Q: What is the history of the fund?
We launched the Goldman Sachs Global Income Fund in 1995. Our goal was to provide clients with a broad, global opportunity set that still seeks to provide the traditional benefits of active fixed income, including yield, high credit quality and the potential for capital gains. Over the 20-plus year history of the fund, we have focused predominantly on investment grade bonds in major developed bond markets, emerging markets, and corporate bond markets. We also employ some active currency risk as a diversification strategy. Currently, the fund’s assets under management (AUM) are close to $900 million. In related strategies for non-U.S. investors, AUM exceed $1 billion, and in global multi-sector strategies overall, the firm has over $15 billion in AUM.
Q: How is the fund different from its peers?
Three things make this fund unique. First, we fully hedge the currency risk of non-US bonds in order to meet the volatility expectations of clients seeking global fixed income exposure. In strategies that leave currency risk completely unhedged or partially hedged, currency risk is likely to dominate and volatility is likely to be inconsistent with what fixed income investors may expect.
Second, we do take currency risk in the portfolio as a strategy for adding value, but this is driven by active views from a team of currency specialists and risk-managed to limit the impact on overall volatility.
Third, our strategy only invests in high-quality, investment-grade bonds. It is possible that a bond already in the portfolio might be downgraded to below investment-grade, but we avoid “mission creep” by investing only in investment-grade bonds.
Q: What is your investment philosophy?
Our overall philosophy is that the best way to provide clients with attractive total return and income potential is through diversification, specialization and risk management.
From a diversification perspective, global exposure is important because it expands our potential to diversify our active risks. In the Goldman Sachs Global Income Fund, we primarily invest in the industrialized G10 nations but the ability to add high-quality emerging market bonds and risk-managed currency exposure adds to the opportunity set and our potential for diversified strategies.
In terms of specialization, our philosophy is that the best way to find diverse opportunities is to identify the active decisions that will drive risk and return in the portfolio, and assign those decisions to teams that are localized and specialized. In the Goldman Sachs Global Income Fund, my role is to allocate portfolio risk to these specialist teams, which then identify the most attractive opportunities within their area.
Risk management is another critical element of our philosophy. We must be able to evaluate the individual risks that our specialist teams are taking and the overall impact on portfolio risk and return potential. We have multiple layers of risk management across all of our portfolios.
As portfolio manager for the Goldman Sachs Global Income Fund, I am part of the team responsible for managing the overall risk and return potential of the portfolio.
Q: What are the key elements of your investment strategy and process?
Our strategy and process reflect the key elements of our investment philosophy. We analyze the portfolio’s benchmark and the drivers of active risk and return potential relative to that benchmark, and allocate those active decisions to our specialist teams.
In the Goldman Sachs Global Income Fund, the macro, top-down drivers include the portfolio’s directional exposure to interest rates (i.e., duration), the allocation to different countries, the currency exposure and the sector allocations across government bonds, corporate bonds, emerging markets and other bonds such as agency bonds. And then from a bottom-up perspective, the individual bonds we select relative to the benchmark are another driver of the portfolio’s risk and return potential. We assign each of these decisions to a specialist team and my role is to manage the allocation of risk across the specialist teams and the overall portfolio risk.
Q: Could you provide examples of how your active views are expressed in the portfolio?
For example, when deciding on the portfolio’s allocation to different countries, our country specialist team has favored overweight allocations to positive-yielding economies and underweight allocations in negative-yielding markets. As a result, the portfolio has tended to be underweight relative to the benchmark in Eurozone countries like Germany, where many bonds have negative yields, and overweight in the US, where yields have remained positive. Importantly, this relative value decision is independent of our view on the direction of rates in the US or Europe, which is determined by a specialist team focused on duration.
In terms of duration risk, we believe the Fed will raise rates in December and the portfolio has been somewhat underweight duration in the U.S. Financial conditions are quite loose, inflationary pressures have increased and unemployment continues to decline.
