Blackrock Report 2015

7/25/2019 Blackrock Report 2015

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APRIL 2015

INNOCENTS ABROAD:The Case for International Diversification

M A R K E T

PERSPECTIVES


2/12

EXECUTIVESUMMARY

RUSS KOESTERICHManaging Director,

BlackRock ChiefInvestment Strategist

Over the past six years, U.S. investors have been rewarded for staying close to

home. U.S. equities have entered the seventh year of the bull market, one of the

longest in history, and bond yields have remained contained thanks to massive

central bank intervention, restrained growth and low inflation. A traditional

60/40 blend of U.S. stocks and bonds has performed well relative to most other

asset allocations.

However, with bond yields still near record lows and U.S. equity valuations

stretched, this may not be the case going forward. Three arguments support the

need for more international diversification, particularly in equities:

Relative valuations. U.S. equities trade at a significant premium to the rest of

the world. Longer term metrics, such as cyclically adjusted P/E ratios, suggest

that U.S. stocks are likely to produce, at best, average to below-average returns

over the next five years. In contrast, valuations are considerably lower in

international markets, including developing countries.

U.S. declining share of world GDP. While the United States is still arguably the

worlds most dynamic economy, its relative share of the global economy is

shrinking. Depending on the exact methodology, China is now the worlds

largest economy or soon will be. Owning a predominately U.S. portfolio

underweights the dominant and fastest-growing portion of the global economy.

The basic tenets of portfolio construction. Finally, best practices in portfolio

construction suggest that owning a portfolio solely focused on the United

States may lead to suboptimal risk-adjusted returns. In other words, investors

may be taking on risk that could otherwise be diversified away. This is aparticularly important point today as stock correlations have fallen to their

pre-crisis level, suggesting a greater benefit to diversification.

[2 ] INNOCENTS ABROAD: THE CASE FOR INTERNATIONAL DIVERSIFICATION


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Simplicity and sexiness, thats what people want.

Diane von Furstenberg

While few would consider anyportfolio to be sexy, the appeal

of simplicity applies as much to investing as to any other

endeavor. Investors have gotten themselves in trouble on

more than one occasion embracing questionable, overly

complicated financial products. In the spirit of greater

simplicity, some would argue that a basic 60/40 mix of

domestic stocks and bonds should suffice for most investors.

Market returns in recent years would support this approach.

Since the start of the bull market in March 2009, a 60/40

split of U.S. stocks and bonds would have been hard to beat.

Over this time period, the S&P 500 has gained approximately

200%. Adding to the returns, not only have equities done

phenomenally well but bonds have been surprisingly resilient.

Despite the improvement in the domestic economy, U.S.

10-year Treasury yields are actually below where they were at

FIGURE 1: ASSET PERFORMANCE YEAR-TO-DATE

Performance in calendar year-to-date percent*

* Total return in local currency except currencies, gold and copper which are spot returns.

Government bonds are 10-year benchmark issues

Source: Thomson Reuters Datastream, BlackRock Investment Institute, 04/13/15.

the lows in 2008; collapsing credit spreads have meant a rally

in corporate bonds as well. Given the success of this

approach, why change?

For starters, the recent pullback in U.S. equities coupled

with particularly strong performance from Europe and

Japan means that a big U.S. equity overweight has been less

successful year-to-date. For the first time in several years,

U.S. stocks are lagging and investors are shifting money, at

least temporarily, out of U.S. equities and into international

markets (see Figure 1). A combination of factors are driving

this shift away from the United States: lower valuations

outside of the United States, more accomodative monetarypolicy in Europe and Japan, improving economic performance

in Europe and the headwind of a strong dollar on U.S.

earnings growth. While three months of good relative

performance should not change anyones long-term asset

allocation, recent events are a useful reminder that U.S.

outperformance is not preordained.

China Shanghai A

MSCI Europe Equities

Japan Topix

MSCI Asia ex Japan

Dollar Index

MSCI EM U.S.

U.K. FTSE 100

Italian BTP

MSCI Emerging Markets Latin America

Nasdaq Composite

MSCI Developed Equities

JPM EMBI Emerging Debt

German Bund

Brent Crude Oil

U.S. 10-year Treasury

S&P 500

ML Global High Yield

Gold

Yen

ML Global Investment Grade

CRB Commodities Index

Copper

GSCI Soft Commodities

27.41

16.19

13.62

13.04

10.22

9.37

8.84

6.05

5.81

5.33

4.38

4.14

4.10

3.06

2.62

2.21

1.35

1.24-0.37

-1.49

-5.71

-5.76

-7.58

[ 3 ]BLACKROCK


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stretched relative to the rest of the world. This is particularly

true based on the price-to-book (P/B) measure. Currently, the

P/B on the S&P 500 Index is roughly 75% higher than for the

MSCI ACWI-ex U.S. Index. This is the highest premium since

the market bottom in 2003.

