Unconstrained Fixed Income

Transcription

1 Unconstrained Fixed Income A Dynamic and Flexible Approach to Fixed Income Investing 26th ANNUAL TEXPERS CONFERENCE Global Fixed Income & Liquidity Management March 2015 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

2 Why Utilize Unconstrained Fixed Income? Unconstrained Fixed Income Offers a Potential Solution to Today s Market Challenges Unconstrained Flexible Less Interest Rate Sensitivity Diversified Global A fixed income portfolio of high conviction ideas that is not constrained by a traditional fixed income benchmark Incorporates the flexibility to pursue a dynamic investment approach, allowing for meaningful changes in interest rate and credit spread exposures across the market cycle Unconstrained portfolios are not reliant on declines in interest rates, and they can tactically benefit from rising interest rates, by holding a zero or even negative duration position Fundamentally-driven approach composed of diverse, potential alphagenerating strategies, including rates, currencies, sector rotation, security selection Investing across the global bond spectrum can provide multiple, diverse income sources, which are not typically found in a traditional fixed income portfolio Source: GSAM As of January 31,

3 Return Component Potential Return Profile of Certain Benchmarks may Offer Little Incentive Barclays US Aggregate Bond Index Historical Return Composition vs. 10-Year Treasury Yield 35% 30% 25% 20% 15% 10% 5% 0% (5)% (10)% (15)% Price Return Coupon Return 10-Year Treasury Yield Periods of rising 10 Yr Treasury Yields Periods of negative price return of the Barclays US Aggregate Bond Index Barclays Agg. Duration: 5.47 years Barclays Agg. Yield: 2.25% 10-year Treasury Yield: 2.17% 21% 18% 15% 12% 9% 6% 3% 0% (3)% (6)% (9)% Yield 10-Year Treasury 1980s 1990s 2000s Avg. Calendar Yr Return : 12.8% 7.9% 6.4% 2010s -to-date 4.5% Source: Barclays as of December 31, 2014 The above-posted illustration demonstrates a steady decline in coupon returns for the Barclays US Aggregate Bond Index and a structural drop in Treasury yields over the past 30 years. With the share of Treasuries in the Barclays US Aggregate Bond Index never falling below 20% over the past three decades and accounting for 36% of the index as of December 31, 2014, we believe the index s historical total return structure is partly correlated to the declining Treasury yields. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. 2

4 Yield to Maturity (%) Potentially Overshadowed Opportunities Traditional Fixed Income is Concentrated here 80% 75% % of Market Capitalization* 70% % of Barclays Aggregate Bond Index 62% 60% but the Current Opportunities are here 7% 6.6% 6% 5.6% 5% 50% 4% 40% 30% 20% 19% 23% 3% 2% 2.2% 3.1% 10% 0% Source: Barclays US Government US Investment Grade Corporates 9% 2% Emerging Markets Debt 6% US High Yield Corporates 4% 0% 0% US Non- Agency MBS 1% 0% Source: Barclays 10 Year US Treasury Barclays US Corporate Bond Index JPM EMBI Global Diversified Index Barclays US High Yield Corporate Index Indices Cited: US Government: Barclays US Government Index; Investment Grade Corporates: Barclays Investment Grade Corporate Index; High Yield: Barclays High Yield Index; EMD Hard Currency: JP Morgan EMBI Global Diversified index. It is not possible to invest directly in an unmanaged index. *Market Capitalizations based off of the sum of US Fixed Income Market represented by market capitalizations within the Barclays US Aggregate Index, Non-Agency MBS market capitalization from Securities Industry and Financial Markets Association (SIFMA), and Emerging Markets External and Local debt from JP Morgan. Past performance does not guarantee future results, which may vary. 3

5 Diversified Approach Combines Key Ideas from Top-down Macro and Bottom-up Security Selection Strategies Macro Views Duration Country Currency Cross Sector Unconstrained Fixed Income Emerging Market Debt Govt/Swaps Corporate (Investment Grade and High Yield) Securitised Debt Security Selection For illustrative purposes only. 4