Central bank divergence is another view we see driving a lot of cross-market volatility today. As a result, we are running a fair amount of risk through our currency specialist team. Take the Swedish krona, for example. We have an overweight position, in part because of our belief that the country is experiencing stronger domestic growth than is reflected in the market. In terms of paired trades, the portfolio is long the Australian Dollar (AUD) versus short the New Zealand Dollar (NZD). We feel the NZD will further weaken relative to the AUD because of our anticipation of further rate cuts.
Japan is another example that comes from our country team. Several months ago, the Japanese Treasury curves were negative everywhere, from overnights through 20-Year bonds. Think about negative yields in Japan; if we borrow short and lend long, and both are negative, it just does not work. With this scenario, a theme the portfolio had presumed the Japanese yield curve would steepen – as it has in the past months and weeks.
Q: How would you describe your holdings?
The investible bond universe for this strategy is investment-grade only. Developed government bonds, investment-grade emerging market bonds and investment-grade corporates make up the bulk of the portfolio, along with some active currency risk as we’ve discussed.
From a sector allocation standpoint, approximately 45% of the portfolio is in government bonds, which is a decent underweight relative to its benchmark, the Bloomberg Barclays Global Aggregate Bond Index. We also have small positions in quasi-government bonds such as agency debt.
One of our larger overweights this year has been in asset-backed securities, namely collateralized loan obligations (CLOs) and other types of structured credit. We think high-quality structured credit makes sense in today’s environment. This is a sector that offers yield with limited interest rate risk and limited credit risk, and we think valuations are attractive because most of the demand for yield has flowed into corporate bonds.
Our holdings also include a host of residential mortgage-backed securities (RMBS); from non-agency to agency RMBS to pass-throughs and from covered bonds to corporate bonds. In corporate bonds today, we are roughly neutral to the benchmark and slightly underweight across financials, industrials, and utilities. Finally, several percent of our holdings are invested in emerging market debt.
Q: How important is diversification for you?
Diversification is critical to our team’s investment philosophy and a major goal of the Goldman Sachs Global Income Fund. Simply being in global fixed-income diversifies our exposure to asset classes and interest rates from around the world, with this fund specifically taking on risk from Canada, Japan, and the 11 Eurozone countries. Further, because the fund is a global aggregate hedged to the U.S. dollar, we able to employ active currency views as another strategy for increasing diversification.
However, we take diversification a step further by having out-of-index views and positions. For example, our benchmark does not have a meaningful allocation to asset-backed securities. In comparison, nearly 12% of the portfolio is invested in high-quality asset-backed securities – CLOs, securities backed by home equity or credit cards etc. – as another way to offer greater diversification to our clients.
Finally, idiosyncratic risk is reduced by the fund’s large number of positions; as of the end of September, it was quite diversified with 955 holdings.
Q: How do you define and manage risk?
Our goal is to own risk where we have conviction and reduce risk where conviction is lower. Of course, owning anything means taking on market risk, and having a manager express active views introduces further risk.
To mitigate this, risk management is intertwined throughout our overall investment process from the beginning of a new portfolio all the way through to scenario testing.
We have invested heavily in risk management systems that allow us to measure portfolio risk on a daily basis by looking at things like volatility, tracking error and drawdown risk, as well as different scenarios and other ways to test positions and portfolio risk. Our goal is to make sure the risks in the portfolio are the risks we intend to take and that our high-conviction views go into the portfolio.
We use a robust proprietary risk-management system called GRM, which is our global risk factor model. It allows us to decompose risk into different factors, taking a security or a sector and breaking it into factors such as credit quality, country, currency, and specific risks.
The system also lets us examine our expected tail loss, or effectively how the portfolio would do if the worst 5% of outcomes were to occur. Knowing the worst that could happen is key—just look back to the 2008-2009 financial crisis. At its beginning, volatility was low. So what did many investors do? They owned more risk and then were caught by the volatility trap. It is a trap we try to avoid by viewing risk through multiple prisms.
