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Market Know-How
Insights and Implementation
Strategic Advisory Solutions
Q1 2016
Q1
2016
GSAM’s ‘Market Know-How’ explains what investors should
KNOW about current market conditions, and HOW they can
implement an investable strategy. The ideas presented in
the Market Know-How are based on our expectations of global
macro conditions, asset class performance, and sound
portfolio construction.
6
The Great ‘Rotate’
As developed economies enter a seventh year of expansion, the
velocity of growth continues to be underwhelming yet resilient.
In 2016, we believe that major economic data points may trend
slightly higher, particularly in Europe and Japan, with economic
leadership continuing to rotate from manufacturing to the
consumer. Other ‘rotations’ include tighter monetary policy in
the US and UK, clusters of volatility, muted US Dollar gains,
and value arising in credit, energy, and select emerging markets.
Here is what we do not expect to change in 2016:
■■ Pro-cyclical
deployment: We continue to believe risk capital
should be positioned in anticipation of economic broadening
and earnings sustainability
■■ Income:
The potential return-limiting influence of elevated
valuations amplifies the role of income
■■ Idiosyncratic
positioning: Manufactured earnings and increased
leverage underscore the need for extensive research and
security-specific positioning
■■ Headline
risk: Whether technically, fundamentally, or
geopolitically driven, we expect structurally higher volatility
to reinforce the benefits of downside risk management and
return differentiation
Finally, as we share our insights for 2016 in the pages that
follow, we remind investors that the most enduring answers to
a complex market environment can be found in a commitment
to strategic portfolio design.
Macro
GLOBAL GROWTH
INFLATION
Global Gross Domestic Product
(GDP) likely bottomed last year
and could rise moderately in
2016. Stability could be led
by ongoing improvements in
consumption.
The depletion of slack in labor
is most advanced in the US,
but varies globally. Much of the
world is still hampered by
what can be termed “lowflation”
and “high capacity.”
MONETARY POLICY
ENERGY
RISK
Central bank policy diverges
with a focus on normalization
in the US and UK, while the
Euro Area and Japan commit to
additional heavy lifting through
policy easing.
Traditional producers cede
ground to a fragmented
landscape of increasingly
efficient shale producers. Supply
and demand may find balance
in late 2016.
While we expect macro
resiliency, the potential for a
Chinese hard landing, plunge
in oil demand, surge in the
Dollar, and acceleration in policy
tightening should be monitored.
MARKETS MAY BE DOMINATED BY DIVERGENT RATE POLICY
3-Month Interbank Rates (%)
1.2
US
Euro Area
Japan
UK
Forecast
0.7
0.2
-0.3
2013
2014
2015
2016
2017
Source: Bloomberg and GSAM. As of November 30, 2015. The economic and market forecasts presented herein are for informational purposes. There can be no assurance that the
forecasts will be achieved. Please see end disclosures for more information.
2
Market
EQUITIES
FIXED INCOME
At full valuations, returns are
likely to be dominated by
earnings growth and cash flow
generation more than multiple
expansion. This bodes well for
Europe and Japan, in particular.
We believe government bonds
remain expensive, impacted
by low inflation expectations,
excess savings, and central bank
asset purchases. Regional rate
divergence may occur.
CREDIT
CURRENCY
VOLATILITY
We see value in US corporate
credit, where valuations are
consistent with recession, but
fundamentals are not. Increased
leverage and illiquidity may
warrant idiosyncratic emphasis.
While an uncomfortable
consensus view, the gradual
pickup in inflation and realized
monetary policy divergence may
drive further Dollar appreciation,
although at a slower pace.
Following an extended period
of low realized equity volatility,
we may have entered a new
phase of more frequent, yet
more historically normal, bouts
of volatility.
S&P 500 OUTPERFORMANCE VS. OTHER ASSET CLASSES: HISTORICALLY UNUSUAL
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
US Large Cap (S&P 500 Index)
Bank Loans
(CS Leveraged Loan Index)
Global High Yield
(Barclays Global High Yield Index)
International Stocks
(MSCI EAFE Index)
Commodities
(S&P GSCI Commodity Index)
Hedge Funds
(HFRI Fund of Funds Index)
US Aggregate Bonds
(Barclays US Aggregate Bond Index)
Emerging Market Debt
(J.P. Morgan EMBI Global Index)
International Real Estate
(S&P Developed ex-US Property Index)
US Real Estate (Dow Jones US Select
Real Estate Securities Index)
Emerging Market Equity
(MSCI Emerging Markets Index)
International Small Cap
(S&P Developed ex US Small Cap Index)
US Small Cap Equity
(Russell 2000 Index)
Source: Bloomberg, Barclays, and GSAM. As of November 30, 2015. All data represents total return. Past performance does not guarantee future results, which may vary.
Market Know-How Q1 2016: The Great ‘Rotate’ |
3
Market Know-How Q1 2016
THE KNOW
THE HOW
1
Economic expansions
have been persistent
Deploy pro-cyclically
2
China’s economy is in transition
A bumpy road ahead
3
Non-US stocks and US rate hikes
have historically moved together
Understand domestic
recoveries, globally
4
Economic growth may amplify
smaller stock performance
Don’t forget the ‘other 500’
5
Credit spreads reflect
pessimism
A seasonal pattern emerges
6
Single sources of income
entail tradeoffs
Blending income has
potential benefits
7
Oil prices have taken MLPs
for a ride
Attractive valuations,
high cash flow potential
8
Liquid alternative sub-strategy
returns have been variable
Harness the power
of diversification
Views and opinions are current as of December 2015, and may be subject to change, they should not be construed as investment advice.
Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These
forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual
data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly,
these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions,
and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs Asset Management has no
obligation to provide updates or changes to these forecasts. Examples are for illustrative purposes only.
4
1
Economic expansions have been persistent. Investors should not
be distracted by the age of the expansion.
100
Probability that a 6 Year Old Expansion Becomes a:
7 Year Expansion is 90%
90
The historical record suggests
that age has little bearing on the
prospects of a downturn.
80
Probability (%)
70
10 Year Expansion is 60%
60
50
40
30
20
10
0
6
8
10
12
14
Years of Expansion
16
18
20
In the same way that one can derive
lifespan probabilities from an actuarial
table, we calculate the probability
that our current six-year-old economic
expansion enters its seventh year
at about 90%. Indeed, there is a
60% probability that our current cycle
may avoid recession for another four
years—maturing into a 10 year cycle.
