Speaking to InvestorDaily, Mr Moffitt said the US Federal Reserve is likely to increase interest rates earlier than the market expects.
With the Fed’s ‘tapering’ of its quantitative easing program set to wind up in October this year, the general expectation is for the first rate move to be in the first half of 2016, he said.
But Goldman Sachs AM expects the US central bank to increase rates “this time next year”, said Mr Moffitt.
As a result, holding long duration fixed income is starting to look risky – and the simplest thing for investors to do is “go short duration”, he said.
“What we’re saying to our clients now is that most of the time you want to be long credit and duration risk because you get paid a risk premium – it makes sense,” Mr Moffitt said.
“But there are times in a cycle where you want to be short duration – and there might even be times when you want to be short credit,” he said.
Most traditional fixed income funds that institutions use tend to be along the lines of a market-cap UBS portfolio, said Mr Moffitt.
“That’s about four years’ duration and two years’ credit,” he said. “If you have an active manager who can take risk around that, they’re generally not taking that much risk around it.”
Instead, it makes sense to have cash as a starting point and then give the active manager the flexibility to go long and short both credit and duration as market conditions dictate, Mr Moffitt said.
“This is what we’re recommending to clients. Either to create more flexibility in their existing mandates so that the managers can move, or redefine your starting point,” he said.
Mr Moffitt said the Goldman Sachs Global Strategic Bond Fund (GSBF), which was launched in Australia in November 2013, was set up to allow investors to be long duration when the environment is good and short duration when things are looking dangerous.
“Right now [within] the portfolio [we would be] short duration and we would still be a little long credit risk,” he said.
The GSBF invests in the Goldman Sachs Strategic Income Fund, which is run out of New York and has around $24 billion in funds under management.
