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A Deeper Look: Goldman Sachs

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The popularity of index investing keeps gaining steam. By the start of 2018, nearly 45% of equity assets in U.S. mutual funds and exchange-traded products were managed through such passive strategies. That was up from about 20% in 2007, according to Morningstar.

But that's just part of the story. As we've chronicled over the years (see here and here), active managers are failing to outperform most of their passive investing rivals. Now, as part of IFA's ongoing series breaking down how active managers at major fund companies are doing compared to their indexes, we're putting Goldman Sachs' active funds through our microscope.

The publicly traded investment banker, which was founded in 1869, is headquartered in New York. It employs more than 36,000 around the world and operates in four business segments: investment banking, investment management, investing and lending as well as institutional client services.

As of the latest reported quarter, its investment management unit had $1.55 trillion in global assets under supervision. Many investors are familiar with Goldman Sachs through their company sponsored retirement plans. This spring, Pensions & Investments ranked Goldman Sachs Asset Management as the fifth-largest player in so-called outsourced investment management programs used by sponsors of defined benefit and defined contribution plans.

The industry trade magazine listed GSAM with "outsourced" institutional assets under investment management of $135.2 billion. This figure includes money overseen on a discretionary and a non-discretionary basis. It also counted some $21 billion of managed assets gained in last year's acquisition of Seattle-based Verus Investors.

Goldman Sachs, however, has recently been in the news after shareholders were granted the right to move forward with a multi-billion dollar lawsuit. The class-action suit involves the Arkansas Teacher Retirement System and other investors. As a group, Bloomberg reports they're alleging a $13 billion loss after brokers failed to disclose conflicts of interest when selling investments tied to "risky" mortgages like the "infamous" Abacus collateralized debt obligation.

The suit seeks to cast a shadow on sales practices by Goldman Sachs leading up to and immediately following 2008's global credit crisis. But the ensuing market meltdown led to creation of the Troubled Asset Relief Program or TARP, which set up a mechanism for the government to buy distressed financial instruments such as CDOs from banks. Goldman Sachs accepted a $10 billion TARP bailout, notes Reuters' coverage of the suit.

Aside from concerns raised by shareholders related to Goldman Sachs' banking side of the business, we are also going to examine some of the issues involving its investment funds.

As mentioned above, we've taken a deeper look at the performance of several other mutual fund companies in the past. One universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark.

You can review our past analysis by clicking any of the links below:


Controlling for Survivorship Bias

It is important for investors to understand the idea of survivorship bias. While there are 74 strategies that are currently offered by Goldman Sachs, it doesn't necessarily mean that these are the only strategies that this company has ever managed. In fact, there are 37 funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly. 

