InvestmentsMar 2 2015

Fund Review: GS US Core Equity Portfolio

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The Luxembourg-domiciled, $607m (£393m) GS US Core Equity Portfolio was launched in November 2005 and adopts a “comprehensive, objective and risk-managed approach to equity investing”.

The fund is managed by Goldman Sachs Asset Management’s quantitative investment strategies (QIS) team, which seeks to add value from stock selection, rather than sector bets or other style biases.

Portfolio manager Javier Rodriguez-Alarcon says the team employs a three-step investment process, which in simple terms is: analyse assets, build portfolio and then execute trades. He explains: “First, we forecast expected returns on more than 1,000 US large-cap stocks [and more than 13,000 stocks globally] on a daily basis. Stock return forecasts are determined using proprietary models developed by the QIS team, and is based on various investment themes: valuation, profitability, quality, management, momentum, global linkages and sentiment.”

Once the stocks are analysed, the team uses computer optimisation for portfolio construction. “We believe to effectively manage portfolio risk, the optimiser must recognise the risk associated with any stock and should be able to respond quickly to changing market conditions,” he says.

“We have developed our own proprietary risk model, which we believe allows us to measure and manage portfolio risk more effectively than would be possible by using widely used, commercially available models. To capture the changing risks in the market more effectively, we update our model with daily data and place higher weight on the most recent information.”

Mr Rodriguez-Alarcon points out that transaction costs are considered at every step of the process, from weighting the investment themes, to portfolio optimisation, to trading.

With such a quantitative process, he says the team is constantly working to improve the models that are used, and most recently it has spent time thinking of the growth of unstructured data and the ability to harness the data to its advantage.

The key investor information document for the base shares class puts the risk level of the fund at six out of seven, while the ongoing charge sits at 1.5 per cent.

The portfolio has delivered consistently strong returns, outperforming its peers in the Investment Association (IA) North America sector in six of the past 10 years. Meanwhile, its five-year return to February 19 2015 of 103.43 per cent outperformed both the S&P 500 index return of 103.26 per cent and the IA North America sector average of 89.66 per cent, FE Analytics data shows.

Mr Rodriguez-Alarcon notes: “We rebalance all portfolios periodically. Between rebalances, we monitor all portfolios and we will rebalance a portfolio if there is a significant cashflow or a material change in predicted return or risk. We typically focus on an increase in the active weight of holdings, rather than simply on new portfolio positions. Some of the largest rises in portfolio holdings in the third quarter of 2014 were JPMorgan Chase, Chevron, ExxonMobil, Wal-Mart Stores and Adobe Systems.”

The “quality” theme of the portfolio provided the most contribution to outperformance, while profitability and management were the main detractors, he says. “Stock selection was positive among sectors overall. Holdings in the energy and IT sectors outpaced their peers in the benchmark most, while holdings in the healthcare and telecoms sectors were least successful relative to their peers. Our five-biggest contributors to excess returns in 2014 were: Southwest Airlines, Delta Air Lines, International Business Machines, Apache and Micron Technology.”

Looking ahead the manager acknowledges some headwinds such as the low price of oil and currency strength, but he adds: “We expect US growth to accelerate in 2015 driven by increases in consumer spending, business investment and fiscal spending. Our outlook incorporates some expected weakness in exports due to the stronger dollar and reduced oil and gas investment. Inflation is the key question for the US this year as the Federal Reserve considers hiking rates. We expect inflation to increase modestly, allowing the Fed to at least begin the process of normalising policy with a rate hike in mid-2015.”

EXPERT VIEW

Martin Bamford, chartered financial planner and managing director, Informed Choice

This quant-driven fund offers an alternative to index trackers in what is a typically efficient market of US equities. Aiming to deliver capital growth over the long term, the fund has done a good job of delivering first-quartile returns in the past couple of years. The fund analyses a universe of more than 4,000 stocks daily and distils this into 134 holdings, with the value of the top 10 making up less than a quarter of the portfolio. The offshore Sicav structure is likely to deter UK retail investors, who would be well advised to wait until a UK-regulated version of the fund becomes available, if indeed this is on the cards.