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Goldman Sachs: A Deeper Look at the Performance

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The popularity of index investing keeps gaining steam. By mid-2019, nearly half of all equity assets in U.S. mutual funds and exchange-traded products were managed through such passive strategies, according to Morningstar. That was up from about 20% in 2007, estimated the Chicago-based funds research firm.

But that's just part of the story. As we've chronicled over the years, 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 $1.76 trillion in global assets under supervision.1 Many investors are familiar with Goldman Sachs through their company sponsored retirement plans. Industry trade magazine Pensions & Investments has ranked Goldman Sachs Asset Management as one of the largest U.S. players in so-called outsourced investment management programs used by sponsors of defined benefit and defined contribution plans.2 

As mentioned above, we've taken a deeper look at the performance of several other large 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.


Controlling for Survivorship Bias

It is important for investors to understand the idea of survivorship bias. While there are 67 strategies that are currently offered by Goldman Sachs with at least five years of performance data, it doesn't necessarily mean that these are the only strategies that this company has ever managed. In fact, there are 35 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 67 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 study with any fund family include expense ratios as well as front end (A), deferred (B) and level (C) loads, along with 12b-1 fees. Together, 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 67 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 Deferred Load Max Front Load Global Category
Goldman Sachs Absolute Return Tracker Instl GJRTX 137.00 0.73 -- -- -- Multialternative
Goldman Sachs Alternative Premia Instl GDIFX 349.00 0.94 -- -- -- Multialternative
Goldman Sachs Asia Equity A GSAGX 39.00 1.50 0.25 -- 5.50 Asia ex-Japan Equity
Goldman Sachs Balanced Strategy Institutional GIPIX 45.00 0.86 -- -- -- Moderate Allocation
Goldman Sachs Blue Chip Institutional GINGX 47.00 0.67 -- -- -- US Equity Large Cap Growth
Goldman Sachs Bond Institutional GSNIX 429.00 0.46 -- -- -- US Fixed Income
Goldman Sachs Capital Growth A GSCGX 55.00 1.14 0.25 -- 5.50 US Equity Large Cap Growth
Goldman Sachs Commodity Strategy Instl GCCIX 46.00 0.61 -- -- -- Commodities Broad Basket
Goldman Sachs Concentrated Growth Instl GCRIX 40.00 0.80 -- -- -- US Equity Large Cap Growth
Goldman Sachs Core Fixed Income Instl GSFIX 396.00 0.38 -- -- -- US Fixed Income
Goldman Sachs Dynamic Global Equity Instl GAPIX 11.00 0.44 -- -- -- Global Equity Large Cap
Goldman Sachs Dynamic Municipal Inc A GSMIX 16.00 0.75 0.25 -- 3.75 US Municipal Fixed Income
GS Emerging Markets Equity Insights Intl GERIX 147.00 1.09 -- -- -- Global Emerging Markets Equity
Goldman Sachs Emerging Markets Debt Instl GSDIX 80.00 0.85 -- -- -- Emerging Markets Fixed Income
Goldman Sachs Emerging Markets Equity Instl GEMIX 52.00 1.19 -- -- -- Global Emerging Markets Equity
GS Enhanced Dividend Global Equity Instl GIDGX 15.00 0.95 -- -- -- Global Equity Large Cap
Goldman Sachs Enhanced Income Instl GEIIX 42.00 0.35 -- -- -- US Fixed Income
Goldman Sachs Equity Income A GSGRX 42.00 1.08 0.25 -- 5.50 US Equity Large Cap Value
Goldman Sachs Flexible Cap Institutional GILLX 50.00 0.59 -- -- -- US Equity Large Cap Growth
Goldman Sachs Global Income Fund GGISX 302.00 1.19 0.25 -- -- Global Fixed Income
Goldman Sachs Government Income A GSGOX 530.00 0.88 0.25 -- 3.75 US Fixed Income
Goldman Sachs Growth & Income Strategy Instl GOIIX 32.00 0.84 -- -- -- Moderate Allocation
Goldman Sachs Growth Opportunities Instl GGOIX 69.00 0.90 -- -- -- US Equity Mid Cap
Goldman Sachs Growth Strategy Instl GGSIX 29.00 0.88 -- -- -- Aggressive Allocation
GS Hi Quality Floating Rate Instl GSARX 47.00 0.36 -- -- -- US Fixed Income
Goldman Sachs High Yield Floating Rate Instl GSFRX 69.00 0.64 -- -- -- US Fixed Income
Goldman Sachs High Yield Instl GSHIX 59.00 0.75 -- -- -- US Fixed Income
Goldman Sachs High Yield Municipal Instl GHYIX 16.00 0.55 -- -- -- US Municipal Fixed Income
GS Imprint Emerging Markets Opportunities Instl GSYIX 11.00 1.25 -- -- -- Global Emerging Markets Equity
Goldman Sachs Income Builder A GSBFX 42.00 0.98 0.25 -- 5.50 Cautious Allocation
Goldman Sachs Inflation Protected Securities Instl GSIPX 160.00 0.34 -- -- -- US Fixed Income
GS International Equity ESG Fund GSISX 38.00 1.40 0.25 -- -- Global Equity Large Cap
GS International Equity Income Instl GSIKX 87.00 0.85 -- -- -- Global Equity Large Cap
GS International Tax-Managed Equity Instl GHTMX 177.00 0.90 -- -- -- Global Equity Large Cap
GS International Equity Dividend & Premium Instl GIDHX 14.00 0.94 -- -- -- Global Equity Large Cap
Goldman Sachs Intl Equity Insights Instl GCIIX 124.00 0.80 -- -- -- Global Equity Large Cap
Goldman Sachs Intl Real Estate Securities Instl GIRIX 43.00 0.99 -- -- -- Real Estate Sector Equity
Goldman Sachs Intl Small Cap Insights Instl GICIX 110.00 0.87 -- -- -- Global Equity Mid/Small Cap
GS Investment Grade Credit SAI GSCPX 82.00 0.37 -- -- -- US Fixed Income
Goldman Sachs Large Cap Growth Insights Instl GCGIX 188.00 0.53 -- -- -- US Equity Large Cap Growth
Goldman Sachs Large Cap Value Instl GSLIX 62.00 0.79 -- -- -- US Equity Large Cap Value
Goldman Sachs Large Cap Value Insights Instl GCVIX 202.00 0.56 -- -- -- US Equity Large Cap Value
Goldman Sachs Local Emerg Markets Debt Instl GIMDX 117.00 0.92 -- -- -- Emerging Markets Fixed Income
GS Long Short Credit Strategies Inst GSAWX 220.00 1.13 -- -- -- Long/Short Credit
Goldman Sachs Managed Futures Strategy Instl GMSSX 529.00 1.20 -- -- -- Alternative Miscellaneous
Goldman Sachs Mid Cap Value Instl GSMCX 82.00 0.83 -- -- -- US Equity Mid Cap
GS MLP Energy Infrastructure Instl GMLPX 68.00 1.32 -- -- -- Energy Sector Equity
GS Multi-Manager Alternatives Instl GSMMX 232.00 1.84 -- -- -- Multialternative
Goldman Sachs Real Estate Securities Ins GREIX 43.00 0.91 -- -- -- Real Estate Sector Equity
Goldman Sachs Rising Dividend Growth A GSRAX 101.00 1.10 0.25 -- 5.50 US Equity Large Cap Blend
Goldman Sachs Satellite Strategies Instl GXSIX 17.00 1.03 -- -- -- Moderate Allocation
GS Short Duration Government Instl GSTGX 247.00 0.48 -- -- -- US Fixed Income
Goldman Sachs Short Duration Tax-Free Instl GSDUX 44.00 0.38 -- -- -- US Municipal Fixed Income
Goldman Sachs Short Duration Income Instl GDFIX 99.00 0.45 -- -- -- US Fixed Income
Goldman Sachs Small Cap Equity Insights Instl GCSIX 111.00 0.84 -- -- -- US Equity Small Cap
Goldman Sachs Small Cap Growth Insights Instl GSIOX 127.00 0.84 -- -- -- US Equity Small Cap
Goldman Sachs Small Cap Value A GSSMX 47.00 1.33 0.25 -- 5.50 US Equity Small Cap
Goldman Sachs Small Cap Value Insights Instl GSITX 130.00 0.84 -- -- -- US Equity Small Cap
Goldman Sachs Small/Mid Cap Growth Instl GSMYX 76.00 0.92 -- -- -- US Equity Mid Cap
Goldman Sachs Strategic Growth Instl GSTIX 28.00 0.75 -- -- -- US Equity Large Cap Growth
Goldman Sachs Strategic Income Instl GSZIX 169.00 0.65 -- -- -- Fixed Income Miscellaneous
GS Tax-Advantaged Global Equity Instl TIGGX 14.00 0.93 -- -- -- Aggressive Allocation
GS Technology Opportunities Inst GITIX 27.00 0.98 -- -- -- Technology Sector Equity
GS US Equity Dividend and Premium Instl GSPKX 37.00 0.74 -- -- -- US Equity Large Cap Blend
Goldman Sachs US Equity Insights Svc GSESX 168.00 1.05 0.25 -- -- US Equity Large Cap Blend
Goldman Sachs US Mortgages SAI GSUPX 963.00 0.44 -- -- -- US Fixed Income
Goldman Sachs US Tax-Managed Equity Instl GCTIX 152.00 0.75 -- -- -- US Equity Large Cap Blend