Source: Goldman Sachs Global Investment Research and GSAM.
Deploy pro-cyclically. US activity remains sturdy as measures of
broader economic health suggest a solid macro foundation.
Current
1 Year Ago
N
AT I
O
INF L
EA
R
RY
Payroll Job Growth
Change in
Unemployment Rate
Unemployed
per Job
T
Output Gap
When we look beyond the actuarial
lifespan of an economy, and more at
its fundamental health, we arrive at
the conclusion that the US economy
may be poised for additional growth.
In the accompanying chart, high
frequency economic indicators and
financial metrics point to a slowly
aging, but still mid-cycle expansion.
EN
G
Total Employment
Gap
PLO
YM
DP
BBB
Credit Spread
EM
INDUS T
D
Manufacturing
Inventory/Supply
Ratio
R LY
Industrial
Production
ION
ES
EC S
E
MI
L AT
L
Credit Standards
ISM
Manufacturing
Real Gross Domestic
Product (GDP) Growth
CIA
Change in
Inflation Rate
AN
S&P 500 Volatility
We would put the odds of a US
recession in 2016 at about 10–15%.
F IN
Term Spread
Real Federal
Funds Rate
Source: Goldman Sachs Global Investment Research and GSAM.
Top Section Notes: As of November 9, 2015. The chart shows the cumulative probability that an expansion will last longer than six years (the duration of the current US
expansion). Cumulative probability refers to the unconditional probability based on US business cycle data since 1950. Expansion refers to the period during a business cycle
when the economy moves from a trough to a peak. Bottom Section Notes: As of October 30, 2015. The chart reveals the individual positions of 15 economic indicators across
the four stages of the business cycle (early, mid, late, and recession). Please see end disclosures for more information on credit.
Market Know-How Q1 2016: The Great ‘Rotate’ |
5
2
% of Total GDP
50
China’s economy is in transition. The rotation to a consumerdriven, freer Chinese economy may help drive global GDP growth.
Industrial Sector
Service Sector
Regardless of recent slowdown
fears, China is increasingly the
largest contributor to global real
GDP growth.
45
40
Service Sector Now the Largest Part of China's Economy
35
30
1990
1994
1998
2002
2006
2015
Global GDP
Growth
39% China
2010
2014
22% China
2005
Global GDP
Growth
7% Chinese GDP Growth in 2015
Could Contribute More to Global GDP
than 11% in 2005
Top Chart Source: Bloomberg, National Bureau of Statistics of China, and GSAM. Bottom Chart Source: International
Monetary Fund World Economic Outlook Database and GSAM.
While China’s industrial economy
continues to slow, services continues
to grow, becoming the largest
contributor to the Chinese economy.
Typically, as consumer wealth
increases, spending rises. But,
productivity falls, and therefore GDP
growth may decelerate during this
economic transition.
A bumpy road ahead. We expect China to be a continued source
of market volatility.
Monetary Policy Flexibility
Interest Rate Liberalization
Financial Regulation
Greater Regulatory Coordination
Renminbi Internationalization
IMF SDR Basket Inclusion
Source: GSAM.
Broader Access to Chinese Equities
Shanghai-Hong Kong Link Connect
Financial
Liberalization
Chinese Debt Market Instruments
Diversification in Bond Financing
State Owned Enterprise (SOE) Reform
Improving Corporate Governance of SOEs
China is not only undergoing
an economic transition, but also
a financial transition from
a controlled to a more open
market economy.
China is progressively liberalizing its
economy with market policy changes,
driven by desires for political stability.
While these changes have been
underway for some time, they have
come sporadically, leaving investors
with little warning. We believe
investors should expect further
volatility.
Top Section Notes: Top chart analysis is from 1990 until year-end 2014. The chart shows that China is at a turning point in its economic transition as the service sector overtakes
the industrial sector as the largest part of the economy. The industrial sector includes goods produced in construction and manufacturing. The service sector includes the
production of intangible goods. Bottom chart as of October 31, 2015. This chart shows China’s contribution to global GDP growth. Bottom Section Notes: As of November 2015.
Image for illustrative purposes only, providing examples of China’s liberalization. IMF stands for International Monetary Fund. SDR stands for Special Drawing Rights. An SDR
review is conducted every 5 years by the IMF’s Executive Board to ensure the SDR basket reflects the relative importance of major currencies and to enhance the SDR’s usability
as a reserve asset.
6
3
Non-US stocks and US rate hikes have historically moved
together. Major international markets fared well after Fed actions.
Average Price Performance After Initial US Rate Hike in Major Global Markets:
3 Months
6 Months
12 Months
13
13
Economic recoveries in the Euro
Area and Japan have trailed the US
expansion. But today, we believe
these regions offer an attractive
combination of earnings growth
and relative valuations. Major global
equity markets in Europe and Asia
have the potential to outperform
US equities in this hiking cycle.
Performance (%)
10
9
8
7
5
4
International equities have shown
resilience following US rate hikes.
5
3
1
0
US
Asia Pacific Ex-Japan
Europe
Japan
Source: Bloomberg and GSAM.
Understand domestic recoveries, globally. The international
market recovery is now being driven by domestic growth.
The domestic recoveries in Europe
and Japan bear watching.
Net Exports
GDP (%)
Euro Area Recovery Has Recently Been Driven by Consumption
6
Consumption
Capital Formation
GDP, % Year over Year
4
2
0
-2
-4
-6
2005
2007
2009
2011
2013
2015
Japanese Corporate Reforms May Have A Long-Term Benefit
ROE (%)
15
Return on Equity (ROE)
10 Year Average
9.2%
10
5
0
-5
2005
2007
2009
2011
2013
Economic indicators show that
Euro Area growth is being driven
primarily by domestic consumption.
While in Japan, Prime Minister Shinzo
Abe‘s “three arrows” reform platform
continues to fuel the domestic
economy and corporate profitability.
At the same time, accommodative
monetary policy is supportive in
both regions.
2015
Top Chart Source: Haver and GSAM. Bottom Chart Source: Bloomberg and GSAM.