Higher U.S. valuations are also evident when comparing

an aggregate of U.S. value metrics against those of othercountries (see Figure 2). The average U.S. value metric is in

the 75th percentile versus its own history. Most of Europe,

ex-Germany, is closer to the 50th percentile, Japan the 40th,

while emerging markets are even cheaper.

Longer term valuation metrics, most notably the cyclically

adjusted price-to-earnings or CAPE ratio, are even more

troubling. As we discussed in our February Market

Perspectives, Highway to the Danger Zone, the CAPE on

U.S. equities is approximately 27, versus a historical average

of roughly 16. The current reading is well into the upper

quintile of historical observations. This should worry long-

term investors. Historically, similar levels have been

associated with below-average returns over the subsequent

five years. By comparison, CAPE ratios are much lower in

other developed markets.

THE MOST EXPENSIVE HOUSE ONTHE BLOCK

Over the past five years, one of the most repeated refrains

used to defend a strong U.S. equity bias was that the United

States was the best house on a bad block. In retrospect,

this was completely true. The U.S. economy outgrew the rest

of the developed world and still enjoyed the massive tailwindof unconventional monetary stimulus. The United States has

also been less prone to deflation than Europe or Japan.

Finally, relative to the rest of the worldabsent a government

shutdown or twothe United States has enjoyed a period of

relative political stability, although some might better describe

it as stasis. At the very least, nobody was worried about the

demise of the dollar.

A willingness to pay up for U.S. equities has resulted in

several years of steady multiple expansion. As a result, U.S.

large-cap stocks now trade at nearly 19x trailing earnings,

roughly a 15% premium to the 60-year average. Even looking

at the more recent past, the trailing P/E ratio for U.S. large

caps is roughly a third higher than it was three years ago.

While the current premium on U.S. stocks makes some sense

in the context of low inflation and low rates, valuations look

Source: Thomson Reuters Datastream, OECDBlackRock Investment Institute 02/01/15

FIGURE 2: HISTORICAL NORM

Current Valuation vs. One Year Ago

2014

PERCENTILERANKING

GermanBund

U.K.

Gilt

JapaneseGB

U.S.

Treasury

U.S.

TIPS

EuroHighYield

U.S.

HighYield

EuroCredit

U.K.non-Gilts

U.S.

Credit

EM$

Debt

Developed

U.S.

Germany

Canada

France

Australia

Spain

Italy

U.K.

Japan

Emerging

SouthAfrica

India

Mexico

Taiwan

Brazil

Korea

China

Russia

Developed

Emerging

Frontier

Asiaex-Japan

Europeex-U.K.

Asia

Europe

LatinAmerica

FIXED INCOME EQUITIES

EXPENSIVE

AVERAGE

CHEAP

0

25

75

50

100

Sources: BlackRock Investment Institute and Thomson Reuters. Data as of 03/31/15.Notes: Percentile ranks show valuations of assets versus their historical ranges. Example: If an asset is in the 75th percentile, this means it trades at a valuation equal to or greater than 75%

of its history. Valuation percentiles are based on an aggregation of standard valuation measures versus their long-term history. Government bonds are 10-year benchmark issues. Credit seriesare based on Barclays indexes and the spread over government bonds. Treasury Inflation-Protected Securities (TIPS) are represented by nominal U.S. 10-year Treasuries minus inflationexpectations. Equity valuations are based on MSCI indexes and are an average of percentile ranks versus available history of earnings yield, trend real earnings, dividend yield, price-to-book,price-to-cash flow and 12-month forward earnings yield. Historical ranges extend back anywhere from 1969 (developed equities) to 2004 (EM $ debt).

[ 4 ] INNOCENTS ABROAD: THE CASE FOR INTERNATIONAL DIVERSIFICATION


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THE CHINA SYNDROME

Outside of valuations, there is another argument for broader

international exposure: The United States, while still the

dominant economy, accounts for a shrinking share of global

output. Thirty years ago, the United States accounted for

roughly one-third of global output. Today, the number is

closer to 20% (see Figure 3). While Chinas rate of growth is

slowing, China along with India, Indonesia and many other

emerging markets will continue to outgrow the United States

and other industrialized countries for the foreseeable future.

