The May issue of our new Bond Fund Intelligence publication features Goldman Sachs Asset Management's John Olivo, head of GSAM's short duration strategies within the firm's Global Liquidity Management group. A GSAM veteran of nearly 20 years, John is responsible for overseeing the management of approximately $45 billion in short duration strategies. Our discussion covers the challenges of a low-yield environment, the opportunities for short duration strategies going forward, product development and more. Below, we rerun the first half of the Q&A that first appeared in the latest BFI.
BFI: How long have you been running short term bond funds? Olivo: It's been almost 25 years since we launched our first short duration mutual fund, the Short Duration Government Fund. Today, we offer a range of innovative strategies and support our clients with deep insight, robust risk management and an extensive liquidity management platform. As one of our flagship products, we believe the Short Duration Government Fund offers a very clear illustration of all these features and of the strength of our platform overall. In addition to our funds, GSAM has been running separately managed accounts (SMAs) in the short duration space for more than two decades.
BFI: Are you looking at launching new products? Olivo: GSAM continually reviews its short duration product suite. Over the years, we have adapted our offerings according to investor demand. We've also sought out product gaps which we think we can fill. In both cases, GSAM's goal has been to provide the right solutions for clients, and to strive to meet investor needs in every type of environment. For example, GSAM recently launched an ultra-short duration mutual fund in preparation for money market fund regulatory reform. That was a case where both investor demand and changes in the marketplace convinced us to act.
We also run short duration strategies which derive their primary sources of alpha in innovative ways -- for instance, from a variety of sectors, specifically corporate or securitized products, and in multiple currencies. That was a case of meeting client needs. Another example is the High Quality Floating Rate Fund. This is one of the few floating rate funds that does not take any credit risk, focusing primarily on floating rate securitized products. GSAM believes this approach will resonate with investors in a rising rate environment.
BFI: Any plans for ETFs? Olivo: ETFs have seen explosive growth, and we think they are one of the more innovative product types to come onto the scene the last couple of years. We are always watching the short duration and money market space across product types. At this point, however, we have yet to launch anything.
BFI: What is the biggest challenge for short duration funds today? Olivo: Achieving yield continues to be the major challenge. As you know, today's low interest rate environment is a persistent, pervasive feature of the market. Short duration mutual funds do offer some flexibility as they can invest in longer dated securities and hedge away the unwanted duration risk, but our strategies are subject to the same interest-rate constraints which face every investor. What's more, the funds invest primarily in high quality, short duration assets, which aren't known for their high yields. As a result, offering an attractive yield has been the biggest issue for the entire short duration universe.
BFI: How do short duration investment strategies differ from money funds? Olivo: Generally, there's enough differentiation between short duration funds and money market funds. The duration on some of the short duration strategies are shorter than a year, but you're buying more traditional fixed income securities. For example, in the High Quality Floating Rate fund, we are purchasing longer duration floating rate products in both the agency mortgage and asset backed securities area. In the Enhanced Income fund, we are purchasing high quality corporates -- with a final maturity no greater than 5 years. That is the primary source of excess return in that strategy. Therefore, there is enough differentiation that you are not crossing over into the 2a-7 world very often. (Watch for the second half of our interview tomorrow, or contact us for the latest issue of our Bond Fund Intelligence.)
