Morningstar - Q2 2021 - 18

Dispatches

Fixed-Income Funds
Venture Into Bitcoin
Bitcoin has established a beachhead in traditional
mutual fund portfolios. It's a small presence
and likely to remain so for a while because this is
a volatile asset class, unlike any other. Even
the cryptocurrency pioneers are tiptoeing into it,
and not always just to capture its wild,
eye-catching gains. Bitcoin's off-the-charts
volatility makes it more likely to appear as a small
part of some equity or alternatives funds. It's
unlikely to spread widely in fixed-income
strategies: Morningstar portfolio strategist Amy
Arnott notes that bitcoin has been 24 times
as volatile as the Bloomberg Barclays U.S.
Aggregate Bond Index over the past three years.
It's hard to compare investing in bitcoin to
anything at this point, but it is worth considering
emerging-markets currencies, which have
been among the most potent tools available to
fixed-income managers. Sharp declines in
those currencies can easily erode or wipe out
income streams. The volatility of the JPM
Emerging Local Markets Index Plus lands reliably
between the Aggregate Index and the
S&P 500.
That volatility is nowhere near bitcoin levels.
Indeed, bitcoin makes emerging-markets
currencies look like a safe haven, as a chart
comparing the one-month rolling returns
of the CMBI Bitcoin Index and the JPM ELMI Plus
Index over the past five years illustrates.

the asymmetry of bitcoin's return profile.
While some cite the cryptocurrency's arguable
similarities to gold, suggesting that it
could provide a hedge against inflation or during
market turmoil, Rieder remains skeptical
about viewing it as part of an asset class. Rather,
he views bitcoin futures as a call option on
strong features, including the development of
its market infrastructure, large institutional
investors entering the market, and the resulting
increase in liquidity. Rieder does not rule
out the possibility of bitcoin's price growing eightor tenfold but aims to keep BlackRock
Strategic Income Opportunities' position very
small given its volatility.
Guggenheim's Scott Minerd has been
frequently quoted on his bitcoin views. He said
in December that bitcoin could eventually
be worth as much as $400,000 but showed more
restraint about its valuation at the start of
this year based on the shallow investor base. The
firm had filed for SEC approval in November
to allow Guggenheim Macro Opportunities GIOIX,
also in the nontraditional bond Morningstar
Category, to invest up to 10% of assets in
Grayscale Bitcoin Trust GBTC, an exchange-traded

fund. The firm removed that language in an
updated version of the filing in January,
though. Had Guggenheim proceeded and taken
on even a small portion of that 10%
allocation, it likely would have made the firm
one of the largest owners of Grayscale,
not to mention making the strategy one of
the biggest risk-takers in its category.
Bitcoin will keep finding its way into more
aggressive strategies, and given its risks and
volatility, that's worthy of skepticism.
A very small bitcoin position within a diversified,
unconstrained strategy could make sense,
and BlackRock has the team and risk management
capabilities to handle it. On the other hand,
larger bitcoin positions should raise concerns,
as should positions in funds in more
conservative categories linked to the Aggregate
Bond Index.
Karin Anderson is director of North American fixed-income
strategies at Morningstar Research Services LLC.
Benjamin Joseph, CAIA, is a senior manager research
analyst at Morningstar Research Services LLC.

Dramatic Swings The CMBI Bitcoin Index's monthly return pattern makes the
JPM Emerging Local Markets Index Plus look tame.
CMBI Bitcoin TR USD

Total Return

JPM ELMI+ TR USD

80%

At this point, nontraditional bond funds,
which have the most latitude to take risks,
are the most likely to incorporate some form
of bitcoin exposure. In fact, BlackRock
added prospectus language in January giving
two of its mutual funds the flexibility
to invest in bitcoin futures. That included
nontraditional bond strategy BlackRock Strategic
Income Opportunities BSIIX as well as
BlackRock Global Allocation MALOX.
Rick Rieder, BlackRock's global fixed-income
chief investment officer, sees value in

18

Morningstar Q2 2021

60
40
20
0
-20
-40
03/2016

03/2017

03/2018

Source: Morningstar Direct. Data from 03/01/2016-02/28/2021.

03/2019

03/2020

02/2021
Morningstar - Q2 2021

Table of Contents for the Digital Edition of Morningstar - Q2 2021
