BlackRock eases off the risk pedal across $131B model portfolios

The world’s biggest asset manager is taking some chips off the table as markets enter a “new phase” of turbulence ahead of a Federal Reserve interest rate cutting cycle and the US presidential election.

While the backdrop is still bullish, BlackRock Inc. is reducing its tilt to US equities and growth-oriented shares in favor of value stocks and fixed-income, according to an investment outlook viewed by Bloomberg. As a result, billions of dollars flowed between corresponding BlackRock exchange-traded funds on Thursday as the firm adjusted its model portfolios, a person familiar with the matter said.

“While earnings continue to power forward, the level of surprises and estimate revisions suggest a potential moderation of the earnings-fueled advantages of the last 18 months,” Michael Gates, lead portfolio manager for BlackRock’s Target Allocation ETF model portfolio suite wrote. “We are transitioning from a period marked by relatively clear and stable factors into a new phase, which includes an easing Fed and potential seasonal and election-related volatility.”

BlackRock’s reshuffling comes at a critical juncture for risk assets. Equity benchmarks have shuddered in recent weeks amid an earnings season that saw investors question the artificial intelligence-fueled rally that has propelled megacap technology stocks to nosebleed heights. Meanwhile, the Fed is on the precipice of an easing cycle, just two months ahead of the US presidential election where polls show that both candidates are locked in a dead heat. 

Against that backdrop, BlackRock appears to be taking profits after leaning into growth stocks earlier this year. While BlackRock’s model makers still favor holding more stocks than bonds, the latest adjustment reduced the size of that overweight to 1% versus 4%. 

On the equities side, roughly $2.7 billion flooded into the $18 billion iShares MSCI EAFE Value ETF (ticker EFV) Thursday — the largest one-day sum since the fund’s 2005 inception. A record $1 billion exited from the $5.6 billion iShares Currency Hedged MSCI EAFE ETF (HEFA), while the $50 billion iShares S&P 500 Growth ETF (IVW) lost about $771 million. 

Meanwhile, in the fixed-income space, the $33 billion iShares Core Total USD Bond Market ETF (IUSB) took in a record $2.3 billion. Rick Rieder’s $5 billion BlackRock Flexible Income ETF (BINC) absorbed almost $1 billion in its heftiest single-day inflow yet.

Model portfolios — which package together funds into ready-made strategies to sell to advisers — have ballooned in size in recent years. Broadridge Financial Solutions estimates that model assets likely reached $5.1 trillion at the end of 2023, and could reach $11 trillion by 2028. BlackRock alone commands about $131 billion in model assets.