Goldman arm shuns ratings with new credit strategy

Fri May 1, 2009 11:21am EDT

* To use spreads to assess risk

* Will invest in investment grade and high yield

* GSAM to add to credit team in London this year

By Claire Milhench

LONDON, May 1 (Reuters) - Goldman Sachs's (GS.N) fund arm is developing a new global credit strategy for institutions that will rely on market prices rather than heavily-criticised credit rating agencies.

"Clients often give investment guidelines determined by credit ratings, but we don't think that's the way to think about risk," said Andrew Wilson, global co-head of fixed income and currency at Goldman Sachs Asset Management (GSAM).

Instead, GSAM's approach is to segment credit spreads into five groups, to assess how issuers are trading in relation to their peers, Wilson told Reuters in an interview.

"So the widest 20 percent are the most risky, regardless of the rating," he said.

"That has helped us identify risky names and react in a timely fashion, as the market is a much better guide. Credit spreads widen immediately on bad news, whereas it might take a while for the ratings agencies to reflect that."

Regulators and analysts have criticised ratings agencies Moody's Investors Service, Standard and Poor's and Fitch Ratings for making errors of judgement on complicated credit tools that helped to create the financial crisis.

But a dearth of alternatives makes it difficult to get away from the agencies entirely. [ID:nLA503215]

Wilson said that relying on names which are rated 'triple B' and above -- the traditional way of framing investment grade mandates -- had not been that helpful.

"Ratings agencies are good at static analysis but they are less good at forecasting," he said.

The strategy will take an unconstrained, or "opportunistic" approach, investing across the credit spectrum and assessing how cheap investment grade credits are relative to high yield, for example.

EXPOSURE

Wilson said there were no specific limits on exposure, but said there might be 30 to 40 percent in investment grade, and the rest in distressed and high yield assets.

"We think it's a good time to start putting money to work (in the credit area)," he said. "From a risk-adjusted point of view, investment grade is possibly the best place to be but we see good opportunities across the credit spectrum."

GSAM's fixed income and currency business had some 240 billion pounds ($356.1 billion) in assets at the end of March.

GSAM is looking to add to its credit team in London this year, Wilson said.

"I would hope to have at least an extra two to three people by year-end -- both analysts and portfolio managers to make sure we are well resourced," he said.

Looking across GSAM's fixed income portfolios, the aim is to gradually increase exposure to credit over the next three to six months as earnings clarity improved.

In terms of sector exposure, Wilson said GSAM would probably start with financials as these were the cheapest.

He also tipped early cyclicals in energy and mining: "We are relatively optimistic about the economic situation in relation to the gloom and doom that is around. We don't think it's going to be as bad as the scaremongers are saying."

He pointed out that China is improving, which should support miners and other commodity-related stocks.

"We don't like the later consumer cyclicals such as autos or retailers. It's way too soon for that," he added. ($1=.6739 Pound) (Editing by David Cowell)