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Speed Is the New Alpha in Fixed Income, Goldman Says

The pandemic will accelerate the use of technology in the bond market — and asset managers who are unprepared to embrace it are already at a disadvantage, according to GSAM.

The coronavirus pandemic will push investors to build fixed-income portfolios with technologies that aid their decision-making, according to Goldman Sachs Group’s asset management unit. 

“Speed is becoming alpha in this environment of fixed income,” Ashish Shah, co-chief investment officer of global fixed income and liquidity solutions at Goldman Sachs Asset Management, said Monday during an online event hosted by the bank. “If you are not able to operate your investment process rapidly, in real time, with high precision, you’re going to be at a disadvantage.” 

Fixed income has been a “slower player” in electronification and using factor-orientation in the construction of portfolios, according to Shah. Yet the need for debt investors to pivot quickly became clear earlier this year as markets moved from a coronavirus liquidity crisis into a recovery within weeks of the Federal Reserve’s emergency support.

“If you blinked during that period of time, you missed what was probably one of the biggest opportunities that we’ve seen over the last five years to generate returns,” he said. 

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While a majority of transactions in the corporate bond market are electronic, trades based on dollar volume remain “dominated by voice,” according to Shah. Larger, more deliberate moves in portfolios are still “discreet human decisions,” he said. 

Shah predicts that will change as technology can help investors understand what bond prices mean for the construction of their portfolios as they are changing. Reacting to a price change by having a conversation with a portfolio manager and analyst won’t cut it.

“That’s a very, very slow process to react to a very fast-moving market,” he said. “If you’re an asset manager that isn’t prepared to drive that change, you’re already at a disadvantage.” 

The pandemic will accelerate tech in fixed income markets over the next 24 months, estimates Shah, who says investors will then become more informed on what might cause them to make changes to their allocations.

“What you’re going to see is that your portfolio and your analyst work has already been pre-done,” he said. “You’re going to market with a view as to what the trade-offs are, as prices change, to your existing portfolio construction.” 

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