Investing for income and growth through a multi-asset approach
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Investing for income and growth through a multi-asset approach

Sep 2023
Sep 2023
Generate passive income with a multi-asset approach - Goldman Sachs Asset Management’s David Copsey answers five key questions from income investors

What’s a good way to construct the equity allocation of an income portfolio? Amid high interest rates, should income investors go all-in on bonds? How could investors manage the default risk from high-yield corporate bonds?

In this Q&A article, David Copsey, Executive Director, Multi-Asset Solutions Group at Goldman Sachs Asset Management, answers five frequently asked questions by income investors, and shares more about the Goldman Sachs Global Multi-Asset Income Portfolio — a fund that is an alternative income option to pure fixed income or equity solutions.

This article was syndicated by Endowus in partnership with Goldman Sachs Asset Management.

Stocks allocation — still key in a long-term income strategy

Q: Why should income-oriented investors consider equities when interest rates are at their highest level since the Global Financial Crisis?

David: The rapid rise of interest rates may tempt investors to go all-in on bonds to boost income. 

However, trying to time investments in bonds over equities based on the prevailing level of bond yields has historically proven difficult. Even at starting yields above 5%, bonds have underperformed equities in every calendar year outside the tech bubble and the Global Financial Crisis over the past 30 years. 

To achieve long-term investment goals, investors should aim to stay balanced to avoid overlooking the importance of capital growth. Thus, both capital and income growth are critical elements of a long-term income strategy, and this means exposure to both bonds and equities is required. 

The stocks in our Multi-Asset Income strategies have grown their dividends twice as fast as inflation over the past five years, and 3% per year faster than the broad equity market.*

Chart: Five-year growth of inflation, dividends of broad equity market, and equities in income strategies. Active equity selection may result in dividend growth in excess of inflation. Source: Bloomberg, Janus Henderson Global Dividend Index, Morningstar, Goldman Sachs Asset Management. As of 1 March 2023.

*Source: Bloomberg, Janus Henderson Global Dividend Index, Morningstar, Goldman Sachs Asset Management. As of 1 March 2023. Based on dividends in local currency. Global Dividends based on MSCI World.

Looking beyond high dividend-paying value stocks

Q: What should the equity allocation consist of, bearing in mind that dividend-oriented equity strategies have underperformed the broader market recently?

David: We believe it’s important to construct the equity allocation holistically by looking beyond stocks that might offer high dividend yield today, but potentially offer less total return tomorrow, as buying high dividend-paying value stocks has weighed on the performance of many traditional equity income strategies (Exhibit 3). 

In contrast, we invest in 50 to 70 high-conviction income stocks, which we complement with broad exposure to the global equity markets. This provides balance to our portfolio’s style and sector diversification, which may help its performance during periods in which the growth style outperforms. 

To further diversify sources of income, we complement the dividends earned by our holdings through covered call writing. A covered call is constructed by holding a long position of an equity, followed by collecting premiums from selling corresponding out-of-the money call options on developed market equity indices, which could help achieve downside protection amid the search for upside potential.

Chart: Equity style exposure - Goldman Sachs Asset Management seeks exposure across the style spectrum
Chart: Performance of growth and value stocks. Style performance is volatile, based on the MSCI World Growth vs Value. Source: Morningstar

Managing default risk in a multi-asset income portfolio

Q: With high-yield corporate bonds making up a large part of most multi-asset income portfolios, how do you manage default risk?

David: Selectivity is vital when it comes to reducing a portfolio’s exposure to default risk. Instead of owning the full universe of high-yield corporate bonds, we aim to invest only in low-rated issuers that we’ve selected very carefully. 

This approach has enabled us to avoid any credit defaults in our portfolios in the past three years, while our holdings with a credit rating of BB or below have experienced just half of the credit spread widening experienced by all the bonds with equivalent credit ratings in the broad market over the past year. 

Given the current environment, we aim to identify issuers with resilient balance sheets and limited revenue cyclicality. We’re finding them in sectors such as aerospace and defence. By contrast, we aim to avoid companies that are sensitive to changes in discretionary consumer spending, like cruise operators and theatres, or have high refinancing needs, such as capital-intensive cable companies. 

Chart: Change in credit spread vs broad market. Goldman Sachs Asset Management's income strategies experienced less spread widening in the risk-off environment of Q1 2022, as compared to the US HY CCC Index. As of 28 Feb 2023.
Chart: Number of credit defaults in the last 12 months. Goldman Sachs Asset Management's income strategies experienced no credit defaults. The US High Yield Index saw 11 credit defaults. As of 28 Feb 2023.

Understanding the macro outlook: economic growth, recession risks

Q: How does the Goldman Sachs Global Multi-Asset Income Portfolio reflect your macro views?

David: We believe the most developed markets are in the advanced stage of the growth cycle, but are unlikely to contract this year due to continued resilience of labour markets. 

That said, growth is likely to remain below historical standards and recessionary risks are increasing with the persistence of tight credit conditions and restrictive monetary policy. 

Distinguishing between “late” and “end of cycle” is important when it comes to tactical positioning, as risk assets have historically performed well in the “late” cycle phase but struggled when recessions are imminent. 

This backdrop means our portfolios are currently largely aligned with their long-term strategic positioning targets, but elevated uncertainty coupled with relative valuation differences mean we marginally favour government and investment-grade bonds over high yield and equities. 

This is illustrated in the chart below, which shows how the US 10-year real bond yield now trade in 22%.

Chart: Current valuation of bonds, credit and equities relative to their own history since 2005. US 10Y real bond yields have only been higher 22% of the time since 2005; global equities have traded at higher PE ratios only 19% of the time. Source: Goldman Sachs Asset Management, as of 30 June 2023.

Getting exposure to stocks and bonds in Asia

Q: How do Asian securities feature in your portfolio?

David: Our income strategies invest globally and access the Asian markets directly by investing in both local and hard-currency emerging-market sovereign debt and equities from developed Asian markets. 

As economies and companies today are often global in nature, we like to look beyond the location of a company’s stock listing and invest in stocks with exposure to revenue growth in Asia. 

Looking through the revenue lens, the companies held in our income strategies derive almost a fifth of their revenues from Asia.

Pie chart: Geographical revenue exposure of stocks in our income strategies. At 19%, GSAM's equity holdings derive a significant portion of their revenues from Asia. Source: Goldman Sachs Asset Management.
Pie chart: Direct fixed income exposure in GSAM's income strategies. At 11%, GSAM has meaningful direct exposure to emerging market (EM) debt. Source: Goldman Sachs Asset Management.


This article was written by Goldman Sachs Asset Management in August 2023.

Bringing together traditional and alternative investments, Goldman Sachs Asset Management provides clients around the world with a dedicated partnership and focus on long-term performance. As the primary investing area within Goldman Sachs, it delivers investment and advisory services for the world’s leading institutions, financial advisors and individuals — overseeing more than US$2.5 trillion in assets under supervision worldwide, with 1,800+ investment professionals and 1,100+ data engineers and technologists across 60+ locations as of 30 June 2023. 

Endowus has eight funds from Goldman Sachs Asset Management (as of 29 August 2023), including the Global Multi-Asset Income Portfolio.

Get started building your own portfolio with these funds on the Endowus Fund Smart platform. 

Endowus recently held a webinar on how investors can secure passive income in uncertain times, featuring David Copsey from Goldman Sachs Asset Management and Alvin Ong from Manulife Investment Management. Watch the webinar replay here.

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Generate passive income with a multi-asset approach - Goldman Sachs Asset Management’s David Copsey answers five key questions from income investors

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