Top Section Notes: As of November 2015. US refers to the S&P 500 Index, Asia Pacific Ex-Japan refers to the MSCI Pacific Ex-Japan Index, Europe refers to the United Kingdom’s
FT 30 Index, and Japan refers to the TOPIX Index. Performance analysis based on nine historical US rate hikes, except for the MSCI Pacific Ex-Japan Index which captures four US
rate hikes (maximum available data). Bottom Section Notes: Top chart analyzes data from 2005 Q1–2015 Q2. GDP is calculated by the sum of expenditures, namely consumption,
gross capital formation, and net exports. Bottom chart as of 2005 Q3–2015 Q3. The chart shows that return on equity (ROE) is nearing double-digit levels for the first time in about
a decade. The “three arrows” refers to Prime Minister Shinzo Abe’s platform of fiscal stimulus, monetary easing, and structural reforms. Past performance does not guarantee
future results, which may vary.
Market Know-How Q1 2016: The Great ‘Rotate’ |
7
4
Economic growth may amplify smaller stock performance.
Historically, performance has been tightly linked to expansions.
The US expansion in our view
remains supportive of smaller
caps.
Real GDP Growth Forecast and Contributions by Component (Q4 2015–Q4 2016)
3.0%
2.3%
1.8%
0.5%
0.5%
0.5%
GDP
Total
PCE
Capex
Housing
-0.8%
Gov't
Net Exports
Domestic Final Sales
Revenues Generated in the US
Correlation of Earnings Growth
to US Economic Growth
68%
82%
S&P 500
Russell 2000
0.7
0.4
S&P 500
Russell 2000
The outlook for US growth remains
healthy as signs of improving data
provide a supportive backdrop. This
is an environment in which smaller
capitalization equities may thrive
going forward, as smaller caps
have historically provided amplified
exposure to domestic revenues
and earnings.
Top Chart Source: Department of Commerce, Goldman Sachs Global Investment Research, and GSAM.
Bottom Left Chart Source: Bureau of Economic Analysis, BofA Merrill Lynch Small Cap Research, and GSAM.
Bottom Right Chart Source: FactSet and GSAM.
Don’t forget the ‘other 500.’ In the past, small- and midcap stocks
have outperformed small caps alone.
Rolling 3 Year Returns (Basis Points)
500
Investors who move down
the market cap spectrum may
consider “SMID”—a combination
of small and mid-sized stocks.
Performance: Small- and Midcap Relative to Small Cap
400
300
200
100
0
-100
-200
-300
1982
1986
Source: FactSet and GSAM.
1990
1994
1998
2002
2006
2010
2014
We believe SMID caps are an
important component of a diversified
portfolio. On a rolling 3 year basis
since 1979, adding a “midcap”
bias (from the “other 500” names
captured in the Russell 2500 beyond
the Russell 2000) has generated
higher returns 84% of the time
versus small caps alone.
Top Section Notes: Top chart as of November 2015. Domestic final sales contribution to real GDP growth is composed of Personal Consumption Expenditure (PCE), Capital
Expenditure (Capex), Housing, and Government. PCE is a measure of price changes in consumer goods and services. Capex refers to funds used by a company to acquire or
upgrade physical assets. Net exports refers to the difference in value between exports and imports. Correlation is defined as the extent to which two or more variables fluctuate
together. Economic growth is represented by the four-quarter average of Gross Domestic Product (GDP). Bottom left and right charts as of September 2015. Small Cap refers to
the Russell 2000 Index. Large Cap refers to the S&P 500 Index. The economic and market forecasts presented herein have been generated by Goldman Sachs Global Investment
Research for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved.
Past correlations are not indicative of future correlations, which may vary. Bottom Section Notes: Data is from January 1, 1979 to August 31, 2015. Small/Midcap performance
is represented by the Russell 2500 Index and Small Cap is represented by the Russell 2000 Index. One basis point (bps) is 1/100th of a percent. Past performance does not
guarantee future results, which may vary.
8
5
Credit spreads reflect pessimism. Markets have painted a range
of high yield bonds with the same wide brush.
Tightest Ever
Year-End 2014
Widest Ever
Current Spread
US High Yield Energy
EM Corporates
US Investment Grade
US High Yield
US High Yield Ex-Energy
Euro Investment Grade
EM External Debt
Asia High Yield
Euro High Yield
0
25
50
75
100
Percentile
Source: Bloomberg, Barclays, J.P. Morgan, and GSAM.
Higher spreads, leverage, and
price dispersion belie a steady
macro backdrop.
We believe macro conditions
should support credit performance,
particularly in the US, where oilrelated names have contaminated
broader credit spreads. Beyond
energy, wider credit spreads, in our
view, can compensate investors for
concerns about volatility, liquidity,
and leverage. But investment still
requires significant balance sheet
expertise and idiosyncratic scrutiny.
Average High Yield Monthly Excess Return (Basis Points)
A seasonal pattern emerges. High yield may be particularly
attractive as it enters a historically favorable period.
The US high yield market has
demonstrated patterns of seasonal
strength and weakness.
200
150
100
As we enter the new year, wide
credit spreads are converging with
a historically strong period for credit
returns, advancing our enthusiasm
for credit-oriented pro-cyclical
implementation.
50
0
Seasonally Strong Periods of Returns
-50
-100
-150
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Source: Barclays and GSAM.
Top Section Notes: Data shows various economic indices as of November 30, 2015 from Bloomberg. US High Yield Energy, US Investment Grade, and US High Yield Ex-Energy
are all spliced from the Barclays US Corporate Index. EM Corporates is represented by the J.P. Morgan Emerging Market Bond Index Global Diversified. Euro Investment Grade
is represented by the Barclays Euro Corporate Index. EM External Debt is represented by the J.P. Morgan Corporate Emerging Market Bond Index. Euro High Yield is represented
by the Barclays Euro High Yield Index. Asia High Yield is represented by the J.P. Morgan Corporate Emerging Markets Bond (CEMBI) Broad Asia High Yield Index. Bottom Section
Notes: Data is from January 1989 to December 2014 and measures the average monthly returns of the Barclays US High Yield 2% Issuer Cap Index over US Treasuries. Past
performance does not guarantee future results, which may vary.
Market Know-How Q1 2016: The Great ‘Rotate’ |
9
6
Single sources of income entail tradeoffs. Higher yield may bring
varying levels of volatility, returns, and rate sensitivity.
