Last week we sat down with two of our valued research providers—Goldman Sachs and JP Morgan—to discuss the economy, share insights and review investment strategies. These types of face-to-face meetings are very constructive and serve to provide us with valuable, often differing opinions from the leading thought providers in the industry.
Michael Armstrong, Regional Director at Goldman Sachs, indicated that Goldman feels a rate hike is likely this year and sees three measured hikes of 25bps before year end 2016. Looking at the markets, Goldman feels upside of around 8% exists in the S&P 500 this year. On the fixed income front they estimate returns for the Barclay's Aggregate Bond Index will likely be in the negative 1% to positive 2% range for the next 10 years. Goldman forecasts that 1) the U.S. stock market total returns for 2015 is still 5% for the year and 2) that oil will stabilize in the mid-50s during the fall and they look for a $30 increase in the price over the next three years with an equilibrium price of approx. $85.
In discussing the fixed income market, the Strategic Income fund that Goldman offers took center stage. This is an unconstrained fund described as their "Fixed Income Best Ideas". Paired bond trades such as long U.S. and short German bonds as well as bets against Emerging Market economies tied to China figure into this strategy. The fund also currently maintains a healthy cash balance that should be deployed opportunistically this fall as markets search for liquidity.
Another strategy that was discussed is Goldman's Multi-Manager Alternative fund. The 300 strong AIMS (Alternative Investment and Manager Selection) group helps choose the macro allocation and selection of the managers for this fund. The fund shoots for roughly a 6% return and 6% volatility in a five-year market cycle (annualized). The fund hopes to achieve this by participating in 60% of the upside and only 50% of the downside in a cycle.
The last topic was that of Managed Limited Partnerships or MLPs, specifically relating to the Goldman Sachs MLP Energy Infrastructure fund. This fund focus on the midstream small to mid-sized players in the space. With rates being very low the MLP space had seen inflated prices as investors flocked to it high income paying attributes. With the sharp decrease in oil and energy prices this year, the space is now underperforming the S&P 500 and valuations are coming back in line. While risks abound, the recent selloff may have made this an interesting area to consider as a more value oriented investment.
Clayton Hall, Vice President at JP Morgan Asset Management (JPM), shared similar market perspectives. JPM did offer thoughts on China noting that one of the best proxies for the Chinese economy is that of Australia. A read on Australian GDP tells us a lot about China and as expected this is currently looking like bad news as the Chinese shift from a production oriented economy to that of a consumption economy.
JPM also feels liquidity could be an issue in the bond market going forward as dealer inventories are very lean. This is an unintended consequence of regulations introduced following the last recession that are meant to shore up bank balance sheets. It is also an opportunity—and Clayton mentioned that one of their top bond managers is positioned to take advantage of this liquidity issue should it arise. For now they are avoiding the short end of the curve and noting that use of unconstrained funds makes sense in this current environment.
The JPM Hedged Equity strategy was also discussed. This is a fund that limits the upside to protect the downside. Its goal is 4-5% returns with a similar volatility profile. This is currently under discussion for inclusion to our Advanced Strategies Portfolio Module.
This communication is meant to be a recap of a research meeting and not to be construed as an opinion by Russell Capital Management. We are not necessarily purchasing any of the securities mentioned nor is this a recommendation to do so. We may not agree with the opinions expressed by our research partners.