Fees & Expenses

Let's first examine the costs associated with Goldman Sachs' surviving 74 strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, as well as 12b-1 fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 74 surviving active funds offered by Goldman Sachs that have at least three years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Max Front Load Global Category
Goldman Sachs Tax-Advntgd Gbl Eq Instl TIGGX 8.00 0.95 -- -- Aggressive Allocation
Goldman Sachs Satellite Strategies Instl GXSIX 57.00 0.98 -- -- Allocation
Goldman Sachs Growth Strategy Instl GGSIX 85.00 0.87 -- -- Allocation
Goldman Sachs Target Date 2020 R6 GTZHX 189.00 0.47 -- -- Target Date 2000-2020
Goldman Sachs Target Date 2030 R6 GTZJX 143.00 0.47 -- -- Target Date 2021-2045
Goldman Sachs Target Date 2040 R6 GTZMX 142.00 0.48 -- -- Target Date 2021-2045
Goldman Sachs Target Date 2050 R6 GTZSX 139.00 0.47 -- -- Target Date 2046
Goldman Sachs Growth & Inc Strat Instl GOIIX 81.00 0.86 -- -- Moderate Allocation
Goldman Sachs Balanced Strategy Instl GIPIX 81.00 0.89 -- -- Moderate Allocation
Goldman Sachs Income Builder A GSBFX 51.00 0.97 0.25 -- Cautious Allocation
Goldman Sachs Managed Futs Strat Instl GMSSX 529.00 1.25 -- -- Other Alternative
Goldman Sachs Long Shrt Crdt Strats Inst GSAWX 267.00 1.13 -- -- Other Alternative
Goldman Sachs Multi-Manager Alts Instl GSMMX 112.00 1.93 -- -- Multialternative
Goldman Sachs Alternative Premia Instl GDIFX 349.00 0.95 -- -- Multialternative
Goldman Sachs Absolute Ret Trckr Instl GJRTX 76.00 0.78 -- -- Multialternative
Goldman Sachs Commodity Strategy Instl GCCIX 89.00 0.62 -- -- Commodities Broad Basket
Goldman Sachs Asia Equity A GSAGX 89.00 1.54 0.25 5.50 Asia ex-Japan Equity
Goldman Sachs International Eq ESG Svc GSISX 116.00 1.40 0.25 -- Global Equity Large Cap
Goldman Sachs Intl Eq Insghts Instl GCIIX 161.00 0.85 -- -- Global Equity Large Cap
Goldman Sachs International Eq Inc Instl GSIKX 32.00 0.85 -- -- Global Equity Large Cap
Goldman Sachs Enhanced Div Gbl Eq Instl GIDGX 8.00 0.95 -- -- Global Equity Large Cap
Goldman Sachs International T/M Eq Instl GHTMX 134.00 0.90 -- -- Global Equity Large Cap
Goldman Sachs Intl Eq Div & Prem Instl GIDHX 17.00 0.94 -- -- Global Equity Large Cap
Goldman Sachs Equity Growth Strat Instl GAPIX 53.00 0.84 -- -- Global Equity
Goldman Sachs Emerging Markets Eq Instl GEMIX 113.00 1.18 -- -- Emerging Markets Equity
Goldman Sachs Em Mkts Eq Insghts Intl GERIX 172.00 1.09 -- -- Emerging Markets Equity
Goldman Sachs N-11 Equity Instl GSYIX 26.00 1.34 -- -- Emerging Markets Equity
Goldman Sachs Total Emerg Mkts Inc Instl GDDIX 199.00 0.97 -- -- Flexible Allocation
Goldman Sachs Intl Sm Cp Insghts Instl GICIX 129.00 0.90 -- -- Global Equity Mid/Small Cap
Goldman Sachs MLP Energy Infras Instl GMLPX 42.00 1.02 -- -- Energy Sector Equity
Goldman Sachs Technology Opps Inst GITIX 19.00 0.98 0.00 -- Technology Sector Equity
Goldman Sachs Strategic Growth Instl GSTIX 54.00 0.75 0.00 -- US Equity Large Cap Growth
Goldman Sachs Capital Growth A GSCGX 48.00 1.14 0.25 5.50 US Equity Large Cap Growth
Goldman Sachs Blue Chip Institutional GINGX 77.00 0.67 0.00 -- US Equity Large Cap Growth
Goldman Sachs Flexible Cap Institutional GILLX 47.00 0.59 0.00 -- US Equity Large Cap Growth
Goldman Sachs Large Cap Gr Insghts Instl GCGIX 196.00 0.54 -- -- US Equity Large Cap Growth
Goldman Sachs Concentrated Growth Instl GCRIX 54.00 0.80 0.00 -- US Equity Large Cap Growth
Goldman Sachs Rising Dividend Gr A GSRAX 45.00 1.15 0.25 5.50 US Equity Large Cap Growth
Goldman Sachs US Eq Div and Prem Instl GSPKX 34.00 0.74 -- -- US Equity Large Cap Blend
Goldman Sachs US Tax-Managed Eq Instl GCTIX 108.00 0.75 -- -- US Equity Large Cap Blend
Goldman Sachs US Equity Insights Svc GSESX 193.00 1.06 0.25 -- US Equity Large Cap Blend
Goldman Sachs Large Cap Value Instl GSLIX 124.00 0.78 0.00 -- US Equity Large Cap Value
Goldman Sachs Equity Income A GSGRX 43.00 1.12 0.25 5.50 US Equity Large Cap Value
Goldman Sachs Large Cp Val Insghts Instl GCVIX 208.00 0.56 -- -- US Equity Large Cap Value
Goldman Sachs Small Cap Gr Insghts Instl GSIOX 136.00 0.84 -- -- US Equity Small Cap
Goldman Sachs Small Cap Eq Insghts Instl GCSIX 137.00 0.84 -- -- US Equity Small Cap
Goldman Sachs Small Cap Value A GSSMX 68.00 1.34 0.25 5.50 US Equity Small Cap
Goldman Sachs Small Cp Val Insghts Instl GSITX 138.00 0.84 -- -- US Equity Small Cap
Goldman Sachs Small/Mid Cap Growth Instl GSMYX 60.00 0.91 0.00 -- US Equity Mid Cap
Goldman Sachs Growth Opportunities Instl GGOIX 61.00 0.95 -- -- US Equity Mid Cap
Goldman Sachs Small/Mid Cap Value Instl GSMVX 108.00 0.84 0.00 -- US Equity Mid Cap
Goldman Sachs Mid Cap Value Instl GSMCX 124.00 0.77 0.00 -- US Equity Mid Cap
Goldman Sachs Intl Real Estate Sec Instl GIRIX 38.00 0.99 -- -- Real Estate Sector Equity
Goldman Sachs Real Estate Securities Ins GREIX 35.00 0.91 -- -- Real Estate Sector Equity
Goldman Sachs Local Emerg Mkts Dbt Instl GIMDX 112.00 0.91 -- -- Emerging Markets Fixed Income
Goldman Sachs Short Dur Govt Instl GSTGX 87.00 0.48 -- -- US Fixed Income
Goldman Sachs Enhanced Income Instl GEIIX 63.00 0.35 -- -- US Fixed Income
Goldman Sachs Short-Term Cnsrv Inc Instl GPPIX 67.00 0.24 -- -- US Fixed Income
Goldman Sachs Hi Quality Float Rt Instl GSARX 54.00 0.36 -- -- US Fixed Income
Goldman Sachs Core Fixed Income Instl GSFIX 273.00 0.45 -- -- US Fixed Income
Goldman Sachs Bond Institutional GSNIX 372.00 0.45 -- -- US Fixed Income
Goldman Sachs Investment Grd Crdt SAI GSCPX 82.00 0.37 -- -- US Fixed Income
Goldman Sachs US Mortgages SAI GSUPX 1,149.00 0.45 -- -- US Fixed Income
Goldman Sachs Government Income A GSGOX 380.00 0.91 0.25 3.75 US Fixed Income
Goldman Sachs Short Duration Inc Instl GDFIX 106.00 0.45 -- -- US Fixed Income
Goldman Sachs Infl Protected Secs Instl GSIPX 203.00 0.34 -- -- Inflation Linked
Goldman Sachs Global Income Svc GGISX 172.00 1.19 0.25 -- Global Fixed Income
Goldman Sachs High Yield Instl GSHIX 69.00 0.74 -- -- High Yield Fixed Income
Goldman Sachs Strategic Income Instl GSZIX 128.00 0.61 -- -- Other Fixed Income
Goldman Sachs Emerging Markets Dbt Instl GSDIX 70.00 0.85 -- -- Emerging Markets Fixed Income
Goldman Sachs High Yield Fl Rate Instl GSFRX 44.00 0.63 -- -- US Fixed Income
Goldman Sachs High Yield Muni Instl GHYIX 16.00 0.56 -- -- US Municipal Fixed Income
Goldman Sachs Dynamic Municipal Inc A GSMIX 12.00 0.76 0.25 3.75 US Municipal Fixed Income
Goldman Sachs Short Dur T/F Instl GSDUX 35.00 0.39 -- -- US Municipal Fixed Income


