Do Goldman Sachs' Funds Add Value for Investors?

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1 Do Goldman Sachs' Funds Add Value for Investors? May 19, 2015 by Larry Swedroe In an April column, New York Times reporter Nathaniel Popper noted that, over the last few years, an expanding line of mutual funds created by commercial banks such as Goldman Sachs and JPMorgan Chase have been drawing billions of dollars from investors looking to earn a good return. While the fees these funds have generated are among the few consistent bright spots of growth on Wall Street, the question for investors is whether or not the active mutual funds managed by these banks actually have been good investment choices. Popper noted that over the last 10 years, Morningstar data shows just 12% of Goldman Sachs mutual funds have outperformed their analyst-assigned benchmarks. Today, I ll provide further insight into the results posted by these funds. I continue my series evaluating the performance of the market s foremost actively managed fund families with an in-depth look at Goldman Sachs Asset Management (GSAM). According to Morningstar, as of April 30, 2015, GSAM had more than $107 billion assets under management in mutual funds. Their website states: Goldman Sachs Asset Management is one of the world s leading investment managers. With over 2,000 professionals across 33 offices worldwide, GSAM provides institutional and individual investors with investment and advisory solutions, with strategies spanning asset classes, industries, and geographies. They go on, adding: Our investment teams represent over 700 investment professionals, capitalizing on the market insights, risk management expertise, and technology of Goldman Sachs. We help our clients navigate today s dynamic markets, and identify the opportunities that shape their portfolios and long-term investment goals. We extend these global capabilities to the world s leading pension plans, sovereign wealth funds, central banks, insurance companies, financial institutions, endowments, foundations, individuals and family offices, for which we invest or advise more than $1 trillion of assets. That all sounds nice, but certainly nothing about it is unique. After all, there are many mutual fund firms that say essentially the same thing. So, the crux of the matter is: Does GSAM add value or is the firm benefiting at the expense of the investors? Active versus passive Page 1, 2017 Advisor Perspectives, Inc. All rights reserved.

2 As is my practice, I ll compare the performance of GSAM s actively managed equity funds to similar offerings from two prominent providers of passively managed funds: Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.) To keep the list to a manageable number of funds and to make sure I examine long-term results through full economic cycles, the period I ll cover is the 15 years from April 2000 through March I ll use the lowest-cost share classes when more than one class of fund is available for the full period. In cases where GSAM has more than one fund in the asset class, I will use the average return of their funds in my comparison. The table below shows the performance of 14 Goldman Sachs funds in 10 asset classes. April 2000-March 2015 Page 2, 2017 Advisor Perspectives, Inc. All rights reserved.

3 Fund U.S. Large Blend Symbol Annualized Return (%) Expense Ratio (%) Goldman Sachs U.S. Equity Insights GSELX Goldman Sachs Large Cap Growth Insights GCGIX Goldman Sachs Average DFA U.S. Large Company DFUSX Vanguard Institutional Index VINIX U.S. Large Growth Goldman Sachs Capital Growth GSPIX Goldman Sachs Strategic Growth GSTIX Goldman Sachs Average Vanguard Growth Index VIGIX U.S. Large Value Goldman Sachs Large Cap Value Insights GCVIX Goldman Sachs Growth and Income GSIIX Goldman Sachs Large Cap Value GSLIX Goldman Sachs Average DFA U.S. Large Cap Value DFLVX Vanguard Value Index VIVIX Page 3, 2017 Advisor Perspectives, Inc. All rights reserved.

4 U.S. Real Estate Goldman Sachs Real Estate GREIX DFA Real Estate Securities DFREX Vanguard REIT Index VGSIX U.S. Small Blend/Growth Goldman Sachs Small Cap Equity Insights GCSIX DFA U.S. Small Cap DFSTX Vanguard Small Cap Index VSCIX U.S. Small Value Goldman Sachs Small Cap Value GSSIX DFA U.S. Small Cap Value DFSVX Vanguard Small Cap Value VISVX Foreign Large Blend Goldman Sachs Focused International Equity GSIEX DFA Large Cap International DFALX Vanguard Developed Markets Index VTMGX Page 4, 2017 Advisor Perspectives, Inc. All rights reserved.

