Fixed IncomeNov 28 2016

Fund Review: GS Sterling Broad Fixed Income Portfolio

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Fund Review: GS Sterling Broad Fixed Income Portfolio

This Luxembourg-based fund, which entered the IA 100 Club for the first time in 2016, aims to provide a total return consisting of both income and capital appreciation. Manager Jason Smith notes the investment philosophy behind the strategy is “founded upon the belief that consistent long-term positive excess returns can be generated by employing the broadest possible array of diverse investment opportunities, combined with disciplined portfolio risk management”. 

Mr Smith points out the management of all GSAM’s fixed income portfolios is team-based with investment decisions taken collectively. He continues: “Our process has three key steps from the setting of the investment themes and context, the identification of specific investment opportunities through to the construction of diversified portfolios consistent with [our] objectives.”

The team behind the fund use a process that adopts a global perspective to compare and contrast investment opportunities around the world. In addition, the portfolio benefits from the use of specialist investment strategy teams that each conduct detailed fundamental and quantitative research in their search for attractive investments. 

Mr Smith adds the process attempts to capture the value in the inherent diversification benefits among the different investment strategies by using “a disciplined risk-management approach to implement the strategy”. “We believe our investment philosophy can produce robust excess returns across a full market cycle – a three- to five-year investment time frame,” he says. 

The investment philosophy and process have remained broadly consistent over time, although the team periodically reviews and evolves the process. 

Unlike some portfolios, Mr Smith notes fundamental top-down macroeconomic analysis “plays a large part in our investment process”. In particular, the team looks at economic indicators that “tend to lead aggregate economic activity and provide insight into monetary policy, inflation expectations, international capital flows and the risk appetite of the capital markets at large”.

The fund’s R ‘clean’ retail share class, launched in 2012, sits at a risk-reward level of four out of seven, while ongoing charges are 0.6 per cent, the key investor information document shows. 

For the five years to November 17 the fund has delivered a return of 20.9 per cent in sterling terms, slightly behind the 21.3 per cent rise in the BofA ML Sterling Broad Market index but ahead of the IA Sterling Strategic Bond sector average of 16.4 per cent, data from FE shows. In the 12 months to November 17, the fund has outperformed the sector and the index with a return of 8.9 per cent. 

Mr Smith says year-to-date outperformance has been driven primarily by “our cross-sector and government/swap selection strategies”. He explains: “The cross-sector strategy returns [were] mainly driven by our sector exposure to collateralised loan obligations, asset-backed securities and covered bonds. The government/swaps selection strategy also contributed to excess returns mainly driven by our specific agency selection, as well as our UK inflation trade. Our decision to be long UK breakeven rates, and [to] expect a steeper inflation curve, benefited as expectations for UK inflation rose over the period on the back of increasing talk around a ‘hard’ Brexit, [and] the decline in sterling versus the US dollar and euro.”

But he acknowledged the fund’s emerging market debt selection strategy underperformed. This was driven by exposure to Chinese and Mexican external sovereign debt, with the manager explaining “Mexican rates experienced heightened volatility in the run-up to the US elections”.

Changes to the portfolio in the year to date include moving from a short to a flat position in US rates in mid-October on rising US Treasury yields as market odds for a US Fed rate hike this year increased. Mr Smith says: “We continue to expect the Fed to raise rates this year, though tightening financial conditions may keep policymakers on hold. We also maintained our neutral positioning on European and Japanese rates.”

In addition, the team maintained the fund’s modest underweight in corporate credit through the third quarter of 2016. “The ‘reach-for-yield’ theme coupled with continued monetary easing in Europe, the UK and Japan, will continue to be supportive of risk assets,” adds the manager.