Yield
Ann. Return
Volatility
Rising Rates
Strength
Weakness
MLPs
7.4%
2.1%
18.5%
1.0%
Yield
Return
Global High Yield
5.8%
7.6%
11.6%
0.8%
Yield
Rising Rates
S&P 500 Buy-Write
4.5%
6.8%
13.4%
1.1%
Rising Rates Volatility
US REITs
4.5%
5.6%
24.6%
-0.1%
Yield
Volatility
Emerging Market Debt (USD)
4.1%
7.5%
9.0%
0.1%
Volatility
Rising Rates
Emerging Market Debt (Local)
4.1%
4.9%
13.0%
0.1%
Volatility
Rising Rates
Leveraged Loans
3.7%
4.1%
7.8%
0.7%
Volatility
Return
US Large Cap Value
1.5%
6.1%
16.3%
1.2%
Rising Rates Yield
Source: Bloomberg, Morningstar, and GSAM.
Income-generating asset classes
rarely offer the full package of
yield, return, a smooth ride, and
management of interest rate risks.
Historically, income-oriented asset
classes have often required tradeoffs.
For instance, Master Limited
Partnerships’ (MLPs) high yield came
with higher volatility. Rarely can
investors find all the attributes they
may seek in a single asset class.
Blending income has potential benefits. Historically, a broad
basket of income drivers has helped blunt the unwanted tradeoffs.
Yield
4.6% Higher Yield than Stocks and Bonds
2.1%
2.5%
6.2% Comparable Return to Stocks
7.7%
5.0%
Ann. Return
11.9% Lower Volatility than Stocks
15.4%
Volatility
3.2%
Rising Rate
Performance
Diversified Income Portfolio
S&P 500
Barclays Agg
0.8% Comparable Return to Stocks during Rising Rates
1.5%
-0.3%
Source: Bloomberg, Morningstar, and GSAM.
A diversified approach to income
sources historically has offered
a number of benefits.
Spreading an allocation across a
range of income drivers historically
has enjoyed a higher yield than core
stocks and bonds, higher returns
than bonds, and lower volatility than
stocks. Critically, this allocation also
has exhibited resiliency in the face
of rising rates. A diversified income
portfolio could potentially offer the
full package.
Top Section Notes: As of November 2015. Abbreviations in the top chart and the corresponding allocations of the asset classes comprising the Diversified Income Portfolio in the
bottom chart: MLPs refers to the Alerian MLP Index (13.2%). Global High Yield refers to the Barclays Global High Yield Index (17.4%). Emerging Market Debt (USD) refers to the
J.P. Morgan EMBI Global Diversified Index (7.8%). Emerging Market Debt (Local) refers to the J.P. Morgan GBI-EM Global Diversified Index (6.8%). S&P 500 Buy-Write refers to
the CBOE S&P 500 BuyWrite Index (30%). Leveraged Loans refers to the Credit Suisse Leveraged Loan Index (6.8%). Ex-US REITS refers to the FTSE EPRA/NAREIT ex US TR index
(3.7%). US REITs refers to the FTSE NAREIT Composite TR Index (4.3%). US Large Cap Value refers to the Russell 1000 Value Index (10%). Yield assumptions are represented by
the asset-weighted average 12-month yield of the Institutional and No-Load Shares, excluding those funds with 12-b(1) fees, in the Morningstar peer groups, respectively, through
November 30, 2015. Bottom Section Notes: These illustrative results do not reflect any GSAM product and are being shown for informational purposes only. No representation
is made that an investor will achieve results similar to those shown. The S&P 500 refers to the S&P 500 Index and Barclays Agg refers to the Barclays US Aggregate Bond Index.
Yield shown is the current dividend yield for the S&P 500 and yield to worst is for the Barclays US Aggregate Bond Index as of November 2015. Yield assumption for the Diversified
Income Portfolio is the aggregate yield of the top chart asset class yields weighted at the respective weights from the top chart notes. Return and Volatility are annualized using
monthly returns from June 2006 to November 2015. Rising Rate Performance represents the average monthly return when the 10-Year Treasury Yield rises. Diversification does
not protect an investor from market risk and does not ensure a profit. Please see end disclosures for additional definitions. Past performance does not guarantee future
results, which may vary.
10
12 Month Moving Average of 3 Month Rolling Correlations
7
Oil prices have taken MLPs for a ride. Their correlation has
recently soared above historical averages.
In the short term, the correlation
between MLPs and energy prices
has spiked beyond the relatively
low long term correlation.
1.0
0.8
10 Year Correlation between
MLPs and West Texas Intermediate
(WTI) Oil Is Only 0.28
6 Month Correlation
between MLPs and WTI
Has Surged to 0.85
0.6
We believe the recent tight linkage
between MLPs and energy is not
sustainable in the long run, and we
expect the recent unusually high
correlation to revert closer to the
long-term average. In our view, MLPs
should not be fundamentally tied
to the price of oil.
0.4
0.2
0
-0.2
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg and GSAM.
Distribution Growth (%)
Attractive valuations, high cash flow potential. We view the
oil selloff’s aftermath as an investment opportunity for MLPs.
15
7% Total Projection
5
0
0–2 % Current
Market Pricing
2007
2008
2009
2010
2011
2012
15
Yield Spread (%)
Distribution Growth:
2% Global Financial Crisis
Distribution Growth
10
0
2014
2015 2016
Outlook
5.6%
October 31, 2015 Level
10
5
2013
Higher
3.7% Historical Average
Lower
2007
2008
2009
2010
Source: Bloomberg, Alerian, and GSAM.
2011
2012
2013
2014
2015
MLPs potentially offer strong
distribution growth and currently
trade at a meaningful discount.
MLP valuations today suggest
an implied distribution growth of
0-to-2%—similar to levels last
seen during the global financial
crisis and a fraction of their average
historical distribution growth of 7.6%.
Additionally, current yields may
provide investors with considerable
levels of cash flow, well above their
historical average.
Top Section Notes: Chart is based on data from August 31, 2005 to August 31, 2014. Correlation is defined as the extent to which two or more variables fluctuate together. Rolling
correlations are calculated for 12 month periods, based on 3 month correlations between the Alerian MLP Index and West Texas Intermediary (WTI) crude oil price. Bottom Section
Notes: Top chart as of October 31, 2015. Distribution growth rates are market-cap weighted and reflect year-over year growth rates on a rolling basis. Past correlations are not
indicative of future correlations, which may vary. Bottom chart as of October 31, 2015. Yield spread reflects the market cap weighted yield of the Alerian MLP Index over the yield
of the 10-Year Treasury Note yield. Please see end disclosures for additional information.
