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By Paul Justice, CFA | 05-29-2012 01:00 PM

Goolgasian: Global Environment Ripe for Tactical Management

Sovereign fiscal issues and currency effects can create opportunity for a tactical global fixed-income manager, says State Street's Chris Goolgasian.

Paul Justice: Most investors have a lot of experience in picking between domestic and international stocks, and getting their balance right with their fixed-income portfolio. Fewer investors, though, have adopted international fixed income in their portfolio, given a wide range of reasons. Part of that may be that the research isn't available and part of it might be about the volatility of the underlying investments.

Here today to talk about this phenomenon is Chris Goolgasian of State Street Global Advisors.

Chris, thanks for joining me.

Christopher Goolgasian: Sure, Paul. Thanks.

Justice: So in your global allocation fund and some of your income funds, you are really focusing on moving between asset classes, and one tendency I noted was that you do have the availability to go abroad for fixed income, where you are going to get a lot of sway within the price of the products just simply based on a lot of currency appreciation or depreciation. Can you talk about how you go about investing in these, and how you really see the suitability of those investments in these strategies?

Goolgasian: Sure. So we've noticed that investors are classically home country biased in equity. They are also country biased in fixed income. And so one way to mitigate some of that is to build a blended portfolio that has exposure to non-U.S. government bonds, non-U.S. corporate bonds. And that is how we built some of our funds here.

Now, in a world in which you have these massive governmental balance sheet problems, then the selection of those markets matters tremendously. In a world in which there aren't those problems, then the differentiation between a U.S. bond and another developed-market Treasury bond of the same credit stature and duration, etc., may not be all that different, but then you introduce currency, you introduce the fact that there are in fact a lot of balance sheet differences across these countries. And you realize that there can be quite a selection process.

So, you could add significant value if you have currency views, and if you have views about the stability of their fiscal situation and likely what they're going to do next, which is not as easy. So, we think that moving between U.S. and non-U.S. fixed-income instruments can also be a value-add for us.

Now, as you said, there's a currency issue there that can both help you and hurt you, and your currency view is critical to that decision. So, once you're implementing non-U.S. investment-grade fixed income, you also have to make sure that you have a very strong currency view on these other countries, because that is at times really going to dwarf the returns.

Justice: Certainly, the international side of that isn't going to act like a ballast in the portfolio much like just basic [U.S.] Treasury bonds would.

Goolgasian: Right. At times it may, at times it may not. So, it all depends on how volatile that swing in currency is.

We've seen in the U.S. for sure in the last couple of years that the only true risk-free instrument has been Treasuries, and the longer the Treasury, the more risk-free it has been.

So, even in the last few weeks with some of this noise out of Europe, you've had long Treasuries rally 4% or 5% in a couple of weeks. Even though their yields are so compressed already, they're still rallying, which is quite mind-boggling, but it's still happening.

Justice: We've been calling for the demise of U.S. Treasuries, I think, for four years now.

Goolgasian: Far too long, yes. So, that safe-haven status is clearly still U.S.-based, but that could rotate. It could be that emerging markets become safe havens at some point; their balance sheets certainly look a lot better. And it could be that Europe rides the ship. So, the idea, though, is to give you that optionality--that the world is going to change, your view on those currencies is going to change, and then tactically maneuvering between them could be quite beneficial.

Justice: Sure. So, getting the return over time and getting the timing right is really going to matter.

Goolgasian: That's right.

Justice: Great. Well, thanks for those insights and thanks for joining me today.

Goolgasian: Thank you, Paul.

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