Top marks for Goldman Sachs


Helen Avery
Published on:

GSAM's boutique structure provides a potential model for other asset managers.

Recent research from Morgan Stanley described Goldman Sachs Asset Management (GSAM) as “the hidden jewel” in the investment bank’s crown. The report notes: “From much investor doubt five years ago about why Goldman Sachs was even in asset management, we believe GSAM’s success today should be unquestioned.” GSAM, it appears, is the new golden child in institutional asset management.

There’s so much to admire, it seems, that Barclays Global Investors is modelling itself on the company [see Fund champions go head to head, this issue]. “It’s hardly surprising that other firms want to emulate GSAM,” says a senior executive at a US fund manager. “They’re running an active business properly, have succeeded in hedge funds and performance is good.”

GSAM is not among the top 10 managers by assets under management – it has almost $500 billion, $110 billion of which is in Europe. But growth in assets and profitability is impressive. The asset base has grown at a compound annual rate of about 25.4% during the past 10 years, and pre-tax profit margins run at about 30% to 32%. Furthermore, Morgan Stanley’s research says GSAM is well positioned to outgrow the industry based on its diverse product offerings.

GSAM assets under management                                      Source: BGI and SSgA

First, it is well placed to pick up investors switching to fixed income away from equities. The performance of GSAM’s fixed income funds has been strong compared with large competitors, such as Pimco, Wamco and BlackRock, and should be attracting clients that do not want to rely too heavily on those three big fixed income manager. At the end of September, GSAM had $232.9 billion in its fixed income and currency products – up 4.7% from the end of 2004.

GSAM has also attracted significant net inflows in its alternatives business, at a 20% annualized rate in the past two years. At the end of September, the fund manager had $14.8 billion invested in hedge funds, making it the third largest such investor behind Bridgewater and DE Shaw, and about $14 billion invested in funds of hedge funds. With real estate, private equity and merchant banking funds, GSAM’s entire alternatives offering is the largest of its kind, with an estimated $110 billion in total.

Suzanne Donohoe is GSAM’s co-head in Europe and attributes the success of the firm to its boutique structure. There are 10 independent investment teams, each with its own CIO, split across active equity, quantitative strategies, fixed income and alternatives. “When it comes to performance, we have a strong belief that teams tend to yield more alpha than having star managers, and the teams are given autonomy to act independently but with access to our global resources,” Donohoe says.

“Each has its own distinct investment philosophy, with the number one focus on performance and being best in class.” All of GSAM’s quantitative strategies and fixed income strategies have outperformed their benchmark since inception (gross of fees).

In each of its businesses, the teams can run unconstrained hedge funds alongside their traditional funds. “By not breaking them out [of the teams], it means that we don’t have this ‘haves and have-nots’ culture,” says Donohoe. “The whole team is remunerated on the performance of all its products.”

She adds that where GSAM might differ from its competitors is in not having grown up with a stress on selling products, but rather focusing on performance and client service knowing that if these two criteria are met well, clients will stay with the firm.

Donohoe has good reason to be pleased. The European business has contributed one-third to GSAM’s net sales in the last year, driven by its quantitative business and fixed income products and hedge funds. And in the Dutch pension fund space, GSAM is one of the top quantitative specialists, with more than €3 billion in assets under management.