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October 6, 2022  |  6 Minute Read

Timothy P. Ramsey, CFA

Equity Strategist, Public Capital Markets

Timothy P. Ramsey, CFA

For equity investors, there are reasons to believe the next decade may look very different from the previous one. The 2012-2021 period was extraordinarily friendly to investors, thanks to ultra-low interest rates and the rise of the so-called FANGMAN stocks---Facebook, Apple, NVIDIA, Google, Microsoft, Amazon and Netflix. Together, this cohort powered the S&P 500 to a 17% annualized return over 10 years through 2021, well above long-term trend. On top of that, some suspect the returns that might have come over the next decade were “pulled forward” as unprecedented monetary and fiscal stimulus helped economies rebound from the COVID-19 pandemic.


It may be prudent to lower forward expectations at this point. We expect returns for the S&P 500 to mark a significant step down from what recent history might suggest. To add insult to injury, stocks are expected to exhibit more volatility in the future (Exhibit 1) as markets grapple with multiple headwinds, including hawkish global central banks, supply chain realignment, geopolitical unrest, deglobalization and energy insecurity.



Exhibit 1: Equity Reward and Risk: That Was Then, This is Now


Source: Morningstar Direct, December 31, 2021; *Historical 10-Yr Period = 01/01/2012–12/31/2022. Goldman Sachs Multi-Asset Solutions Group June 30, 2022. Strategic long-term assumptions are subject to high levels of uncertainty regarding future economic and market factors that may affect future performance. They are hypothetical indications of a broad range of possible returns. Please see additional disclosures.  Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein have been generated by Goldman Sachs Asset Management for informational purposes as of the date of this publication. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this publication. Volatility is measured by standard deviation.



We are still constructive with regard to equities and firmly believe they have a significant role to play in a portfolio, especially when inflation is eroding purchasing power. Still, in the new market regime, market stressors may be more frequent and more extreme.


What might investors consider to help them navigate this more challenging market terrain? We think equity Buy-Write strategies may deserve a look. No two Buy-Write strategies are the same, but they tend to have some strong commonalities. A Buy-Write strategy will typically hold (“Buy”) a diversified basket of stocks to mimic a particular index—the S&P 500, for instance—and sell (“Write”) related call options seeking to generate additional income from the premium. In short, a Buy-Write strategy forfeits potential equity upside in exchange for enhanced income above and beyond equity dividends.


The Merits of Buy-Write Strategies

Buy-Write strategies do things differently from long-only equity portfolios, and usually produce different outcomes. For one thing, Buy-Write strategies can alter the mix of total return. Looking forward, it may be more palatable to accept lower return potential in exchange for a greater proportion of income relative to less reliable stock price appreciation.


Secondly, it is in more muted return environments that Buy-Write strategies have tended to outperform. In negative or flat-to-single-digit markets, selling call options provides incremental returns that are beyond the reach of long-only strategies. With its option premium “cushion,” a typical Buy-Write strategy may demonstrate a higher frequency of outperformance in these markets relative to the benchmark.


For instance, considering rolling one-year returns (measured quarterly, over 20 years), the CBOE S&P 500 2% OTM Buy-Write Index—a reasonable proxy for the Buy-Write strategy universe in aggregate—has outperformed the S&P 500 more than 50% of the time in flat markets, but nearly three quarters of the time in negative return periods. In negative return markets, the CBOE S&P 500 2% OTM Buy-Write Index outperformed the S&P 500 by an average 370 bps. Often, playing good defense can be a solid foundation for long-term outperformance (Exhibit 2).



Exhibit 2: Buy-Write Strategy: Frequency of Outperformance Across Different Market Regimes


Source: Morningstar Direct, Goldman Sachs Asset Management as of June 30, 2022. Time periods represent rolling 4 quarter window rolled each quarter. Time frame shown is 3Q 2002 – 2Q 2022. Past performance does not guarantee future results, which may vary.. The S&P 500 represents the overall market in the example above. Negative Market is defined as returns less than zero, Flat to Single Markets is defined as returns from 0-9.99%. Exuberant Market is defined as returns greater than 10%.



In the more challenging equity return environment we anticipate, a Buy-Write strategy may improve investor experience via a more defensive, muted-volatility return profile.



Exhibit 3: Lower Highs But Higher Lows


Source: Goldman Sachs Asset Management. For illustrative purposes only.



In the new market regime, it may be more sustainable to accept lower highs but higher lows (Exhibit 3). A smoother glide path may be more likely to keep investors engaged with their investment programs—and with equities—to the benefit of their long-term financial health. In an era of rising costs and eroding purchasing power, we think that’s engagement worth having.



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Risk Considerations

Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Buy-write strategies are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. They are also subject to the risks associated with writing (selling) call options, which limits the opportunity to profit from an increase in the market value of stocks in exchange for up-front cash at the time of selling the call option. In a rising market, the strategy could significantly underperform the market, and the options strategies may not fully protect it against declines in the value of the market.

A Buy Write Strategy's maximum loss is equal to the full value of shares minus the premium collected from the options. 

General Disclosures


This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

The views expressed herein are as of October 5, 2022, 2022 and subject to change in the future.   Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Strategic Long-Term Assumptions:

Alpha and tracking error assumptions reflect Multi-Asset Solutions’ estimates for above-average active managers and are based on a historical study of the results of active management. Expected returns are estimates of hypothetical average returns of economic asset classes derived from statistical models. There can be no assurance that these returns can be achieved. Actual returns are likely to vary. Please see additional disclosures.

The data regarding strategic assumptions has been generated by MAS for informational purposes. As such data is estimated and based on a number of assumptions; it is subject to significant revision and may change materially with changes in the underlying assumptions. MAS has no obligation to provide updates or changes. The strategic long-term assumptions shown are largely based on proprietary models and do not provide any assurance as to future returns. They are not representative of how we will manage any portfolios or allocate funds to the asset classes.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities.

“Hawkish” refers to a state of less accommodative monetary policy.

Standard Deviation is a statistical measure of volatility indicates the “risk” associated with a return series.

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.

The Cboe S&P 500 BuyWrite Index measures the total rate of return of a hypothetical “covered call” strategy applied to the S&P 500 Index. This strategy consists of a hypothetical portfolio consisting of a “long” position indexed to the S&P 500 Index on which are deemed sold a succession of one-month, at-the-money call options on the S&P 500 Index listed on the Cboe exchange.

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

Date of First Use: October 5, 2022.  293448-OTU-1677830

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