6 Lowest Highest Sector Rotation has Significant Alpha Opportunity Calendar Year Total Returns: EMD External IG Credit CMBS High Yield EMD Local EMD External EMD Local EMD Local US Treasuries High Yield CMBS US Treasuries EMD External High Yield IG Credit CMBS ABS EMD External EMD External EMD External EMD Local High Yield US Treasuries US Agencies EMD External EMD Local EMD External EMD Local IG Credit EMD External US Treasuries CMBS US Treasuries EMD Local High Yield US Treasuries EMD External US Agencies MBS CMBS High Yield IG Credit High Yield ABS MBS US Agencies US Agencies US Agencies IG Credit IG Credit High Yield MBS MBS IG Credit ABS EMD External CMBS IG Credit CMBS US Treasuries MBS MBS IG Credit CMBS MBS MBS CMBS EMD External EMD Local EMD Local IG Credit MBS CMBS US Agencies CMBS ABS US Treasuries MBS ABS CMBS US Agencies ABS CMBS EMD External IG Credit US Treasuries ABS ABS MBS US Agencies IG Credit High Yield ABS MBS US Treasuries ABS US Agencies IG Credit ABS MBS ABS High Yield US Agencies US Treasuries High Yield High Yield EMD External High Yield US Agencies US Agencies CMBS IG Credit High Yield CMBS US Agencies MBS US Agencies MBS EMD External ABS US Treasuries ABS IG Credit US Treasuries ABS High Yield US Treasuries US Agencies EMD Local US Treasuries EMD Local EMD Local Source: GSAM, Barclays, JP Morgan; As of December 31, US Treasuries: Barclays US Treasury Index; US Agencies: Barclays US Agency Index; ABS: Barclays US ABS Index; CMBS: Barclays CMBS Index; IG Credit: Barclays US Credit Index; High Yield: Barclays 2% Capped US High Yield Index; EMD External: JPM EMBI Global; EMD Local: JPM GBI-EM Global Diversified Index. Past performance does not guarantee future results, which may vary. Please see additional disclosures. 5

7 Returns and Volatility Vary Across the Economic Cycle Economic Expansions Tend to be Associated with Low Volatility and Modest-butpositive Returns on Risk Assets Economic Growth Return¹ : +0.6% Volatility² : 2.7% Return¹ : +0.9% Volatility² : 2.1% Fed Policy Return¹ : +4.5% Return¹ : -2.0% Volatility² : 4.9% Volatility² : 5.6% Risk Asset Valuations For Illustrative Purposes Only. Source: Barclays Capital, GSAM, Bloomberg. As of December 31, ¹ Return indicates the average annualized excess return of the Barclays US Investment Grade Corporate Index from August 1, 1988 to December 31, 2013, in the month following the designated phase of the business cycle. ² Volatility indicates the average annualized volatility of the Barclays US Investment Grade Corporate Index from August 1, 1988 to December 31, 2013, in the month following the designated phase of the business cycle. Past performance does not guarantee future results, which may vary. 6

8 The Benefits of Three Decades of Declining Rates are Unsustainable Risk-Managing Assets Then ( ) Historically strong performance during market crises 1 Now (2015 and beyond) Potentially strong performance during market crises 1 Investment grade fixed income intended for risk management or asset/liability matching High single-digit annual returns as rates fell Potential for frequent losses as rates rise Global Developed Government Debt US Agg. Global Agg. Cash Investment Grade Munis US Agg Fixed Income experienced 8.8% annualized return with only two negative years 2013 performance of US Agg Fixed Income: -2.0% Asset class yield exceeding 4% total portfolio yield target until Potential index yield to worst below a 4% total portfolio yield target Should all investors maintain the same exposure to risk-managing assets if only one of these benefits is potentially sustainable? 1 Barclays US Aggregate Fixed Income Index Yield to Worst. Source: GSAM Past performance does not guarantee future results, which may vary. Source: Bloomberg.This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. Barclays US Aggregate Fixed Income Index Yield to Worst. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 7

9 Unconstrained Fixed Income Intended to Complement Traditional Core Strategies Traditional Core Unconstrained Broader opportunity set Investment grade Macro Duration-sensitive Sector Down-the-fairway Flight-to-quality Building a Better Core Opportunistic Dynamic No individual risk exposure dominates Yield enhancement potential Traditional Core 50-75% Unconstrained 25-50% Volatility reduction potential Precise sizing depends on expected need for core stabilization during extreme markets. Source: GSAM Diversification does not protect an investor from market risk and does not ensure a profit. 8

10 Characteristics of Unconstrained Fixed Income Strategies Flexible global bond portfolios designed to help you build a better fixed income core The Strategies seek total return comprised of income and capital appreciation Not managed to a traditional benchmark, the strategy s flexible approach: seeks fixed income opportunities across the globe seeks to manage risk by adapting dynamically to changing market conditions This flexibility is particularly important during periods of rapidly changing interest rates, market dislocations and geopolitical uncertainties Potential Benefit: Seeks attractive total return through all types of economic environments I. Diversified Sources of Returns II. Less Interest Rate Sensitivity III. Dynamic, Flexible Approach The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. There is no guarantee that the Fund s dynamic management strategy will cause it to achieve its investment objective. 9

11 Why Diversify Your Portfolio with Unconstrained Fixed Income? Compensation for rate risk is unattractive in major government bond markets due in large part to intervention by central banks Investors need to consider diversifying their core fixed income exposures going forward, as the potential benefits of its total return and yield become less certain Allocations of 25-50% of core fixed income exposure may be sufficient to make a difference in an investor s portfolio, although the specific sizing of unconstrained fixed income depends on an investor s risk and return objectives Unconstrained fixed income is a low-correlated way to complement portfolios by employing tactical, benchmark-unaware strategies 10

12 General Disclosures THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities Confidentiality No part of this material may, without GSAM s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Index Benchmarks Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of "failed" or closed hedge funds may mean that each index overstates the performance of hedge funds generally Goldman Sachs. All rights reserved OTU