NEW YORK (Reuters) – Late last year, Goldman Sachs reached an important milestone: its investment management business surpassed $1 trillion in client money under supervision.
But the achievement went largely unnoticed as shareholders focused on troubles in Goldman’s fixed-income trading business instead. Even inside the investment management division there was little fanfare.
“We absolutely didn’t have a party at a trillion,” says Eric Lane, a Goldman partner who co-heads the group with Timothy O’Neill.
The number is a sign the business has regained its footing after the financial crisis, and comes at a time when it is becoming ever more important to Goldman’s bottom line with a much higher return-on-equity than the trading operations.
Interviews with current and former Goldman executives, investors and clients show that the Wall Street bank is increasingly turning to investment management as the centerpiece of its growth strategy in the much more regulated banking world that is hurting returns elsewhere.
The bet on investment management is one of the first signs that, much like arch rival Morgan Stanley, Goldman is coming around to the view that the years-long slump in fixed income trading is here to stay.
It has a long way to catch up its rivals. It trails JPMorgan Chase & Co, which had $2.5 trillion in assets under management on June 30. That business is the most directly comparable to Goldman’s.
And while Morgan Stanley’s investment management business had only $382 billion in assets at the end of the first quarter, the investment bank has a massive wealth management business – built on the brokerage services it provides retail clients – with $1.9 trillion in assets at the end of March. Goldman doesn’t directly compete in that area.
Goldman’s plan started as a turnaround effort for an asset management business hurt badly by the crisis, but have morphed as the bank’s traditional profit drivers have come under pressure from regulation and lethargic markets, sources said.
Over the past few years, Lane and O’Neill have bought companies, hired people, launched new products and started lending to clients. In a joint interview, their first in years, they said they are not done yet.
“We certainly want the business to be bigger in every metric – revenues, pretax, performance statistics,” said O’Neill. “But that will only happen if we perform for clients.”
Goldman’s investment management division is split into three roughly equal parts: private banking for the wealthiest around the world; asset management for institutional clients like pension funds and insurers; and distribution of Goldman funds to retail investors through third parties like Morgan Stanley and Bank of America Corp’s Merrill Lynch.
On Tuesday, Goldman reported the business generated $1.4 billion in revenue during the second quarter, up 8 percent from the same period a year earlier. Assets under supervision rose to $1.14 trillion from $1.08 trillion the prior period. Goldman CEO Lloyd Blankfein highlighted the business as one that helped offset “less favorable conditions” in trading.
The business didn’t get much management attention when trading was doing well, said SunTrust Robinson Humphrey analyst Eric Wasserstrom. “That’s really changed in the past few years, and it’s being highlighted now both in the operational performance and in management rhetoric,” he said.
For example, when Goldman Sachs President Gary Cohn talked about growth prospects for the bank at a recent industry conference, he spoke almost entirely about opportunities in the investment management business.
To be sure, investment management is still dwarfed by Goldman’s sales and trading operations. Last year, the division delivered 16 percent of Goldman’s overall net revenue, compared with 46 percent from institutional securities.
But at a time when regulators are requiring more and more capital to be held against bond trading, investment management is returning much better results for shareholders. Bernstein Research pegs return-on-equity for Goldman’s investment management business at 25 percent, compared with single digit returns in trading.
“MR. FIX IT”
Goldman’s investment management business was hit hard by the financial crisis and its aftermath. It suffered some high-profile blowups, including its quantitative hedge fund, Global Alpha, which dropped from a peak of $12 billion to just $1.6 billion before shuttering in 2011.
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