Market Know-How Q1 2016: The Great ‘Rotate’ |
11
8
Liquid alternative sub-strategy returns have been variable.
Predicting category leadership has been challenging.
2010
2011
2012
2013
2014
7.63
2.71
6.64
14.20
5.31
5.85
0.30
6.02
6.09
3.01
5.76
0.03
3.68
4.74
2.29
4.84
-1.44
2.33
2.95
1.83
0.46
-2.89
1.52
1.92
0.06
GSAM Liquid Alternative Investment (LAI) Peer Groups:
Equity Long/Short
Event Driven
Relative Value
Tactical Trading/Macro
The relative performance of
alternative sub strategies has not
been predictable over time.
Multistrategy
“Timing” an allocation to liquid
alternatives based solely on recent
past performance may lead to
poor results. There has been little
persistence in the returns of singlestrategy liquid alternative mutual
funds.
Source: Morningstar and GSAM.
Harness the power of diversification. Increasing the number
of strategies may lower volatility, without detracting from returns.
Historically, groupings of 8 to 12
liquid alternative funds have
shown reduced volatility of
returns.
Historical Volatility, 2012–2014 (%)
12
The reduction in returns volatility
historically achieved by holding
just 8-12 funds is 87% of the reduction
achieved by holding as many as 35 funds.
10
8
6
4
2
0
5
10
15
20
25
Number of Funds Owned during Period
30
35
Adding an increasing number of
liquid alternative funds reduced the
volatility of returns in our analysis
over the period 2012–2014. Notably,
in our view, groups of 8 to 12 funds
did not sacrifice returns (~4% average
annualized) for lower volatility.
Source: Morningstar and GSAM.
Top Section Notes: For illustrative purposes only. As of calendar year-end 2014. Current performance may be lower or higher than the performance quoted. In order to help
investors make sense of the myriad of LAI offerings, we analyzed the 642 mutual funds that Morningstar, Inc. categorizes as liquid alternatives to identify those that employed
an investment style that we deemed to be “hedge fund-like.” We eliminated funds that used certain nontraditional investment styles that do not closely resemble a traditional
hedge fund investment strategy. Our elimination process narrowed the universe of liquid alternative investments to 331 funds. Once we identified our universe of “hedge fundlike” LAI funds, we then assigned each fund to one of the five standard hedge fund buckets based on fund information: Equity Long/Short, Event Driven, Relative Value, Tactical
Trading/Macro, and Multistrategy. See “Appendix: GSAM Liquid Alternative Investments Selection Methodology” for detail on GSAM’s liquid alternative investments category
methodology. Diversification does not protect an investor from market risk and does not ensure a profit. Bottom Section Notes: For illustrative purposes only. As of December 31,
2014, based on historical returns of 121 single-strategy liquid alternative investment funds which make up the GSAM LAI Peer Groups and possess track records over the period
January 1, 2012 to December 31, 2014. The line represents the average annualized volatility of the combined monthly returns of a given number of funds. The shading represents
the annualized volatility of 90% of the combined monthly returns of a given number of funds. The returns represent past performance. Past performance does
not guarantee future results, which may vary.
12
2
Q1
2016
Market Know-How Q1 2016: The Great ‘Rotate’ |
13
Our Contributors
Heather Kennedy Miner, CFA
John Tousley, CFA
James Ashley
Managing Director, Global Head of
Strategic Advisory Solutions
Managing Director, Head of US
Market Strategy
E xecutive Director, Head of International
Heather is the global head of Strategic
Advisory Solutions, which delivers
GSAM’s perspectives on global markets,
strategic asset allocation, and innovative
business practices.
John leads the Market Strategy team,
focusing on global capital markets,
macro strategy, and implementation.
He specializes in developing tactical
and strategic investment insights within
a risk-aware framework.
James is the head of the international
market strategy team, with responsibility
for providing actionable investment
ideas and perspectives on the latest
international market developments.
Candice Tse
Allen Sukholitsky, CFA
Brendan Conway
Vice President, Senior Market Strategist
Vice President, Senior Market Strategist
Vice President, Senior Financial Writer
Candice is responsible for economic
and market strategy, along with client
engagement on investment solutions.
Her areas of expertise include
Womenomics and emerging markets.
Allen focuses on economic and market
strategy as well as client engagement
on investment implementation. He is
responsible for helping clients make
sense of the markets and turning insights
into actionable strategies.
Brendan helps drive content production
for Market Strategy, Portfolio Strategy,
and Business Practices, as well as for
other teams across GSAM.
Davide Andaloro
Associate, Market Strategist
Davide is responsible for analyzing
macroeconomic dynamics and developing
timely market views across different
asset classes.
14
Market Strategy
Risk Disclosures
Investors should also consider some of the potential risks of alternative
investments: Alternative Strategies. Alternative strategies often engage in
leverage and other investment practices that are speculative and involve a high
degree of risk. Such practices may increase the volatility of performance and the
risk of investment loss, including the entire amount that is invested. Manager
experience. Manager risk includes those that exist within a manager’s organization,
investment process or supporting systems and infrastructure. There is also a
potential for fund-level risks that arise from the way in which a manager constructs
and manages the fund. Leverage. Leverage increases a fund’s sensitivity to market
movements. Funds that use leverage can be expected to be more “volatile” than
other funds that do not use leverage. This means if the investments a fund buys
decrease in market value, the value of the fund’s shares will decrease by even more.
Counterparty risk. Alternative strategies often make significant use of over-thecounter (OTC) derivatives and therefore are subject to the risk that counterparties
will not perform their obligations under such contracts. Liquidity risk. Alternative
strategies may make investments that are illiquid or that may become less liquid in
response to market developments. At times, a fund may be unable to sell certain of its
illiquid investments without a substantial drop in price, if at all. Valuation risk. There
is risk that the values used by alternative strategies to price investments may be
different from those used by other investors to price the same investments. The above
are not an exhaustive list of potential risks. There may be additional risks that should
be considered before any investment decision.