This suggests that the U.S. share of relative GDP should

continue to decline.

Some will argue that investors can simply get their

international exposure from large U.S. companies that sell

abroad. While it is true that international sales represent a

growing portion of revenue for U.S. companies, even for

large-cap companies in the S&P 500 foreign revenue still

only accounts for approximately 35% of the total.

In aggregate, the companies in an all-U.S. portfolio stillderive the overwhelming majority of their sales from U.S.

customers. Investors who remain concentrated in the

United States will be lacking exposure to the majority

a growing oneof the rest of the world.

HOME ALONE

Beyond valuation and the relative economic position of the

United States, there is a more basic reason to consider adding

international equities to even a conservative portfolio. While an

overweight to the United States has benefited portfolios over

the recent past, over the long term investors should considerthe potential benefits of diversification and better risk-

adjusted returns that meaningful exposure to international

equity markets can offer.

A structural underweight or even the total exclusion of markets

outside of ones home country is a common phenomenon, so

common in fact that it has a name: home country bias. And in

fairness to investors, a U.S. home country bias is probably

much less dangerous than for investors in other markets.

The United States is one of the best diversified economies and

markets in the world. For example, today the largest sector in

the S&P 500 is once again technology, with a 20% weight; thelargest company is Apple, with a 4% weight. In contrast, in

many markets, even developed markets, sector and company

concentration is much higher. In Switzerland, just four

stocksNovartis, Nestle, Roche and UBSrepresent more

than 60% of the market.

FIGURE 4: COUNTRY MARKET EQUITY

CORRELATIONAverage of Individual Countries with MSCI World Index

FIGURE 3: U.S. RELATIVE SHARE WORLD GDP

1985 to Present

Source: Thomson Reuters Datastream, MSCI, BlackRock Investment Institute, 04/10/15.

Source: Bloomberg, as of 12/31/13.

20

24

28

32

36

PERCENT

1986 1990 1994 1998 2002 2010 20132006

0

.25

.50

.75

1.0

0.64

CORRELATION

1999 2001 2003 2005 2007 20112009 20152013

[ 5 ]BLACKROCK


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Given the breadth and diversity of the U.S. economy and

market, it is understandable that many investors feel

comfortable keeping their money within U.S. borders. But while

the tendency is understandable, it is still not optimal.

International markets do offer diversification, in the process

lowering the volatility of the overall portfolio. Of course, there

are never guarantees with investing and diversification may

not protect against market risk or prevent losses.

ALL TOGETHER NOW

Indeed, while few object to diversification in principle, many

investors argue that it doesnt work when most needed:

during a crisis. It is true that during the financial crisis about

the only two asset classes that provided any real hedge were

safe haven bonds, including Treasuries, and gold. Virtually all

other risky assets moved in lockstep. Even in the immediate

aftermath of the crisis, correlations remained unusually high

as investors fixated on macro eventsthe European debt

crisis, the U.S. fiscal cliff, Greecethat transcended assetclasses and geographies. However, a crisis is the exception

that proves the rule.

While frustrating, the recent tendency toward higher

correlations during periods of stress is completely consistent

with history. For example, in the prelude to the Asian crisis in

1997, the U.S. equity market had a relatively low correlation,

around 0.32, with non-U.S. stocks. That correlation jumped by

more than 50% as the world focused on the turmoil in Asia.

A similar phenomenon occurred a year later with the Russian

default in 1998. Prior to that event, the correlation between

U.S. and non-U.S. equities was 0.60. As the crisis hit,

correlations once again rose, hitting 0.75, a 25% increase.

In other words, correlations will invariably rise during a crisis.

Investors, who normally have different time horizons and

strategies, all suddenly focus exclusively on the here and

now. As everyones focus narrows to a single event or issue,

risky assets all behave in a similar fashion. Fortunately, these

periods do not last.

Recently, correlations have been falling as economies diverge

and company fundamentals begin to reassert themselves.

At the peak in 2011, the average correlation of individual

countries was as high as 0.80 (see Figure 4). At this level,

the benefits of international diversification are more muted.

Regardless of the country in which they are domiciled, stocks

are mostly moving together when correlations are this high.

However, over the past three years, correlations have been

dropping. Intercountry correlations recently hit a post-crisis

low of around 0.50. While they have bounced back somewhat

since then, this reversion to the mean suggests that the

benefits to international diversification should be greater than

they have been during most of the post-crisis environment.

