harnessing the full potential of alternative...

Edwin Conway, Managing Director Head of BlackRock U.S. and Canada Institutional Client Business

& Global Head of BlackRock Alternatives Specialists

Harnessing the Full Potential of Alternative Strategies

Topics

1. Market Context

2. The Next Frontier of Alternative Investing

Market context

Proprietary and Confidential - This material may not be distributed beyond its intended audience

Investors are increasingly challenged to meet their return needs

1. BlackRock Investment Institute, Barclays, Thomson Reuters (as of June 2014). The bars show market capitalization weights of assets with an average annual yield of over 4% in a select universe that represents about 70% of the Barclays Multiverse Bond Index. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future returns

2. Morgan Stanley Research, Dealogic, Haver, OECD, DMO, US Bureau of Public Debt, ECB, Fed, BoE, SIFMA, TREPP, January 2015

Equity investors are vulnerable to the business cycle

Index Max Draw-down Peak Trough Length

S&P 500 -53%

October 2007

February 2009 16 monthsMSCI World -55%

MSCI EM -63%

Equity valuations are above their historical averages

Global rates continue to be at historical lows1 Fixed income supply is dwindling across the globe2

0.01.02.03.04.05.06.0

2006 2008 2010 2012 2014US UK Germany Japan

(1,000)

-

1,000

2,000

3,000

4,000

1980 1985 1990 1995 2000 2005 2010 2015

USD

bill

ions

US Europe UK Japan Total

Percent

12

16

20

24

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Rolling Average MSCI Rolling Average S&P500MSCI World Mean S&P500 Mean

Rolling average P/E ratios for public equities

4


Diversification implies looking beyond traditional asset classes

Over time equities and fixed income exhibit low to moderate correlation

US Equities

Global Equities

EM Equities

Eur. Equities

Global Corp Credit

Global High Yield

T-Bills LIBOR

US Equities 1.00

Global Equities 0.97 1.00

EM Equities 0.77 0.86 1.00

Eur. Equities 0.83 0.86 0.71 1.00

Global Corp. Credit 0.22 0.30 0.34 0.17 1.00

Global High Yield 0.67 0.74 0.76 0.59 0.60 1.00

T-Bills -0.13 -0.13 -0.09 -0.08 -0.03 -0.13 1.00

LIBOR -0.16 -0.15 -0.08 -0.09 -0.01 -0.15 0.95 1.00

Sources: BlackRock (as of Jan 2015). Notes: Correlation calculated from monthly returns from January 2000 through December 2015. Indices referenced include S&P 500 (US equities), MSCI World Index (Global Equities), MSCI Emerging Markets Index (EM equities), Euro STOXX 50 (European equities), Barclays Global Aggregate Corporate Total Return Index Value Hedged USD (global corporate credit), Barclays Global High Yield Total Return Index Value Hedged USD (global high yield), BofA ML 3 Month Treasury Index (t bills) and US Cash Indices LIBOR Total Return 3 Month (LIBOR).

but those correlations are not stable and spike during periods of economic stress

r = 0.5

r = -0.6

r = 0.7

-1

-0.5

0

0.5

1

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Rolling 12-Month Correlation: Global Equities & Global CorporatesHigh correlation (0.75 < r < 1.00)

Moderate correlation (0.50 < r < 0.75)

Low correlation (0.00 < r < 0.50)

Negatively correlated (-0.25 < r < 0)

r = correlation

5


Source: BLK SPM, from Towers Watson survey, client interviews, BLK team materials, Deutsche Bank survey, CitiBank, Pyramis Survey. For illustrative purposes only. It serves as a general summary, is not exhaustive and should not be construed as investment advice.

