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GSAM Connect 
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November 17, 2016

GSAM Connect

November 17, 2016 | GSAM Connect

Income in Volatile Markets

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We believe investors today are facing a new, more turbulent market environment where an emphasis on quality and income can help weather the storm.

Since the global financial crisis of 2007-08, US equity markets have been experiencing more rapid declines and recoveries than before the crisis. Prior to 2008, the S&P 500 Index would take on average 37 days to correct between 5-10% -- that figure today is 29 days. Recoveries from these declines, too, have shrunk on average to 30 days, from the prior 48 days.

These smaller time frames have been especially challenging for would-be market timers, for whom “bottom ticking” – always a challenging task – is now even more difficult. Politics in Europe and the US, China and energy are just a few of the catalysts we expect to contribute to these trends going forward.

EXHIBIT 1: S&P 500 Correction and Recovery Times have Shrunk

2016Q4_KH3_IncomeBuilder_1-digital-01-edit

Chart Notes: Bloomberg, Goldman Sachs Investment Research and GSAM. Analysis from September 2, 1945 (post-WWII) to August 31, 2016, using the S&P 500 Price Index. Post-Crisis is after March 9, 2009. Length of sell off is measured in days from peak to bottom, and length of recovery from bottom to previous peak. Past performance does not guarantee future results, which may vary.


For investors seeking new entry points, we would urge a fresh look at diversified approaches to income investing. A diversified income portfolio (DIP) as we see it incorporates a risk-aware selection of income-oriented equities and fixed income. This includes higher-quality stocks (e.g., those with stronger balance sheets) and relatively high-coupon, dividend-paying sectors such as Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), and high yield bonds.

To see how the returns of this approach have stacked up versus the S&P 500 index during periods of market turbulence, we looked at three historical scenarios. Each covered 10% corrections in the S&P 500 Total Return Index from earliest index common inception to the present.

Scenario 1, which we call “Perfectly Timed,” shows what happened for those who invested in a diversified income portfolio on the exact day the 10% correction finished. Scenario 2, “Early,” shows what happened when investing halfway between the market peak and bottom. Scenario 3, “Late,” is defined as investing after the market bottomed, but only halfway to the prior peak.

EXHIBIT 2: DIVERSIFIED INCOME PORTFOLIOS VERSUS THE S&P 500: THREE SCENARIOS

2016Q4_KH3_IncomeBuilder_2-digital-01

Chart Notes: Bloomberg, Morningstar, and GSAM. Analysis from September 1, 2000 (first peak for earliest common index inception) to October 31, 2016, using total returns. All returns are calculated from the initial investment point back to the prior peak. “Perfectly timed” is investing at market bottom. “Early” is investing halfway between the prior peak and bottom. “Late” is investing halfway between the recovery from bottom to prior peak. Peak to trough periods: September 1, 2000–October 4, 2002, October 12, 2007–March 6, 2009, April 23, 2010–July 2, 2010, April 29, 2011–August 19, 2011, July 17, 2015–September 4, 2015, and November 6, 2015–February 12, 2016. Diversified Income Portfolio allocation (an illustrative income portfolio): 16.2% Russell 1000 Value Index, 8.1% CBOE S&P 500 BuyWrite Index, 10.5% MSCI EAFE TR Index, 5.3% MSCI EAFE Value TR Index, 20.4% J.P. Morgan EMBI Global Diversified Index, 21.7% Barclays Global High Yield Index, 6.8% Credit Suisse Leveraged Loan Index, 5.0% S&P Developed ex-US Property Index, and 6.1% Dow Jones US Select RESI Index. Volatility is the annualized standard deviation of daily returns. These illustrative results do not reflect any GSAM product and are being shown for informational purposes only. No representation is made that an investor will achieve results similar to those shown. The performance results are based on historical performance of the indices used. The result will vary based on market conditions and your allocation. Please see end disclosures for additional definitions. Past performance does not guarantee future results, which may vary.


As “perfect” timing is virtually impossible, we look to the “early” and “late” scenarios as more realistic. Here, the “early” entrant to a diversified income portfolio outperformed the S&P 500 Index by 11%, and with only 60% of the S&P 500 Index’s volatility. Similarly, the “late” investor’s returns equaled the S&P 500 Index, with less volatility.

There are important differences between the S&P 500 and an income-oriented approach, especially the smaller upside potential of many income-oriented investments in a strong bull market. But we think the tradeoffs are worth noting in today’s market environment. They suggest that the choice of investment strategy – diversified income -- trumps timing in turbulent periods.

We think blending income sources in a thoughtful way has the potential to rival or beat the performance of the broader equity market but, importantly for turbulent times, with the potential for lower volatility.

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About the Author

John Tousley

John Tousley

Head, US Market Strategy, Strategic Advisory Solutions, Goldman Sachs Asset Management

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