What exactly are those benefits? The argument for

international diversification rests on modern portfolio theory

and the premise that combining assets with low, or ideally

negative, correlation produces better risk-adjusted returns.

While the steady move toward a more integrated global

economy suggests that equity market correlations are

unlikely to be negative, in many instances they are low

enough to offer diversification relative to an all-U.S. portfolio

(see Figure 5).

For example, while the correlation between U.S. large-cap

and small-cap indexes is nearly 0.90 (1 represents perfect

correlation, 0 no correlation, and -1 a perfect inverse

relationship), the correlation drops to 0.60 for Japanese

equities and emerging markets. The correlation between U.S.

large caps and frontier markets, which include countries inan early stage of development, such as Nigeria or

Bangladesh, is a relatively modest 0.36.

PRACTICED DIFFERENCES

While diversification may be a desirable characteristic in a

well-constructed portfolio, this leaves the question of how

much international exposure is enough. As with most

questions in finance, the answer is: it depends. This is not a

dodge, but a reflection of the fact that portfolio construction

is as much a matter of risk tolerance and constraintswhat

you will and wont invest in and to what degreeas marketviews. Investor risk tolerance can determine a portfolios

composition as much, if not more, than expected returns.

If an investor is very conservative, equity exposure will be

limited no matter the geography or how attractive stocks

might be relative to bonds and cash. That said, even for more

conservative portfolios, the international equity allocation

should rarely be zero.

Looking at a few hypothetical portfolios, international equity

allocations look similar for both all-equity portfolios and

more balanced portfolios. For an all-equity portfolio, a

typical allocation to non-U.S. equitiesboth developed and

emerging marketswould be roughly 25% (see Figure 6).

Nor would the relative allocation change much within a

multi-asset class portfolio; international stocks still make up

around 25% of the overall stock allocation within a traditional

60/40 portfolio (60% stocks and 40% bonds).

[ 6 ] INNOCENTS ABROAD: THE CASE FOR INTERNATIONAL DIVERSIFICATION


7/12

This information should not be relied upon as research, investment advice or a recommendation regarding any security in particular. This information is strictly for illustrative and educationalpurposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.

Source: Bloomberg, 03/15/15. Indexes referenced are: S&P 500, Russell 2000, MSCI Emerging Markets Investable, MSCI Japan, MSCI Europe Investable Market, Barclays U.S. 20+ YearTreasury Bond, Markit iBoxx USD Liquid High Yield, Barclays U.S. Short Treasury Bond, LBMA Gold Price, S&P/Citigroup International Treasury Bond Index Ex-U.S., and MSCI Frontier 100.

FIGURE 6: HYPOTHETICAL ASSE T ALLOCATIONS

FIGURE 5: ASSET CLASS CORRELATIONS

S&P 500Russell2000

EmergingMarkets Japan Europe

20+ YearTreasury

iBoxx HighYield

Interna-tionalEquities

ShortTreasur y Gold

Interna-tionalBonds Frontier

S&P 500

1.000

Russell 2000

0.869 1.000

EmergingMarkets 0.570 0.466 1.000

Japan

0.614 0.560 0.430 1.000

Europe

0.813 0.723 0.664 0.554 1.000

20+ YearTreasury -0.380 -0.395 -0.187 -0.289 -0.310 1.000

iBoxxHigh Yield 0.633 0.539 0.534 0.323 0.620 0.044 1.000

InternationalEquities 0.557 0.465 0.685 0.690 0.638 -0.016 0.469 1.000

ShortTreasury 0.052 -0.010 0.014 0.110 0.118 -0.038 -0.005 0.119 1.000

Gold

-0.104 -0.044 -0.013 -0.314 0.063 0.210 0.044 -0.080 0.104 1.000

InternationalBonds -0.119 -0.105 0.049 -0.163 0.194 0.456 0.139 0.215 0.077 0.476 1.000

Frontier0.363 0.225 0.338 0.168 0.412 -0.127 0.290 0.306 0.042 0.027 0.133 1.000

50%

0

10

20

30

40

U.S. Large Cap

PORTFOLIOALLOCATION(%)

U.S. Large Cap Value U.S. Small Cap U.S. Mid Cap EAFE Emerging Markets Equities

60:40 Model100% Equities

[ 7]B L A C K R O C K


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It is also worth highlighting that the allocation to international

stocks remains sizable even with conservative assumptions

for international equity returns. The capital market

assumptions (CMA) that we used in the portfolio construction

exercise included higher expected returns for U.S. equities.1

We assumed expected returns of roughly 9% for U.S. large

caps, but just 7% and 8%, respectively, for Japanese and

European equities, based on historical returns adjusted forcurrent valuations. While the model does assume a higher

return for emerging markets (a function of higher risk), the

expected return is only slightly above what is expected for U.S.

large caps and slightly below the expectation for U.S. small

caps. In other words, the 25% allocation to international stocks

is not a function of aggressive return assumptions but instead

rests on their diversification benefits.