Alternative investments can help achieve various outcomes

Desired Outcomes

Asset Characteristic

Absolute Return /

Hedge Funds Private Equity

Illiquid & Opportunistic

Credit

Real Estate(private equity

& debt)

Infrastructure(private equity

& debt)

Income Stable cash flows

Growth High target returns

Inflation Protection

Inflation-linked cash flows

Diversification Low correlation

Reduce vol / tail risk Low volatility

6


Considerations for implementing an Alternative investments portfolio The challenges facing alternative investment managers are real, but the current landscape presents opportunities to deliver alpha to clients

Proven record of performance in various market environments

Alignment, transparency, and implementation within risk parameters

A solutions approach that can deliver the client's desired outcome

Harder to add uncorrelated alpha

Higher and rising operating cost

Greater regulation / capital requirements

Increased demand for institutional quality

products

Managers need investment knowledge, market insights, and trading relationships to source investments and add alpha

Manager / client interests can be at odds as the client seeks to add alpha and the manager seeks asset scale to cover its operating costs

New regulations challenged traditional capital suppliers (banks), stimulating investment from large pools of money (asset managers)

Alternatives are being used for portfolio construction and across a broader client base, including pensions and sovereign wealth funds

Requirements for success given these challenges and opportunities

1

2

3

7

The next frontier of alternative investing

1. Real Assets


Investors are reportedly increasing allocations to real assets% of total survey respondents invested in real assets by sector1

51%

7%

34%

71%

1%

25%

48%

6%

34%

No Change

Decrease the number of employees dedicated to realassets

Increase the number of employees dedicated to realassets

EMEA

Americas

APAC

1 Please indicate the approximate proportion of your companys total portfolio that is allocated to each of the following real asset types : Real Estate Debt; Private Real Estate Equity; Public Real Estate Securities; Infrastructure Debt; Infrastructure Equity; Commodities (energy/oil, metals, agricultural); Timber; Farmland. (Enter percentage allocation. Totals should not add up to 100%). Information derived from participants self-reported investment characteristics (including current organizations investment and portfolio description) and responses to survey questions. 2 Q5a, Q12a, Q18a:How has your companys allocation to real asset investments changed (relative to its current allocation) over the past three years, and do you expect it to change over the next 18 months? Participants indicated their re-allocation plans by selecting: Substantial decrease (10%+) Moderate decrease, No significant change, Moderate increase, Substantial increase (10%+)3 Q3b Which of the following best describes the most likely changes in your companys organizational structure for investing in real assets over the next 18 months? ( Participants answered by indicating Increase, decrease, no change, will have no employees dedicated to real assets)

Organizational structure changes to incorporate real assets into portfolios3

Planning to increase allocations in all sectors2

29%

66%

96%

Commodities

Infrastructure

Real Estate

10


Key drivers for investing in real assets

Key drivers for investing in real assets relate to current market conditions

22%

19%

11%

22%

37%

70%

52%

29%

23%

22%

31%

43%

49%

55%

17%

23%

24%

24%

38%

63%

63%

Cyclical adjustment

Inflation protection

Portfolio rebalancing

Diversify overall portfolio

Address long-duration liabilities

Replace or enhance currentincome

Increase return

Macro environmentconsiderations

Real Estate Infrastructure CommoditiesQ6/Q13/Q19: You indicated that your company expects to increase its [real estate / infrastructure / commodities] investment allocation. Please indicate the most important factors motivating this change (Participants answered by selecting up to three of the options listed above). Cyclical adjustment was only asked for Q19.

11


The benefits of investing in infrastructure

Infrastructure can provide solutions that investors seek in their portfolios Structure of asset class creates consistent returns and enables long-term investors to tailor allocations to achieve desired outcomes Emerging opportunity for investors to get access to a less traditional asset class Uncorrelated risk/return targets optimize a clients portfolio

1. Private Infra Debt is private infrastructure debt transactions rated BBB or BBB- (Private Infra Debt spread data obtained via Bloomberg, Dealogic, InfraNews, and Market Participants); Public Corp Index is Barclays 1% Cap Corporate index customized for BBB/BBB- rating and average life of private infrastructure debt transactions; Public Corp (Infra) Index is Barclays 1% Cap Corporate index that includes corporate issuers in Utilities, Transportation and Energy sectors having maturities between 9 and 20 years and includes only BBB/BBB- issues. Data as of December 2014

2. Moodys Default and Recovery Rates for Project Finance Bank Loans 1983-2011 Addendum 3. Moodys Annual Default Study: Corporate Default and Recovery Rates, 1920-2011; Corporate default rates based on 19832011 and recovery rates based on 1987-2011 4. Based on Moodys definition of Broad Infrastructure, including social and transport assets as well as transmission and distribution financings. Data shown is not an indication of future projections. Past performance is not indicative of

future returns.