On average, an investor who utilized an equity strategy from Goldman Sachs experienced a 0.94% expense ratio. Similarly, an investor who utilized a bond strategy from Goldman Sachs experienced a 0.57% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for equity and bond strategies from Goldman Sachs were 90.68% and 174.70%, respectively. This implies an average holding period of about 6.87 to 13.23 months.

It is safe to say that Goldman Sachs makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long term.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Goldman Sachs' management "expertise." We compare each of their 74 strategies -- which includes both current funds and funds no longer in existence (since inception) -- against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 66.22% (49 of 74 funds) have underperformed their respective benchmarks or did not survive the period since inception.
  • 33.78% (25 of 74 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha
  • 4.05% (3 of 74 funds) have outperformed their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance will persist as opposed to being based on random outcomes.


It is safe to say that the majority of active strategies offered by Goldman Sachs have not outperformed their Morningstar assigned benchmark or survived over their lifetime. Of the strategies that did have a positive alpha, three delivered enough consistency to yield a statistically significant result. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indices assigned by Morningstar, then we may form a false conclusion that Goldman Sachs has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S. based strategies from Goldman Sachs that have been around for the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for the multiple betas that we know are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2017.



As you can see, of the 18 funds that met the criteria none produced an alpha that was statistically significant at the 97.5% confidence level (green shaded area).

What we can say is that all active strategies from Goldman Sachs do not have a statistically significant alpha once we control for their overall risk exposure. Why is this important? It means that if we wanted to simply replicate their risk exposure, we could do so more cost effectively through the use of index funds.

Given the lower costs associated with index funds, we could have more confidence that we will experience a more desirable result compared to more expensive actively managed funds.

Conclusion

Like many of the other largest financial institutions, a deep analysis into the performance of Goldman Sachs has yielded a not so surprising result: active management is likely to fail many investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector.

As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.

Below are the individual alpha charts for the existing Goldman Sachs funds that have three years or more of a track record.