Friday, January 15, 2010

What could Goldman Sachs do for you?

Traders are rightly envious of the outsized profits Goldman Sachs manages to achieve on its proprietary trading desks. But how would the investor have fared had he followed Goldman’s focus list? Or what if you had hired Goldman Sachs Asset Management to steer your investments through troubled waters? In both cases I’m looking at returns from 2008.

(click to enlarge)

First, the Wall Street Journal published a table summarizing the 6-, 12-, 36-, and 60-month returns of the focus lists of 14 brokerage firms. I’m not sure whether in Goldman’s case the so-called focus list was its conviction buy list. But, however defined, following Goldman’s advice would have led an investor to underperform the total return of the S&P 500 in 2008. The S&P was down 37%; Goldman was down 43.71%, the second worst one-year performance of the lot. Over the course of five years, for the period ending December 31, 2008, it outperformed the S&P 500 Total Return index but still had negative returns.

Second, let’s look at what Goldman Sachs Asset Management accomplished for a prize client, the Goldman Sachs Foundation. Here I’m taking my data from Felix Salmon's Reuter’s blog. I have better things to do with my time than reading the foundation’s 297-page 2008 tax return.

The foundation had $269 million in assets at the beginning of 2008, made charitable disbursements of $22 million, and ended the year with $161 million. Let’s simplify calculations and consider two alternative scenarios, neither reflective of reality. First, let's assume that the fund started with $247 million (that is, that it made all its grants on the first day of the year—or, more accurately, just before midnight at the end of 2007, but let’s not nitpick). The management firm charged a 1.4% fee ($3,864,540) to steer the fund to a loss of 34.8%. Second, we can improve the performance metrics if we assume that the foundation made no grants at all, started the year with $269 million and ended with $183 million. In this case the managers lost only 32%. Admittedly, in both cases the management team outperformed the 37% loss of the S&P 500 Total Return index, but you’d think they might have done better for one of their own!

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