What can infrastructure provide?

Income Stable income aligned with clients focus on long-term liabilities

Growth Increased opportunities for institutional capital deployment as traditional lenders are constrained by the new regulatory environment

Diversification Low correlation with traditional asset classes improving risk/return profile

Lower defaults and higher recovery rates1,2,3,4

0%

20%

40%

60%

80%

100%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

4.8%

BroadInfrastructure

(OECD)

Baa CorporateBonds

BroadInfrastructure

(OECD)

Senior SecuredBonds

Recovery rate

Def

ault

rate

12


Global real estate universe is large and growing

At $12.9 trillion, global real estate represents ~8% of global investment universe1. DTZ Research; four quadrants represent capitalization of underlying invested real estate market; as of June 2014. "Invested" = investment-grade commercial real estate held by different investor groups; defined as total value of CRE debt outstanding

plus total value of equity in CRE holdings.2. DTZ Research, forecast by BlackRock. Forecast based on BCGs Global Wealth Survey 2014 (5.5% CAGR of global wealth) and real estate allocations going from 8.2% to 10%. Global wealth includes cash and deposits, money market funds, and

listed securities held either directly or indirectly through managed investments or life and pension assets, and other onshore and offshore assets. It excludes investors own businesses, any real estate, and luxury goods. Global wealth reflects total financial assets across all households. Unless stated otherwise, wealth figures and percentage changes are based on local totals that were converted to U.S. dollars using year-end 2013 exchange rates for all years in order to exclude the effect of fluctuating exchange rates.

13

0% 5% 10% 15%

Global REITs

US Core RE

US RE Debt

US CMBS*

Global Equities

Global Bonds

Treasuries

Inflation

Total Return

5-Yr

10-Yr

20-Yr

Real estate returns have historically been attractive1

Americas EMEA APAC

Equity Debt

Priv

ate

Publ

ic $1.0 tn

$4.6 tn $5.8 tn

$1.5 tn

REITs and other publicly traded vehicles

Direct private real estate investments (equity)

Commercial mortgage backed securities and other similar

vehicles

Whole loan mortgages and high-yield/ mezz debt

$12.9 trillion invested in global real estate market 1


6.5%

6.6%

6.7%

6.8%

6.9%

7.0%

8.5% 9.5% 10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5% 17.5%

Tota

l ret

urn

Standard deviation

EquityFixed IncomeUS Private EQ REGlobal Private EQ RE Ex US

Hypothetical Portfolio

Global real estate portfolios benefit from powerful diversification effect

Favorable risk-adjusted returns for global portfolio

+7.5% US RE

+7.5% Global Ex US RE

Traditional 60% EQ / 40% FI

Source: BlackRock, NCREIF, IPD, Barclays, MSCI, Standard & Poors; based on historical total returns in US$, 1993-2013; IPD Global Ex US is capital value-weighted average of IPD country returns; as of December 31, 2013Past performance is not indicative of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index

14

Stable income returns

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Tota

l Ret

urn

Income return Appreciation Return

Chart1

0.4

0.6

Sales

Sheet1

Sales

Fixed Income0.4

Equity0.6

To resize chart data range, drag lower right corner of range.

Chart1

0.36

0.54

0.1

Sales

Sheet1

Sales

Fixed Income0.36

Equity0.54

US Real Estate0.1


Chart1

0.32

0.48

0.1

0.1

Sales

Sheet1

Sales

Fixed Income0.32

Equity0.48

US RE0.1

Global RE Ex US0.1


2. Systematic Investing


Factor-based investment strategies

Factor-based strategies target broad, persistent drivers of return, taking advantage of economic insights, diversification, and efficient execution opportunities that may lead to improved investor outcomes

Looks beyond traditional asset class labels to directly target true economic drivers of returns

Common framework provides more accurate and intuitive risk management

Greater diversification and a higher probability of achieving investment goals

Factor-based investing is more than investing in factors: at its best, it is a powerful and empowering management philosophy