Equity securities are more volatile than fixed income securities and subject to greater
risks. Small and mid-sized company stocks involve greater risks than those customarily
associated with larger companies.
Dividends are not guaranteed and a company’s future ability to pay dividends may
be limited.
Master Limited Partnerships (“MLPs”) may be generally less liquid than other publicly
traded securities and as such can be more volatile and involve higher risk. Investments
in securities of an MLP involve risks that differ from investments in common stocks,
including risks related limited control and limited rights to vote on matters affecting
the MLP, risks related to potential conflicts of interest between the MLP and
the MLP’s general partner, cash flow risks, dilution risks and risks related to the
general partner’s right to require unitholders to sell their common units at an
undesirable time or price. MLPs are also generally considered interest-rate sensitive
investments. During periods of interest rate volatility, these investments may not
provide attractive returns.
MLPs may also involve substantially different tax treatment than other equity-type
investments, and such tax treatment could be disadvantageous to certain types
of investors, such as retirement plans, mutual funds, charitable accounts, foreign
investors, retirement accounts or charitable entities. In addition, investments in MLPs
may trigger state tax reporting requirements. Generally, a master limited partnership
(“MLP”) is treated as a partnership for Federal income tax purposes. Therefore,
investors in an MLP may be subject to certain taxes in addition to Federal income
taxes, including state and local income taxes imposed by the various jurisdictions in
which the MLP conducts business or owns property. In addition, certain tax-exempt
investors in an MLP, such as tax-exempt foundations and charitable lead trusts, may
incur unrelated business taxable income (“UBTI”) with respect to their investment.
UBTI may result in increased Federal, and possibly state and local, tax costs, and may
also result in additional filing requirements for tax exempt investors. Non-US investors
may be subject to US taxation on a net income basis and have US filing obligations
as a result of investing in MLPs. The tax reporting information for MLPs generally is
provided to investors on an annual IRS Schedule K-1, rather than an IRS Form 1099.
To the extent the Schedule K-1 is delivered after April 15, you may be required to
request an extension to file your tax returns.
MLP distributions consist largely of return of capital and not of current income.
The ultimate composition of these distributions may vary due to a variety of factors
including projected income and expenses, depreciation and depletion, and any tax
elections made by the MLP. The final characterization of such distribution will be made
when an MLP can determine each investor’s share of the MLP’s income, expenses,
gains and losses. The final tax status of the distribution may differ substantially from
this information.
An investment in real estate securities is subject to greater price volatility and the
special risks associated with direct ownership of real estate.
Investments in fixed-income securities are subject to credit and interest rate risks.
Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise
in interest rates can result in the decline in the bond’s price. Credit risk is the risk that
an issuer will default on payments of interest and principal. This risk is higher when
investing in high yield bonds, also known as junk bonds, which have lower ratings and
are subject to greater volatility. All fixed income investments may be worth less than
their original cost upon redemption or maturity.
Although Treasuries are considered free from credit risk, they are subject to interest
rate risk, which may cause the underlying value of the security to fluctuate.
Income from municipal securities is generally free from federal taxes and state taxes
for residents of the issuing state. While the interest income is tax-free, capital gains,
if any, will be subject to taxes. Income for some investors may be subject to the
federal Alternative Minimum Tax (AMT).
Multimanager Approach Risk. A multimanager fund’s performance may depend on the
ability of its investment adviser in selecting, overseeing, and allocating fund assets
to underlying managers. The underlying managers’ investment styles may not always
be complementary. Underlying managers make investment decisions independently
of one another, and may make decisions that conflict with each other. For example,
it is possible that an underlying manager may purchase an investment for the fund at
the same time that another underlying manager sells the same investment, resulting
in higher expenses without accomplishing any net investment result; or that several
underlying managers purchase the same investment at the same time, without
aggregating their transactions, resulting in higher expenses. Moreover, a fund’s
multimanager approach may result in the fund investing a significant percentage of
its assets in certain types of investments, which could be beneficial or detrimental
to the fund’s performance depending on the performance of those investments and
the overall market environment. A fund’s underlying managers may underperform the
market generally or underperform other investment managers that could have been
selected for the fund. Some underlying managers have little experience managing
registered investment companies which, unlike the private investment funds these
underlying managers have been managing, are subject to daily inflows and outflows
of investor cash and are subject to certain legal and tax-related restrictions on their
investments and operations. Subject to the overall supervision of a fund’s investment
program by its investment adviser, each underlying manager is responsible, with
respect to the portion of the fund’s assets it manages, for compliance with the fund’s
investment strategies and applicable law. An investment adviser and a fund may
have received an exemptive order from the Securities and Exchange Commission
that permits the investment adviser to engage additional underlying managers, to
enter into subadvisory agreements with those underlying managers, and to materially
amend any existing subadvisory agreement with underlying managers, upon the
approval of a fund’s board of trustees and without shareholder approval.
Investments in Liquid Alternative Funds expose investors to risks that have the
potential to result in losses. These strategies involve risks that may not be present
in more traditional (e.g., equity or fixed income) mutual funds. These Funds generally
may seek sources of returns that perform differently from broader securities markets.
Market Know-How Q1 2016: The Great ‘Rotate’ |
15
Risk Disclosures continued
However, correlations among different asset classes may shift over time, and if this
occurs a Fund’s performance may track broader markets. In addition, if returns are in
fact uncorrelated to the broader securities markets, a Fund may underperform those
markets. For example, in periods of robust equity market returns, returns from a Fund
may be lower or negative. The use of alternative investment techniques such as
shorting or leveraging creates an opportunity for increased returns but also creates
the possibility for greater loss. Losses on short positions are potentially unlimited,
since the positions lose value as the asset that was sold short increases in value.
Taking short positions leverages a Fund’s assets, because the Fund is exposed to
market movements beyond the amount of its actual investments.
Derivative instruments may involve a high degree of financial risk. These risks include
the risk that a small movement in the price of the underlying security or benchmark
may result in a disproportionately large movement, unfavorable or favorable, in the
price of the derivative instrument; risks of default by a counterparty; and liquidity risk.
There is risk that alternative funds hold investments that may be difficult to value and
as a result the values used by alternative funds to price investments may be different
from those used by others to price the same investments. At times, a Fund may be
unable to sell certain of its illiquid investments without a substantial drop in price,
if at all. There is also the risk that funds will not be able to pay redemption proceeds
within the allowable time period because of unusual market conditions, an unusually
high volume of redemption requests or other reasons.
