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May 06, 2022 | GSAM Connect

Core Fixed Income: Does It Still Have a Role?

High-quality bonds1—the staple of any core fixed income allocation—have been a growing source of concern of most investment portfolios in recent years. Low yields kept a lid on the income they produced while equities soared. Some commentators have even blamed bonds for the travails of the traditional 60/40 equity-bond portfolio2 and have questioned whether these core fixed income (CFI) assets are still useful in portfolio construction. We think they are, and here’s why: when part of a well-diversified portfolio, core fixed income allocations have provided downside management during periods of severe market stress. By reducing portfolio volatility, we believe these assets continue to play a key role in managing portfolio risks, thereby lowering the probability of unexpected and potentially unpleasant outcomes.

Manages Against Drawdowns

In our approach to portfolio construction, CFI refers to lower volatility fixed income assets. In other words, investment grade fixed income like US Treasuries or the US Aggregate Bond Index, intended for risk management rather than return generation. Exhibit 1 shows the behavior of CFI asset classes such as the Bloomberg US Aggregate Index and US Treasuries during periods of severe equity drawdowns. As shown, CFI has historically delivered positive returns when most needed: during periods of stress. This is why we believe that asset classes behaving as intended may be particularly valuable, especially in times of equity drawdowns and multi-lateral macro uncertainty.

Exhibit 1: Total Index Returns and Frequency of Positive Returns in Historical Drawdowns.

Source: Bloomberg and Goldman Sachs Asset Management, analysis as of April 2022. Historical drawdowns shown represent all peak-to-trough drawdowns for the S&P 500 Index with magnitude 10% or more, based on monthly total returns. US Aggregate Bond is represented by the Bloomberg US Aggregate Bond Index. US Treasury is represented by the Bloomberg US Treasury Index. Past performance does not guarantee future results, which may vary.


Limited Unwelcome Surprises

Exhibit 2 shows how the range of potential returns narrows as CFI allocations increase. Simple, but not simplistic. In practice, reducing the variability of potential outcomes aligns with reducing risk and narrows the gap between portfolio expectations and realized behavior. To achieve this objective, CFI retains a distinctive role. Ultimately, it is each investor’s individual risk profile and tolerance for short term losses that will inform the decision of how much to allocate to CFI. Historical data suggests that progressively increasing its weight in portfolios may help avoid unintended consequences.

Exhibit 2: As the proportion of CFI decreases, the range of potential portfolio outcomes steadily narrows.

Source: Bloomberg and Goldman Sachs Asset Management, as of March 31, 2022. The chart shows the range of rolling 12-month returns for a range of portfolios over the past 30 years. Each portfolio is represented by a combination of the S&P 500 Index and US Aggregate Bond Index, so that, for example, the 30% Core Fixed Income column refers to a portfolio comprised of 70% S&P 500 Index and 30% US Aggregate Bond Index. Median represents the mid-point of a sorted set of values. Past performance does not guarantee future results, which may vary.


Finally, exhibit 2 shows that a progressively increasing CFI allocation in the context of the overall portfolio may help reduce the variability of outcomes and potentially avoid stressful conversations for advisors and clients alike.


1 High-quality bonds refer to fixed income instruments with a credit rating of BBB or higher.

2 A traditional 60/40 equity-bond portfolio refers to a portfolio with 60% equities and 40% fixed income instruments

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About the Author

Davide Andaloro, CFA

Davide Andaloro, CFA

Senior Market and Portfolio Strategist, Strategic Advisory Solutions, Goldman Sachs Asset Management

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