“Many strategies do look at historical returns to make allocations,” Jonathan Beinner, GSAM’s co-head of global fixed income and liquidity management, told aiCIO. “Going forward, I think that there would be disappointments by continuing this.”
One strategy that critics have said relies heavily on bullish bond markets is risk parity. Levering up long-duration bonds has proven successful—until a rough recent quarter.
“Risk parity strategies did terribly in the month of June,” he said, “Where entire portfolios went down: Nothing hedged anything at all.” But June was only one month, Beinner pointed out, and the strategy is passive by nature.
A number of major risk-parity managers including Bridgewater Associates have tilted their portfolios away from fixed income, arguing that the move does not imply active management, but refining of a strategy.
Beinner called the already-rising interest rates a harbinger of a “prolonged and potentially significant rise” in US rates. “This comes after what has essentially been a 30-year bull market in bonds,” he said. “Rates have been falling overall since the ’80s.”
However, the change in tides will not leave most fixed-income managers washed up, he was quick to point out. (Of course, Beinner himself is co-portfolio manager of GSAM’s Strategic Income Fund.)
Asked if rising rates would expose many managers as lucky rather than skillful, he said he did not foresee that.
“I don’t think so. Active bond managers perform against benchmarks and one another, rather than absolute return,” Beinner said. “There is always a way to compare that strips out the overall movement of the market.”
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