There may be additional risks that the Funds do not currently foresee or consider
material.
The opinions expressed in this research paper are those of the authors, and not
necessarily of GSAM. The investments and returns discussed in this paper do not
represent any Goldman Sachs product.
This research paper makes no implied or express recommendations concerning
how a client’s account should be managed. This research paper is not intended to
be used as a general guide to investing or as a source of any specific investment
recommendations.
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.
16
General Disclosures
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.
Economic and market forecasts presented herein reflect a series of assumptions
and judgments as of the date of this presentation and are subject to change without
notice. These forecasts do not take into account the specific investment objectives,
restrictions, tax and financial situation or other needs of any specific client. Actual
data will vary and may not be reflected here. These forecasts are subject to high
levels of uncertainty that may affect actual performance. Accordingly, these forecasts
should be viewed as merely representative of a broad range of possible outcomes.
These forecasts are estimated, based on assumptions, and are subject to significant
revision and may change materially as economic and market conditions change.
Goldman Sachs has no obligation to provide updates or changes to these forecasts.
Case studies and examples are for illustrative purposes only.
Although certain information has been obtained from sources believed to be reliable,
we do not guarantee its accuracy, completeness or fairness. We have relied upon
and assumed without independent verification, the accuracy and completeness of all
information available from public sources.
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.
This material is provided for informational purposes only and should not be construed
as investment advice or an offer or solicitation to buy or sell securities.
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.
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© 2016 Goldman Sachs. All rights reserved.
Date of first use: 12/7/2015. 22612-OTU-133246.
Market Know-How Q1 2016: The Great ‘Rotate’ |
17
Glossary
Equities
Fixed Income
The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of
500 stocks, an unmanaged index of common stock prices. The index figures do not
reflect any deduction for fees, expenses or taxes. It is not possible to invest directly
in an unmanaged index.
The federal funds rate is the interest rate at which depository institutions lend
balances at the Federal Reserve to other depository institutions overnight.
The S&P Developed ex US Small Cap Index covers the smallest 20% of companies
from developed countries (excluding the US) ranked by total market capitalization.
The Barclays US Corporate Bond Index measures the investment grade, fixed-rate,
taxable corporate bond market. It includes USD denominated securities publicly issued
by US and non-US industrial, utility and financial issuers. The US Corporate Index is
a component of the US Credit and US Aggregate Indices, and provided the necessary
inclusion rules are met, US Corporate Index securities also contribute to the multicurrency Global Aggregate Index.
The S&P Developed ex-US Property Index measures the performance of real
estate companies domiciled in countries outside the United States.
The S&P GSCI Commodity Index is a composite index of commodity sector returns,
representing an unleveraged, long-only investment in commodity futures that is
broadly diversified across the spectrum of commodities.
The STOXX Europe 600 Index is derived from the STOXX Europe Total Market
Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number
of 600 components, the STOXX Europe 600 Index represents large, mid and small
capitalization companies across 18 countries of the European region: Austria,
Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and
the United Kingdom.
The Japan TOPIX, also known as the Tokyo Stock Price Index, is a capitalizationweighted index of all companies listed on the First Section of the Tokyo Stock
Exchange. The index is supplemented by the subindices of the 33 industry sectors.
The MSCI AC Asia ex Japan Index captures large and mid cap representation
across 2 of 3 Developed Markets countries (excluding Japan) and 8 Emerging Markets
countries in Asia. With 610 constituents, the index covers approximately 85% of the
free float-adjusted market capitalization in each country.
The Russell 2000 Index measures the performance of the small-cap segment of the
U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index
representing approximately 10% of the total market capitalization of that index. It
includes approximately 2000 of the smallest securities based on a combination of their
market cap and current index membership.
The Russell 2500 Index measures the performance of the small to mid-cap segment
of the U.S. equity universe, commonly referred to as “SMID” cap. The Russell 2500
Index is a subset of the Russell 3000 Index. It includes approximately 2500 of the
smallest securities based on a combination of their market cap and current index
membership.
The Russell 1000 Value Index is an unmanaged index of common stock prices that
measures the performance of the large-cap value segment of the US equity universe.
The FTSE NAREIT Composite Total Return Index is a free-float weighted index
that tracks US REITs and publicly-traded real estate companies.
The FTSE EPRA/NAREIT Developed ex US Index is a subset of the FTSE EPRA/
NAREIT Developed Index and is designed to track the performance of listed real
estate companies and REITS.
The Dow Jones US Select Real Estate Securities Index is a float-weighted index
that measures US publicly traded real estate securities.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization
index that is designed to measure equity market performance of emerging markets.
The unmanaged MSCI EAFE Index (unhedged) is a market capitalization weighted
composite of securities in 21 developed markets.
18
The 10-Year Treasury is a US Treasury debt obligation that has a maturity of
10 years.
The Barclays Euro Corporate Bond Index is a broad-based benchmark that
measures the investment grade, euro-denominated, fixed-rate corporate bond market.
Inclusion is based on the currency denomination of a bond and not the country of risk
of the issuer. The Euro Corporate Index is a subset of Barclays broader-based flagship
indices, such as the Euro Aggregate and the multi-currency Global Aggregate Index.
The Barclays Euro High Yield Index measures the market of non-investment grade,
fixed-rate corporate bonds denominated in Euro. Inclusion is based on the currency of
issue, and not the domicile of the issuer. The index excludes emerging market debt.
The Barclays Global High Yield Index provides a broad-based measure of the
global high-yield fixed income market.
The J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) is a global,
liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate
bonds issued by emerging markets entities. The J.P. Morgan Emerging Markets Bond Index Global is an unmanaged market
capitalization Index that tracks total returns for USD-denominated debt instruments
issued by emerging market sovereign and quasi-sovereign issuers.
The J.P. Morgan Emerging Market Debt Index is an unmanaged index tracking
foreign currency denominated debt instruments of 31 emerging markets.
The J.P. Morgan GBI-EM Global Diversified Composite Index tracks local
currency bonds issued by emerging market sovereign issuers.
The J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) indices
are comprehensive emerging market debt benchmarks that track local currency bonds
issued by Emerging Market governments.
