BlackRock's Rieder Learned Value of Moderation From 1980s Bond Blowup

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    BlackRock's Rieder Learned Value of Moderation From 1980s Bond Blowup

    BlackRock BLK 2.13% bond chief Rick Rieder learned long ago that making big bets is the easiest way to end up with outsize losses.

    The head of fixed income at the world’s largest asset manager says he is distributing his wagers broadly in the face of unprecedented times. He doesn’t expect the pandemic recovery and fiscal stimulus to spur a wave of inflation that ends the long bull market in bonds, but he is also hedging those wagers after learning early in his career that being right isn’t the same thing as making money.

    Recently, that has meant trimming assets sensitive to inflation and interest-rate swings, building up cash in his portfolios and buying more corporate loans for their higher returns. To the clients calling to ask whether the economy is overheating, he says price increases are likely temporary, but that the Federal Reserve will have to gradually reduce support for the economy—a prospect he doesn’t find daunting.

    “We don’t think inflation is going to be that high for a persistent period of time,” says Mr. Rieder, 59 years old. “But if the markets believe in inflation, well that’s more important than whether six months from now people say, ‘Gosh, you were right.’”

    His stance is a key marker on Wall Street, and it stands out at a time when broad inflation worries have racked markets. BlackRock handles $9 trillion in assets on behalf of investors around the globe. Mr. Rieder oversees roughly 20% of that. That alone would give his decisions reach far beyond the company. He is also known as a wizard at divining market forces from the swings of currencies or sovereign bonds.

    Many on the Street disagree with his sanguinity. Investors including Bridgewater Associates founder Ray Dalio and billionaire trader Stanley Druckenmiller are among those worried that the government’s post-pandemic largess risks fueling inflation, hurting the dollar and inflating asset bubbles. A measure of inflation surged in April as the U.S. recovery gained steam, with consumer prices jumping to the highest 12-month level since 2008.

    Mr. Rieder’s position is supported by benchmark bond yields, which continue to suggest a rapid return to slow, steady growth. The yield on the 10-year Treasury note, which tends to rise when investors expect a surge in growth and inflation, settled at its highest level in more than a month after data Wednesday showed a bigger-than-expected climb in consumer prices. It remains below its yearly high of 1.749% hit at the end of March.

    Mr. Rieder, who works remotely, is boosting the cash in his portfolios and buying more corporate loans for their higher returns.

    Wall Street colleagues and competitors describe Mr. Rieder as the opposite of a swashbuckling trader: affable, modest, measured—a 10-handicap golfer whose favorite course is Augusta National. In an era of slow growth, heavy borrowing and perpetually low interest rates, his focus on the crosscurrents of markets and economics commands attention from many.

    “There isn’t an investor out there who doesn’t want to know what he’s thinking,” says Marc Badrichani, global head of sales and research at JPMorgan Chase & Co. “With an expansive view of global markets, he has a unique ability to spot emerging trends and incorporate them into long-term investment strategies.”

    Raised in Westchester County in New York and educated at Emory University and the University of Pennsylvania’s Wharton School, Mr. Rieder says he enjoyed picking penny stocks when he was younger, such as shares of AMF Bowling Worldwide Inc., and thought he might become a financial analyst. After business school, he joined E.F. Hutton & Co. in 1987 without knowing much about bonds. Brokers shouted and flashed hand signals. The trading floor was jammed with bulky computers, but he says he relied on blotters, pen and paper.

    “I’ll never forget the first month, sitting there and thinking maybe this is the wrong job,” Mr. Rieder says. “I couldn’t figure out what they were talking about. It was all lingo. I’d go home, and then a week later I’d realized I heard that word again.”

    An early trade provided a lifelong lesson. Mr. Rieder bought a chunk of Canadian bonds issued by a utility company, Hydro-Québec. He still remembers the coupon and maturity—details on a bond that affect its value.

    He would stay after work to write down the price of every asset that could move his investment. Certain in his analysis, he bought even more. But word of his position got out to traders at other banks. The price moved against him, and he eventually sold at a significant loss. Ever since, he has avoided putting too many eggs in one basket, a strategy he calls “make a little bit of money a lot of times.”

    “It changed my thinking and really influenced how I thought about fixed income,” Mr. Rieder says. “I learned that you may be right, but if enough people believe you’re wrong the markets can really hurt you.”

    Mr. Rieder says he prefers to ‘make a little bit of money a lot of times,’ rather than become too reliant on one trading area.

    It is a strategy that served him well during his climb at BlackRock. He joined the firm in 2009 to run alternative investments for fixed income and became known for his deep dives into data and a habit of cramming multiple, tiny charts into presentation slides. His performance—three of the funds he manages have been awarded gold medals by rating company Morningstar—eventually earned him a promotion to chief investment officer of fixed income in 2010.

    In April 2019 he took over BlackRock’s Global Allocation Fund, which includes investments in stocks. Institutional-class shares have since posted a cumulative return of 35% through March 31, outperforming benchmarks and other comparable funds. More than 85% of BlackRock’s actively managed taxable fixed-income assets beat peers or benchmarks over the one- and five-year periods ended March 31.

    Morningstar analyst Claire Butz says the ratings company upgraded the Global Allocation Fund in May because of Mr. Rieder’s leadership and ability to combine big-picture views with extensive research. She says his takeover was “a welcome change from the previous manager’s more siloed approach.”

    BlackRock has also ascended. Quarterly profit rose 49% in April. The firm posted record inflows, with $61 billion pouring in to fixed-income investments in the first quarter of 2021. Across all strategies, BlackRock took in $171.6 billion in net new money, up from roughly $35 billion in the year-earlier quarter.

    That size makes BlackRock a prized client for bond desks across Wall Street, with dedicated top-ranked salespeople squabbling over the revenue generated from its trades. It also poses a challenge for Mr. Rieder’s strategy—making it hard to invest in smaller markets without moving prices.

    The inflows also indicate that investors remain willing to buy bonds and other fixed-income investments, despite the worries about inflation or a sudden reversal from the Fed.

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    Mr. Rieder expects growth to surge and the dollar to remain stronger than many analysts and investors currently predict. Inflation could be “shocked higher over the next few months,” Mr. Rieder says, but he expects it to remain contained in the long term by trends that include an aging population.

    “We are living in a very different time than the 1970s and 1980s because of the demographics,” he says. “As the baby-boomer population ages, individuals have to buy fixed income for pensions, retirement investments—and soak up this huge amount of debt that’s coming, meaning it’s not as scary today.”

    Still, he has adjusted his holdings for potential inflation risks. He has pared positions in junk bonds, citing their extremely low yields. He is also holding a lot of cash in portfolios, increasing his investments in loans and buying long-dated corporate bonds with derivatives that offer protection from interest-rate swings. He is holding some euros, too.

    The possible end of easy monetary policy doesn’t worry Mr. Rieder, who has lived through previous Fed tapering that didn’t deal a lasting blow to stocks and other assets.

    “Letting rates normalize, knowing what that plan is—markets can deal with that, they just don’t like uncertainty,” he says. “It’s really hard setting your portfolio up when you’re not certain how that plan will evolve.”

    Mr. Rieder has trimmed positions in junk bonds, citing their extremely low yields.

    Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com

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    Published at Sun, 16 May 2021 14:00:00 +0000

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