What’s the New 60/40? Goldman Has Part of the Answer.

“Most people think of currencies as being very risky,” says GSAM’s co-CIO of global fixed income.

Kerem Uzel/Bloomberg

Kerem Uzel/Bloomberg

Goldman Sachs Group’s asset management unit is suggesting currencies as a way to help protect portfolios as investors weigh alternatives to traditional portfolios of stocks and bonds.

“Part of the answer of, ‘What is the new 60/40?’, involves currencies,” Ashish Shah, co-chief investment officer of global fixed income and liquidity solutions at Goldman Sachs Asset Management, said by phone. “We think you can use currencies to create diversification.”

Blending them with bond duration and interest rates can reduce downside exposure, according to Shah. Currencies are “taking up the volatility that used to occur within rates,” he said, as major central banks seek to keep interest rates from climbing. On “weaker days,” more cyclical currencies tend to sell off, he said, while more stable currencies like the U.S. dollar, yen, and euro perform well.

Not all investors are comfortable with currencies.

“Most people think of currencies as being very risky,” said Shah. “Most people try to use currencies to make money — not to protect themselves.”

Shah finds U.S. investors are generally less comfortable with currencies, while international investors are “very comfortable” with them. It comes down to where you grew up, he said, with investors in, say Europe, having been naturally exposed to the region’s multiple currencies prior to the euro.

Or consider that people in the U.K. don’t have to travel far to find themselves in another country, Shah added. “You have to constantly deal with currencies.”

GSAM had been thinking about a possible recession — and what that would mean for portfolios — before 2020, according to Shah.

“March happens and there we are,” he said. “The U.S. rate curve is at the lower bound.”

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With “so little return available,” investors are looking everywhere for it, Shah said. “You have to be creative and not just assume that everything is the same month to month.”

GSAM now likes agency mortgages and “better-quality” high-yield debt much more than investment-grade corporate bonds, according to Shah. But constructing portfolios is about finding the best part of each area of fixed-income — “strategic asset allocation at a multi-factor level is where the future is going,” he said.

The U.S. has been on a “roller coaster” over the past couple months as investors watch for whether Congress will extend benefits to Americans in the pandemic, according to Shah. He expects that won’t happen until after the U.S. presidential election next week.

“A ‘blue wave’ would probably be more accommodative on the fiscal side,” said Shah, referring to the possibility that Democrats could win the White House and gain control of Congress.

But with the pandemic still disrupting jobs and business, he expects most election outcomes would lead to more government spending on some level.

“That’s positive for the economy,” he said. “The government really needs to make sure it’s helping the economy out before the end of the year.”