The J.P. Morgan Emerging Market Global Bond Index (EMBI) is a benchmark
index for measuring the total return performance of international government
bonds issued by emerging market countries that are considered sovereign (issued in
something other than local currency) and that meet specific liquidity and structural
requirements.
The J.P. Morgan Corporate Emerging Market Bond Index (CEMBI) Broad Asia
High Yield Index is a global, liquid corporate emerging markets benchmark that
tracks U.S.-denominated corporate bonds issued by emerging markets entities. The
corporate CEMBI is a liquid basket of emerging markets corporate issues with strict
liquidity criteria for inclusion in order to provide replicability, tradability, robust pricing
and data integrity.
The Barclays Global Aggregate Index provides a broad-based measure of the
global investment-grade fixed income markets. The three major components of this
index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific
Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds,
Canadian government, agency and corporate securities, and USD investment grade
144A securities.
The Barclays Global High Yield Index provides a broad-based measure of the
global high-yield fixed income markets.
The Barclays US Corporate High Yield 2% Issuer Capped Bond Index is an
issuer-constrained version of the flagship US Corporate High Yield Index, which
measures the USD-denominated, high yield, fixed-rate corporate bond market. The
index follows the same rules as the uncapped version, but limits the exposure of each
issuer to 2% of the total market value and redistributes any excess market value index
wide on a pro rata basis.
The Barclays US Credit Index measures the investment grade, US dollardenominated, fixed-rate, taxable corporate and governmentrelated bond markets. It
is comprised of the US Corporate Index and a non-corporate component that includes
foreign agencies, sovereigns, supranationals and local authorities.
The Barclays Aggregate Bond Index represents an unmanaged diversified portfolio
of fixed income securities, including U.S. Treasuries, investment-grade corporate
bonds, and mortgage backed and asset-backed securities.
Other
The Alerian MLP Index is a composite of the 50 most prominent energy MLPs
calculated by Standards & Poor’s using a float-adjusted market capitalization
methodology. “Alerian MLP Index”, “Alerian MLP Total Return Index”, “AMZ” and
“AMZX” are trademarks of Alerian.
The CBOE S&P 500 BuyWrite Index is a benchmark designed to track the
performance of a hypothetical buy-write strategy on the S&P 500 Index.
The S&P 500 Global Infrastructure Index tracks 75 companies from around the
world chosen to represent the listed infrastructure industry while maintaining liquidity
and tradability.
The Credit Suisse Leveraged Loan Index is mirror the investable universe of the
USD denominated leveraged loan market.
The HFRI Fund of Funds Index is an equal weighted, net of fee, index composed of
approximately 800 fund-of-funds which report to HFR.
Alternative Strategies
Index Benchmarks
GSAM Liquid Alternative Investments Selection Methodology, in order to draw
the line between liquid alternatives and other nontraditional investments, we started
with GSAM’s definition of what it means to be a liquid alternative investment, as
detailed on page 2. We then identified conditions that we believe are necessary for
nontraditional mutual funds to behave in a manner similar to hedge funds. Our first
criterion was that liquid alternatives should provide more than just long-only exposure
to asset classes, namely: equities, fixed income, commodities, or currencies. Secondly,
they seek to significantly hedge against potential downside risk via short positions
(we used 20% of net assets as a threshold, the same threshold that Morningstar, Inc.
uses). We believe that, without considering this narrower universe, investors could
end up investing in a fund with an investment strategy that is inconsistent with their
investment goals or objectives.
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.
For the GSAM LAI Equity Long/Short Peer Group, we included all funds that select
stocks long, using a bottom-up, top-down, fundamental, or quantitative process,
and then hedge by shorting stocks, stock-index futures, ETFs, or long put options
(again using the 20% minimum threshold). Most of these funds were sourced from
Morningstar’s Long/Short Equity category, and a few were found in the Morningstar
Market Neutral category.
For the GSAM LAI Event Driven Peer Group, we included all funds that invest in
equity or debt securities in order to potentially profit from corporate events, such as
mergers or bankruptcies. These strategies included the merger arbitrage funds from
the Morningstar Market Neutral category, and the long/short credit strategies from
the Morningstar Nontraditional Bond category.
For the GSAM LAI Relative Value Peer Group, we included all funds that seek to
capture the price differential between two similar securities. Therefore, we selected
the equity market neutral and (non-merger) arbitrage funds from the Morningstar
Market Neutral category.
For the GSAM LAI Tactical Trading/Macro Peer Group, we chose all funds
that take dynamic directional (long or short) views on at least three of four asset
classes (equities, fixed income, commodities, currencies) using systematic or
discretionary approaches. We combined the systematic managed futures funds from
the Morningstar Managed Futures category with the global macro strategies (which
consistently short 20%) from the Morningstar Multialternative category.
And finally, for the GSAM LAI Multistrategy Peer Group, we selected all funds
which employ strategies consistent with at least two of the other LAI peer groups
using a multimanager or single-manager approach, using active management or hedge
fund replication. We found most of these funds in Morningstar’s Multialternative
category.
Market Know-How Q1 2016: The Great ‘Rotate’ |
19
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Goldman Sachs Asset Management is
one of the world’s leading investment
managers. With more than 2,000
professionals across 35 offices worldwide,
GSAM provides institutional and individual
investors with investment and advisory
solutions, with strategies spanning asset
classes, industries, and geographies.
Our investment solutions include fixed
income, money markets, public equity,
commodities, hedge funds, private
equity, and real estate. Our clients access
these solutions through our proprietary
strategies, strategic partnerships, and our
open architecture programs.
Our investment teams represent over
800 investment professionals, capitalizing
on the market insights, risk management
expertise, and technology of Goldman
Sachs. We help our clients navigate
today’s dynamic markets and identify the
opportunities that shape their portfolios
and long-term investment goals. We
extend these global capabilities to the
world’s leading pension plans, sovereign
wealth funds, central banks, insurance
companies, financial institutions,
endowments, foundations, individuals,
and family offices, for whom we invest
or advise on more than $1 trillion
of assets.
As of September 30, 2015. GSAM leverages the resources of Goldman, Sachs & Co. subject to legal, internal, and regulatory
restrictions. Assets Under Supervision (AUS) includes assets under management and other client assets for which Goldman Sachs
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does not have full discretion.