Goldman attracts record deposits to bond fund

Despite rising rates, bank earns a boost in one of the few Wall Street businesses it hasn't dominated

Dec 17, 2013 @ 8:32 am (Updated 12:42 pm) EST

goldman sachs, bonds, fixed income, interest rates, federal reserve
Bloomberg News

The Goldman Sachs Group Inc. is drawing record deposits into a bond mutual fund that's making money even as interest rates rise, giving the bank a boost in one of the few Wall Street businesses it hasn't dominated.

The Goldman Sachs Strategic Income Fund (GSZAX) attracted $9.8 billion in the first 11 months of 2013, more than three times the net new cash taken in by the company's previous best-selling mutual fund in a calendar year, according to Morningstar Inc. data going back to 1993. The $12.5 billion fund returned 5.3% in 2013 through Dec. 13, beating 96% of rivals, according to data compiled by Bloomberg. The fund has quintupled in size this year.

Strategic Income is raising the bank's profile in the $14.6 trillion U.S. mutual fund industry by standing out among a breed of bond products whose managers can invest across the fixed- income spectrum, including bets that pay off when interest rates rise. The unconstrained funds have caught on as investors flee conventional fixed-income funds in anticipation of rates climbing further and spurring losses in bonds when the Federal Reserve scales back its asset-buying program.

“This portfolio has a shot at making money in any rate environment,” co-manager Michael Swell said. “You will see money flowing out of traditional fixed income into products like this one.”

Slowing stimulus may lead to higher interest rates, which reduces the value of interest-paying securities with fixed rates.

SHIFTING DEPOSITS

Nontraditional bond funds pulled in a record $51.5 billion this year through last month, according to Morningstar, while intermediate-term bond funds, the core fixed-income product for many investors, had $73.2 billion in redemptions.

The $28 billion Pimco Unconstrained Bond Fund won $9.6 billion, while Bill Gross's $244 billion Pimco Total Return Fund had $36.9 billion in withdrawals, Morningstar estimates. Pimco Total Return, which lost its title as the world's largest mutual fund in October, fell 1.5% through Dec. 13, compared with a decline of 1.8% for the Barclays U.S. Aggregate Bond Index.

Mr. Gross, 69, took over Pacific Investment Management Co.'s unconstrained fund Dec. 5 when manager Chris Dialynas went on sabbatical.

Investors may not appreciate that the flexible funds, whose assets grew 20-fold after the 2008 financial crisis to $119 billion, carry their own risks even with limited exposure to rising interest rates, said Eric Jacobson, Morningstar's director of fixed-income research.

Many of the funds, including Goldman Sachs', own high-yield and emerging-market bonds, which can lose value if economies falter or stock markets slump, Mr. Jacobson said. Goldman Sachs Strategic Income fell 2.5% in 2011, trailing 95% of its peers, as large positions in mortgages not guaranteed by the U.S. government declined amid a selloff of riskier assets, Mr. Swell said.

For Goldman Sachs, the popularity of its go-anywhere fund has given the bank success in an area where it has historically trailed better-known competitors. Previously, the bank's top-selling mutual fund in a full calendar year was the Goldman Sachs High Quality Floating Rate Fund, which took in $2.8 billion in 2002, according to Morningstar.

“They've never been much of a player in mutual funds,” said Geoff Bobroff, a fund industry consultant.

'UPHILL CLIMB'

Goldman Sachs had $81 billion in U.S. long-term mutual fund assets as of Nov. 30, ranking 23rd with less than 1% market share, Morningstar data show. The totals don't include money-market funds. In the past five years, the bank's U.S. bond funds outperformed 57% of their peers and its stock funds beat 49%, according to Lipper Inc.

One hot fund such as Strategic Income can boost a firm's visibility, Mr. Bobroff said. “It is still an uphill climb to become much bigger, given all the competition,” he said.

Goldman Sachs attracted more stock and bond mutual-fund money, $12.8 billion, than all but six U.S. firms this year through November, Morningstar's data show.

“This business is a focus for us and we are pleased with what we are seeing,” said James McNamara, president of the bank's mutual-funds business.

Goldman Sachs has added salespeople who deal with brokers and advisers in the U.S., Europe and Asia in a bid to increase market share, McNamara said.

GLOBAL NETWORK

Goldman Sachs Asset Management, the unit overseeing more than $900 billion, last month raised $826 million for its first closed-end fund, which will invest in energy partnerships. Closed-end funds have a fixed number of shares outstanding and usually trade on a stock exchange.

Investment management accounted for 18% of the bank's revenue in the third quarter, compared with 14% a year earlier.

(Bloomberg News)