Portfolio Manager Perspectives

Jeff Benjamin

New Goldman fund overweights emerging-markets debt

Managers can adjust on the fly, use currencies to capture alpha

Mar 12, 2013 @ 1:49 pm

By Jeff Benjamin

If half of the world's gross domestic product is now coming from the emerging markets, why do most global bond indexes allocate only about 7% to emerging-markets debt?

That's the kind of question Goldman Sachs Asset Management portfolio manager Hugh Briscoe believes more investors should be asking.

“With global bond portfolios, you are not getting enough exposure to the real drivers of global growth,” he said.

Mr. Briscoe is not the first person to suggest that American investors are overly allocated to U.S. markets, but he is trying to be part of the solution.

Mr. Briscoe co-manages, along with Iain Lindsay, the Goldman Sachs World Bond Fund (GWRAX), a relatively new product pegged to an equally new benchmark.

The fund, launched in December and still operating mostly on the initial seed money, is pushing a few envelopes by daring to allocate three to four times the traditional weightings to emerging-markets debt.

U.S. government debt still represents about 40% of the portfolio, but even that is hedged through shortened durations.

“From a pure weighting perspective, the U.S. allocation is significant, but from a duration perspective, we are actually underweight,” Mr. Briscoe said. “If rates start to rise, the portfolio is likely to outperform the benchmark because the portfolio in duration terms is lower-weighted.”

In essence, the fund is not only pegged to a modern and more innovative benchmark, the Barclays Global Sovereign Fiscal Strength Index, but also has the ability to adjust on the fly.

A key component of the fund's flexibility is the currency overlay strategy, which is positioned as a source of alpha on top of the sovereign bond portfolio.

The currency strategy is unique because it gives the portfolio managers a means of betting for or against various currencies, while at the same time holding government debt in the locally denominated currency.

For instance, if the portfolio included Mexican sovereign bonds for the yield, but the fund's currency team didn't like the exposure to the Mexican peso, a short position could be established on the peso to neutralize the exposure.

Separately, the currency team applies a currency strategy that involves going long and short various global currencies.

“The currency management gives us an additional universe, because there are more currencies we can manage than there are bonds in the benchmark,” Mr. Briscoe said. “It is a fairly economical way of adding additional risk.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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