Simple: Translates the complex to the intuitive

Unifying: Provides a common language and culture, enabling consistent management of assets, liabilities and the enterprise

Flexible: Allows for more flexibility in asset allocation and manager selection decisions

There has been a radical increase in the amount of information available for investment decision making in recent decades. We believe active managers need to evolve investment processes to capture alpha in todays market

Must advance infrastructure, people and technology

16


17%

10%5%

11%

11%

24%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-6%

-3%

0%

3%

6%

9%

12%

15%

Rates

Diversification

Total Risk: 7.7%

Asset based views of portfolios obscure underlying drivers of risk In the sample portfolio below, the portfolio appears well diversified across many asset classes, with only 32% invested in

global equities Examining risk along factor dimensions reveals that economic risk dominates, contributing 70% of portfolio risk

Factor investing looks through asset class labels

Capital Allocation by Asset Class

Equity: 32%

Factor Allocation

Economic Growth: ~70%

For illustrative purposes only. Calculations performed using the BlackRock Solutions risk model and exposures as of April 30, 2015; Monthly Constant Weighted (MTC model) with 102 monthly observations; Macro Factor scheme.

Credit

FX

US Equity

Intl Equity

EM Equity

High Yield

EM Bonds

Long Treasuries

Cash

17


Finding alpha is increasingly challenging in todays market environment

Image by The Centre for Learning and Teaching, Vocational Training Council (Hong Kong)

18

90% of the data in the world today has been created in the last 2 years IBM 2015


Employee sentiment can be measured from anonymous social media postings Employees view on culture, management, opportunities Positive employee sentiment leads to higher productivity Happy employees are more productive employees!

New ways to answer old questions: Management Quality

Business

Customers Employees

The Virtuous Cycle of Positive Sentiment

Source: BlackRock and Glassdoor.com, illustrative purposes only

19

3. Custom / Opportunistic Solutions


Case Study: Canadian Pension Plan

Direct Opportunistic Portfolio Pursuing a range of opportunistic strategies

Sizable allocation committed over 36 month drawdown period

Range of alternative investments targeting IRRs from 8% to 18%

Broad and flexible scope of mandate

Seeking a concentrated portfolio with position sizes in the 5% 10% range

2 to 5 year weighted average life

No asset class or strategy exclusions aside from two specific exceptions

Large Canadian pension plan

Alternatives strategy: Goal to capture returns through various liquid and illiquid investment strategies

Key strengths: Talented investment professionals, deep relationships with market participants and robust understanding of capital markets and investment fundamentals

Client Profile

Client Need Source and capitalize on direct opportunistic investments that cant be sourced independently

Seek partner with point of access to many market participants

Find diversifier to existing, primarily liquid strategies: investments that are complementary to existing mandates

For illustrative purposes only. There is no guarantee that every solution managed will achieve the same level of diversification as shown above. Each solutions allocation strategies and targets depend on a variety of factors, including prevailing market conditions and investment availability. There is no guarantee that they will be achieved and any particular investment may not meet the target criteria.

21

SolutionKnowledge Sharing

Highly collaborative, interactive partnership

BlackRock provides extensive information on existing and potential investment opportunities throughout life of fund

Investment ideas supported by robust portfolio risk analytics

Transparency Comprehensive reporting and portfolio analysis

Robust new investment reports paired with client veto right to ensure alignment of interests

4. Hedge Fund Solutions


4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%

Hedge funds provide diversification benefits to traditional portfolios

Source: eVestment: Equity: S&P 500 Index; Fixed Income: Barclays Global Aggregate; Hedge Funds: Q-BLK Appreciation Composite (QAC (net)). Data is for time period: Aug 1995 Jun 2015. Indices have no fees, are unmanaged, and are used for illustrative purposes only. Indices are not intended to be indicative of any funds performance. It is not possible to invest directly in an index. Past performance is not an indication of future results. The definitions and disclosures appearing at the end of this document are an integral part of this presentation and should be read in their entirety for a complete understanding of the information contained herein.