A sizable allocation to international equities holds even when

the organizing goal of the portfolio changes. Using the same

return assumptions, we ran another set of optimizations

using U.S. equities, non-U.S. equities as well as other asset

classes.2We ran two separate optimizations with

contradictory goals: maximize return or minimize risk.

Not surprisingly, the portfolio seeking to maximize return,

with no consideration given to risk, contained a large

allocation to stocks, both U.S. and non-U.S. The overall equity

allocation for this portfolio was 90%, with the remaining 10%

in REITs. The allocation to non-U.S. equities was

approximately one-third of the total equity allocation and

roughly 30% of the total portfolio allocation (see Figure 7).

FIGURE 7: THEORETICAL MINIMUM RISK AND MAXIMUM RE TURN PORTFOLIOS

Source: BlackRock MPS team. This information should not be relied upon as research, investment advice or a recommendation regarding any security in particular. This information is strictlyfor illustrative and educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.

1 MPS Capital Market Assumptions

Asset Class E[R] Asset Class E[R]

U.S. Large Cap 0.0898 Long Treasuries 0.0184U.S. Small Cap 0.1031 International Government Bonds 0.0067

Japanese Equities 0.0687 High Yield 0.0381

European Equities 0.0789 Short-term Treasuries 0.0222

Emerging Market Equities 0.0908 REITs 0.0809

Frontier Market Equities 0.1077

E[R] as of 02/2015, E[R] is total.

2 Opportunity set included: U.S. large caps, U.S. small caps, emerging market equities, Japanese equities, European equities, long-term Treasuries, U.S. high yield, global REITs, cash, gold,

international developed bonds, and frontier market equities.

35%

0

7

14

21

28

S&P500

Russell2000

EMEquities

JapaneseEquities

EuropeanEquities

Long-TermTreasury

HighYield

REITs Cash Gold InternationalDeveloped

Bonds

FrontierEquities

Maximum ReturnMinimum Risk

PORTFOLIOALLOCATIO

N(%)

[ 8] INNOCENTS ABROAD: THE CASE FOR INTERNATIONAL DIVERSIFICATION


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What is more surprising is that a portfolio designed with the

opposite objectiveminimize overall riskalso evidenced a

sizable, albeit smaller, allocation to non-U.S. stocks. In this

instance, the optimization resulted in a 12% allocation to

international equities. While the overall allocation was much

smaller than in the previous example, this reflects the lower

allocation to equities within a risk-constrained portfolio.

When you look at the international allocation as a percentageof the overall equity slice, international stocks comprise

roughly 40% of the equity allocation.

At first, this seems a counterintuitive result. Why would a

more conservative portfolio, particularly one with a relatively

modest allocation to equities, allocate a greater percentage

of the equity exposure to riskier, non-U.S. markets? The

rationale again has to do with diversification. Most of the

minimum risk portfolioroughly 65%is allocated to bonds

and cash. These assets serve to help minimize the volatility.

But as discussed previously, in addition to overweighting low

volatility instruments, the other mechanism to lower portfolio

level volatility is diversification. While international stocks are

generally riskierthey are denominated in foreign currencies

that also fluctuate, adding to the volatility of returnsthe

relatively low correlations of certain foreign markets with U.S.

equities help to lower the volatility of the overall portfolio.

The inclusion of international stocks, particularly in lower risk

portfolios, raises another concern: Should investors hedge

the foreign exchange risk when owning international equities?

While the answer obviously depends on expectations for the

dollar, as a rule of thumb, the decision has not, at least

historically, had a material impact on returns. According to

research from the BlackRock Investment Institute, over the

last 15 years the return impact of currency on international

market equities has been modest or negligible (see Figure 8).

That said, currency fluctuations can matter over shorter time

frames (2-5 years). Investors with a shorter term horizon who

have a strong conviction in an appreciating dollar may

consider employing currency hedged vehicles.