On average, an investor who utilized an equity strategy from Goldman Sachs experienced a 0.93% expense ratio. Similarly, an investor who utilized a bond strategy from Goldman Sachs experienced a nearly 0.59% expense ratio. (Target-date retirement mutual funds, which follow varying glide paths, aren't included in this study.)

These types of 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 78.33% and 203.53%, respectively. This implies an average holding period of about 5.90 to 15.32 months.

In general, we find that active managers at Goldman Sachs have made investment decisions based on relatively short-term outlooks, which means they've tended to trade more frequently in the past than a typical rival index fund. 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 67 surviving strategies -- which include 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:

  • 68.66% (46 of 67 funds) have underperformed their respective benchmarks or did not survive the period since inception.

  • 31.34% (21 of 67 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

So it's safe to say that investors in active mutual fund strategies offered by Goldman Sachs have faced an uphill battle in picking a manager-led strategy that outperformed its independently analyzed and Morningstar-assigned benchmark -- or, in fact, in selecting an active fund from this family that had survived over its lifetime. 

Here's the real kicker, however:

  • 1.49% (1 of 67 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.

In other words, of the strategies that delivered a positive alpha, just one produced enough consistency to yield a statistically significant result. The inclusion of statistical significance is key to this exercise as it indicates an outcome that's attributable to skill and potentially repeatable. 

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 12/31/2018.

As you can see, the one fund that met the criteria didn't produce 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 five years or more of a track record.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.




Footnotes:

1.) Goldman Sachs, Third Quarter 2019 Results, Oct. 15, 2019. 

2.) Pensions & Investments, "Special Report: Outsourcing Managers," June 24, 2019. 


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Funds Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.