Improving risk-adjusted returns, Aug 1995 Jun 2015

Hedge funds can exhibit strong risk-adjusted returns, with low beta to traditional asset classes

Return Standard Deviation Sharpe Ratio Portfolio

100% Hedge Funds 8.33% 4.80% 1.18

Traditional + HF:20% Hedge Funds

45% Equity35% Fixed Income

7.59% 7.88% 0.63

Traditional: 60% Equity

40% Fixed Income7.48% 9.68% 0.50

100% Equity 8.77% 15.20% 0.40 100%

60%40%

35%

20%45%

100%

Fixed IncomeHedge funds Equity

Standard deviation (%)

Ann

ualiz

ed re

turn

(%)

23


Hedge funds are complementary to traditional portfolios

Optimal hedge fund portfolios seek to emphasize idiosyncratic (e.g., security-specific) sources of return while minimizing broad market risks

Approach

Idiosyncratic (e.g. deal-specific)Approval of M&A deal, plan of reorganization, model risks

Emphasize idiosyncratic returnsAffects specific positions, can have

significant impact on a portfolio

Sector/styleEquity volatility, liquidity, corporate basis, sovereign risks, industries, market capitalization

Diversify sector/style risks Affects specific strategies in

various magnitudes

MarketEquity market movement,interest rates, foreign currency,commodity prices

Mitigate market risksBroad overarching market

risks, which a hedge fund seeks to mitigateTraditional Portfolios

Hedge Fund Portfolios

Beta

Alph

a

Sources of return

24


Case study: custom emerging manager fund

Investor Background:

A large Canadian public pension fund

Existing hedge fund investments were all direct investments

BlackRock was engaged to discuss its experience investing in early stage hedge funds

Prospect was interviewing hedge fund manager seeding platforms to supplement their growing direct platform

Sought a partner with expertise investing in emerging hedge fund managers and strategies

Observations & Analysis:

Preferred a highly interactive partnership that included information exchange, education and active dialogue

BlackRock sought to design a solution tailored to the clients specific investment goals while leveraging its long emerging manager investment experience

Custom Solution:

The custom fund invests in less than 10 Emerging Managers (i.e., funds with less than six months of performance history or less than $1 billion in capital)

A drawdown structure to opportunistically add managers over a set period

BlackRock offered a comprehensive reporting package aggregating risks at the underlying manager level and fund of hedge funds level

Ongoing education and information sharing is a significant aspect of the relationship

This example is shown for illustrative purposes only and there is no guarantee that every solution managed by BlackRock will achieve the same level of diversification as shown above. Each solutions allocation strategies and targets depend upon a variety of factors, including prevailing market conditions and investment availability. There is no guarantee that they will be achieved and any particular investment may not meet the target criteria.

25


DisclaimerThis material is intended for accredited investors in Canada only. The information and opinions herein are provided for informational purposes only, are subject to change and should not be relied upon as the basis for your investment decisions. Past performance is not necessarily indicative of future performance. This document is not and should not be construed as a solicitation or offering of units of any fund or other security in any jurisdiction. No part of this material may be reproduced in any manner without the prior written permission of BlackRock Asset Management Canada Limited.

2015 BlackRock Asset Management Canada Limited. All rights reserved. BLACKROCK is a registered trademark of BlackRock Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

Slide Number 1TopicsMarket context Investors are increasingly challenged to meet their return needs Diversification implies looking beyond traditional asset classes Alternative investments can help achieve various outcomesConsiderations for implementing an Alternative investments portfolio The next frontier of alternative investing1. Real AssetsInvestors are reportedly increasing allocations to real assetsKey drivers for investing in real assetsThe benefits of investing in infrastructureSlide Number 13Slide Number 142. Systematic InvestingFactor-based investment strategiesFactor investing looks through asset class labelsFinding alpha is increasingly challenging in todays market environmentNew ways to answer old questions: Management Quality3. Custom / Opportunistic SolutionsCase Study: Canadian Pension Plan4. Hedge Fund SolutionsHedge funds provide diversification benefits to traditional portfoliosHedge funds are complementary to traditional portfolios Case study: custom emerging manager fundDisclaimerSlide Number 27

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