Source: MSCI, as of 12/31/14. USD Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or ex-penses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

FIGURE 8: CURRENCY IMPACT

Period MSCI EAFE Index Currency Impact Period MSCI EM Index Currency Impact

2000 through 2004 1.46% 4.74% 2000 through 2004 8.35% 4.39%

2005 through 2009 7.89% -0.10% 2005 through 2009 26.15% 4.40%

2010 through 2014 6.16% -2.52% 2010 through 2014 2.78% -0.13%

2000 through 2014 5.17% 0.71% 2000 through 2014 12.42% 2.89%

[ 9][ 9]BLACKROCK


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CONCLUSION

Everything should be made as simple as possible, but not simpler.

Albert Einstein

Simplicity has its own benefits. For most investors, a portfolio

with broad exposures and fewer moving parts is preferable.

However, too much simplicity may not be ideal either. Aportfolio that is concentrated in just one market, even a large,

diversified market such as the United States, will rarely

produce the best long-term risk/reward trade-off.

Diversification is not a magic elixir. The biggest caveat is that it

is least likely to work when most needed, i.e., during a crisis.

Instead, the benefits are derived, almost imperceptibly, over a

multi-year time frame. Long term, a well-diversified, global

portfolio can help minimize unnecessary risk. The benefits can

even accrue to more conservative investors, as some

international diversification provides for a more balanced, and

hopefully less volatile, portfolio.

While international diversification may be a sensible idea for

most investors, we believe these benefits may be even more

likely to accrue in the coming years. The United States is

expensive relative to other markets. While this has not

inhibited returns over the past couple of years, valuations

matter most over longer horizons. The United States may have

the best fundamentals, but U.S. equities have rarely posted

stellar returns from these valuation levels. In contrast,

international equity valuations are not nearly as stretched.

Finally, an all-domestic portfolio inherently underweights the

growing portion of economic activity that occurs outside ofU.S. borders. Even optimists who believe the United States will

be the dominant economy for years, if not decades, to come

have to admit that the relative footprint of the United States is

likely to decline.

[10] INNOCENTS ABROAD: THE CASE FOR INTERNATIONAL DIVERSIFICATION


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[11][11]BLACKROCK


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Unless otherwise indicated, all sources of data are Bloomberg.

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In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registrationno. 200010143N). In Hong Kong, this document is issued by BlackRock AssetManagement North Asia Limited and has notbeen reviewed by the Securit ies and Futures Commission of Hong Kong. Not approvedfor distribution in Taiwan or Japan. In Canada, this material is intended for permittedclients only. In Latin America this piece is intended for use with Institutional andProfessional Investors only. This material is solely for educational purposes and doesnot constitute investment advice, or an offer or a solicitation to sell or a solicitation ofan offer to buy any shares of any funds (nor shall any such shares be offered or sold toany person) in any jurisdiction within Latin America in which such an offer, solicitation,

purchase or sale would be unlawful under the securitie s laws of that jurisdiction. If anyfunds are mentioned or inferred to in this material, it is possible that some or all of thefunds have not been registered wit h the securit ies regulator of Brazil, Chile, Colombia,Mexico, Peru or any other securitie s regulator in any Latin America n country, and thus,might not be publicly offered within any such country. The securities regulators ofsuch countries have not confirmed the accuracy of any information contained herein.

The information provided here is neither t ax nor legal advice. Investors should speak totheir tax professional for specific information regarding their tax situation. Investmentinvolves risk. The two main risk s related to fixed income investing are interest rate riskand credit risk. Typically, when interest rates rise, there is a corresponding declinein the market value of bonds. Credit risk refers to the possibility that the issuer ofthe bond will not be able to make principal and interest payments. Internationalinvesting involves risks, including risks related to foreign currency, limited liquidity,less government regulation, and the possibility of substantial volatility due to adversepolitical, economic or other developments. These risks are often heightened forinvestments in emerging/developing markets or smaller capital mar kets. Diversification

and asset allocation may not protect against market risk or loss of principal.2015 BlackRock, Inc. All r ights reserved. BLACKROCK, BLACKROCK SOLUTIONS,iSHARES,SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD,and BUILT FOR THESE TIMES are registered and unregistered trademarks ofBlackRock, Inc. or its subsidiaries in the United States and elsewhere. All othertrademarks are those of their respective owners.

156894T-0415

Lit. No. MKT-PERSPECTIVE-0415

iS

15242

0415

1-800-474-2737 blackrock.com

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Blackrock Report 2015

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