the meal clients really want.
Technology makes deeper conversations possible
Wealth management firms and advisors have traditionally used asset allocation because it’s simple, and they haven’t had the means of analyzing risk more deeply at scale across their business. But the technology now exists to make these more meaningful conversations around risk possible. Seventy-five percent of advisors surveyed by BlackRock say that discussions about risk help clients understand their value, suggesting clients want to talk more about risk.*
The charts below show risk and return dispersion for a group of 60/40 portfolios with a bottoms-up view of risk. Over a 3-year period, this risk variation can drive very different return outcomes, which advisors would not be able to highlight with asset allocation-based analyses alone.
Different risks, different return outcomes
Example for illustrative purposes. Source: BlackRock, Aladdin. Data as of 9/30/20.
Advisors who use sophisticated technology to understand the underlying risks in specific portfolios can provide more transparency around potential outcomes and demonstrate more expertise in client engagements to help build trust and deepen relationships.
Aladdin Wealth is that technology…and more
Expectations for how advisors manage portfolios have evolved. When advisors turn on their workstations, the information they need for a deeper analysis is already there with Aladdin Wealth. They can now better understand the drivers of return and risk in their clients’ investments and do more to inform clients of the potential impacts on their portfolios. The portfolio and risk analysis technology available through Aladdin Wealth can help advisors have fewer blind spots when they serve their clients and supports the continued transformation of your wealth business.
© 2022 BlackRock, Inc. All rights reserved.
* BlackRock “Tech in Business” advisor survey, 2020. A total of 510 U.S. advisors with at least $25M in AUM participated in the survey.
This material is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change at any time without notice. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Performance and risk calculations, including those incorporated into Aladdin Wealth technology, are based on assumptions, historical correlations, and other factors (such as inputs provided by the Aladdin Wealth users) and are not assured to predict future results. All graphs and screenshots are for illustrative purposes only. BlackRock’s Aladdin Wealth platform is a financial technology platform designed for institutional, wholesale, qualified, and professional investor/client use only and is not intended for end investor use. Aladdin Wealth users undertake sole responsibility and liability for investment or other decisions related to the technology’s calculations and for compliance with applicable laws and regulations. The technology should not be viewed or construed by any Aladdin Wealth users, or their customers or clients, as providing investment advice or investment recommendations to any parties. This material should not be construed as a representation or guarantee that use of Aladdin Wealth technology will satisfy your legal or regulatory obligations. BlackRock, as provider of the technology, does not assume any responsibility or liability for your compliance with applicable regulations or laws. For additional information on any of the descriptions contained herein, please contact your Aladdin Wealth Relationship Management representative. BlackRock may modify or discontinue any functionality or service component described herein at any time without prior advance notice to you.
In the U.S. and Canada, this material is intended for public distribution. In the UK, this material is for professional clients (as defined by the Financial Conduct Authority or MiFID Rules) and qualified investors only and should not be relied upon by any other persons. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. In the EEA, this material is for professional clients, professional investors, qualified clients and qualified investors. For qualified investors in Switzerland: This information is marketing material. This material shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services (“FinSA”). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa. In Singapore, this advertisement or publication is intended for public distribution and has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is intended for public distribution. The technology and the material have not been reviewed by the Securities and Futures Commission of Hong Kong. In Japan, this is for Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In Brunei, Indonesia, Philippines and Malaysia, this material is issued for Institutional Investors only. In Latin America, for institutional investors and financial intermediaries only (not for public distribution). No securities regulator within Latin America has confirmed the accuracy of any information contained herein. Please note that IN MEXICO, the provision of investment management and investment advisory services (“Investment Services”) is a regulated activity, subject to strict rules, and performed under the supervision of the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, the “CNBV”). BlackRock does not provide, and it shall not be deemed that it provides through Aladdin Wealth technology, any personalized investment advice to the recipient of this document, by reason of its use or otherwise. These materials are shared for information purposes only, do not constitute investment advice, and are being shared in the understanding that the addressee is an Institutional or Qualified investor as defined under Mexican Securities (Ley del Mercado de Valores). Each potential investor shall make its own investment decision based on their own analysis of the available information. Please note that by receiving these materials, it shall be construed as a representation by the receiver that it is an Institutional or Qualified investor as defined under Mexican law. BlackRock México Operadora, S.A. de C.V., Sociedad Operadora de Fondos de Inversión (“BlackRock México Operadora”) is a Mexican subsidiary of BlackRock, Inc., authorized by the CNBV as a Mutual Fund Manager (Operadora de Fondos), and as such, authorized to manage Mexican mutual funds, ETFs and provide Investment Services. For more information on the Investment Services offered by BlackRock Mexico, please review our Investment Services Guide available in https://www.blackrock.com/mx.
©2022 BlackRock, Inc. All rights reserved. BLACKROCK and ALADDIN WEALTH are trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owner.