5 Foreign Large Value Goldman Sachs International Equity Insights GCIIX DFA International Value III DFVIX Foreign Small Goldman Sachs International Small Cap GISIX DFA International Small Company DFISX Emerging Markets Goldman Sachs Emerging Markets Equity GEMIX DFA Emerging Markets DFEMX Vanguard Emerging Markets VEIEX The following is a summary of the most important takeaways from the data in the table above: In the nine asset classes for which there are comparable DFA funds, the GSAM funds provided a higher return in just one, U.S. small value. In the eight asset classes for which there are comparable Vanguard funds, the GSAM funds provided a higher return in just three. A GSAM portfolio equal-weighted in the nine asset classes for which there are comparable DFA funds returned 6.0%. The average expense ratio was 0.89%. An equal-weighted DFA portfolio returned 8.0% a year, outperforming the comparable GSAM portfolio by 2.0 percentage points a year. Moreover, the average expense ratio of the DFA portfolio was only 0.33%. The underperformance of the GSAM funds was about four times greater than the difference in expense ratios. In supposedly inefficient asset classes where active managers contend they have an advantage, specifically international small and emerging markets, GSAM funds underperformed. In the eight asset classes where comparable Vanguard funds were available, an equal-weighted portfolio of GSAM funds returned 6.4%. Its average expense ratio was 0.86%. An equal-weighted Vanguard portfolio returned 6.9%, 0.5 percentage points more than the GSAM portfolio. The Page 5, 2017 Advisor Perspectives, Inc. All rights reserved.

6 average expense ratio for the Vanguard portfolio was 0.13%. In this case, the higher expenses of GSAM s funds explained more than 100% of the difference in returns. Factor analysis I ll now take another look at the performance of the GSAM funds using the analytical tools and data available at Portfolio Visualizer. The following table shows the results of the three-factor (beta, size and value), four-factor (adding momentum) and six-factor (adding quality and low beta) analysis for the firm s domestic funds (excluding its REIT fund). I ll cover the same 15-year period from April 2000 through March The t-stats are in parentheses. Fund Symbol Three-Factor Annual Alpha (%) Four-Factor Annual Alpha (%) Six-Factor Annual Alpha (%) Goldman Sachs U.S. Equity Insights GSELX 0.08 (0.12) 0.09 (0.13) (-1.3) Goldman Sachs Large Cap Growth Insights GCGIX (-1.0) (-1.09) (-1.3) Goldman Sachs Capital Growth GSPIX 0.26 (0.2) Goldman Sachs Strategic Growth GSTIX 0.12 (0.1) 0.50 (0.5) 0.38 (0.3) (-2.3) (-1.7) Goldman Sachs Small Cap Equity Insights GCSIX (-1.1) (-1.7) (-2.4) Goldman Sachs Large Cap Value Insights GCVIX 0.10 (0.1) Goldman Sachs Growth and Income GSIIX 0.44 (0.5) Goldman Sachs Large Cap Value GSLIX 1.83 (1.6) Goldman Sachs Small Cap Value GSSIX 3.32 (2.2) 0.15 (0.2) 0.35 (0.4) 1.76 (1.5) 3.03 (2.0) (-1.3) (-0.5) (-0.4) (-0.2) Average Page 6, 2017 Advisor Perspectives, Inc. All rights reserved.

7 The three-factor analysis shows that seven of the nine GSAM funds generated annual alphas although only two were greater than 0.5%. The average annual alpha was 0.41%, and only one fund achieved alpha that was statistically significant at the 5% level. The four-factor analysis also shows that seven of the nine GSAM funds generated annual alphas although again, only three were greater than or equal to 0.5%. The average annual alpha was 0.34%. Yet again, only one fund had alpha that was statistically significant at the 5% level. When we include all six factors, I find that all nine funds generated negative annual alphas six were worse than -0.5% and five were worse than -1%. The average annual alpha was -1.35%. Only two of the funds had a statistically significant negative alpha at the 5% level. Before summarizing, there are two additional important points to consider. First, all of the data above is based on pre-tax results. For investors holding these funds in taxable accounts, the high turnover from the active management of GSAM almost certainly would have produced more negative tax consequences than the passively managed alternatives of either DFA or Vanguard. Second, Morningstar data unfortunately contains survivorship bias. Thus, it s possible there were GSAM funds that had performed poorly in the past and were either merged into better performing funds or closed. If that were the case, the data will overstate returns earned by the firm s investors. In her own analysis of the performance of GSAM, Morningstar analyst Laura Lallos wrote, We do not consider their overall long-term performance to be a success any way you look at it. On the other hand, here s what Goldman Sachs chief financial officer, Harvey Schwartz, had to say about the firm s strategic initiative to grow asset management on his most recent call with investors: The team s done a great job. Yes, it s true that in terms of growth in assets under management and fees extracted from clients; GSAM s funds have been very good for Goldman Sachs bottom line. Popper writes that during 2014, the company s funds drew $73 billion of new money from investors, increasing revenues in the investment management division by 11% over the previous year. Unfortunately, the news was dismal for investors in its funds. My analysis demonstrates that GSAM did not add value relative to the performance of either the DFA or Vanguard alternatives. And in terms of the factor analysis, there wasn t any evidence that GSAM s managers were able to exploit market inefficiencies. Membership in the Goldman club came at a steep price: lower returns than those from cheaper, passively managed funds. Larry Swedroe is director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country. Page 7, 2017 Advisor Perspectives, Inc. All rights reserved.