‘We have had some terrific momentum in the past year or so,” says Suzanne Donohoe, who co-heads Goldman Sachs Asset Management (GSAM) Europe. This is in contrast to the concerns GSAM was feeling last year when the British Coal pensions schemes’ 1996 assets deal with the firm expired and the business was up for renegotiation. In the event, the asset manager ended up sharing the pie more with others – so all was not lost.
But using the coal assets as a foundation for GSAM’s European asset penetration worked well. Of total group assets worldwide under management of $375bn (E309bn), approximately $80bn are for European clients. “This underlying business has been growing very nicely,” she adds. In figure terms to end May, some $18bn had been taken in as new assets within Europe – excluding the British Coal and money market fund assets.
“We have had a number of underlying strategies that have done very well - our approaches have struck a chord with investors.” She refers in particular to the active alpha investing approach, with the accolade of the E1bn (notional) global tactical asset allocation (GTAA) mandate win from the E53bn PGGM fund in the Netherlands. As an overlay program the assets are notional and amount to perhaps 5 to 7% of the related assets being required to participate. GSAM is a leader in GTAA, with notional assets of $30bn in programs worldwide, and inflows last year of $9bn (notional) in GTAA mandates overall.
Donohoe says that the PGGM award and others in the Netherlands, such as PME, come from the drive to boost returns from uncorrelated sources.
In the past 12 to 18 months, asset growth has been spread across a number of regions, with the Netherlands doing particularly well and the UK and Ireland also proving to be strong markets. “In Germany, where our institutional business is more insurance related, some clients found it necessary to liquidate accounts with gains in order to produce profits for the 2002 P and L. But last year the market turned around and many new enquiries are flowing through.
“In particular we are seeing interest in strategies with uncorrelated sources of return- such as hedge funds, currency and global tactical asset allocation.”
Commodities can have a role here and pension funds have become much more aware of the opportunities, particularly in view of what has happened to oil prices, she points out. “In times of stress, the lack of correlation of commodities with traditional assets is particularly attractive.” The firm reckons value can be added to commodity index performance through asset management. “We have done research and built models to look at active as well as passive index commodities strategies.”
Hedge funds have not taken off with quite the same élan in the Dutch as in the Swiss or Scandinavian markets, she reckons, although some of the first tier are already active with hedge funds. “We are finding enquiries coming in for both direct single fund strategies as well as funds of funds across the European market. Compared with last year, it was just funds of funds.”
The GSAM fund of funds product, which runs about $11bn, is completely with external managers. For a number of the traditionally long-only areas, such as fixed income, currencies and quant equity, single hedge fund strategies are also run internally. Now, FoHF clients can opt to invest in GSAM direct hedge funds alongside should they wish. “This has been successful, as we have been able to generate attractive returns for the investors and it has also meant that we have retained our investment talent that might otherwise have left to run hedge funds elsewhere,”she says.
“In the fixed income space we think that an unconstrained approach allows clients to adopt a more flexible way to run their assets in the bond markets. Even if interest rates are to rise significantly, it does not mean that there is not money to be made in the bond markets. So if clients give our managers sufficient flexibility, we are delighted to do this for them.” With this type of fixed income investing there could be eight different strategies operating – exploring the full opportunity set, including high yield and emerging market debt.
Structured equity products are attracting investors in Germany and other countries. Typically, these can have 100 to 300 basis points of tracking error, with outperformance targets anticipated at 50 to 150bps, she says. “This interest is probably a residual of the bear market, where people will only invest in a risk managed fashion.”
A team of some 35 investment professionals in the Quantitative Equity team are involved in the research to see which strategies and approaches can add value in the future from identified market inefficiencies. “All this is tied together with our equity risk management system,” she says. “This proprietary system was developed some years ago and allows us to customise the model to the actual factors we are using in a more robust way than if we were to use other commercially available systems.”
Asked where she believes the strengths of GSAM lie, she says: “We believe we have a very strong specialist capability – almost a series of boutiques – linked together by a common brand, infrastructure and a shared way of thinking. No matter which of our investment platforms are involved, all activities are team-based, driven by proprietary research with a strong risk measurement culture. In addition, we are global in outlook, but each team has autonomy to produce alpha in different ways.”
The aim is to keep an entrepreneurial spirit alive in each team. “So the chief investment officer for each team will have control over investment decisions, as well as the composition of the team and its structure.”
She is confident that the specialist approach is completely in tune with where the European market is going. “Part of that is attributable to the fact that the group came to asset management in the mid 1990s with a blank sheet of paper. So the business was built in a way we thought the market would look, rather than going out building a book of balanced mandate business.”
The history of the business rested on developing GSAM’s investment capabilities. “So when we acquired the Coal scheme contracts in 1996, this gave us a base of assets, enabling us to attract portfolio management talent and build up our team we did not otherwise have.” It was the foundation of the European business, in her view. “To develop in a serious way meant having the infrastructure, requiring operations and technology spending to make the business scaleable. We could not produce the required alpha if our portfolio managers had to spend all their money on trades and so on.” It was only when the investment talent and infrastructure were in place that the client-facing aspects were refined.
The strategy is to deepen the specialist capability and expand the coverage into the different regional areas as demand develops. “Among our strengths on the portfolio side are alternatives, particularly the uncorrelated asset space. We will continue to build up these capabilities. On the equities side we have expanded into the higher alpha space, with some more concentrated equity strategies, as we see the market evolving here.”
GSAM has also pioneered a fiduciary approach, winning a mandate from a Dutch insurer some years ago, and more recently a European equities fiduciary mandate. “There is a demand for this product among pension funds or insurers with perhaps just E1bn in assets.”The concept is to work in partnership with the client who remains in ultimate control of the asset mix, but GSAM helps with risk budgeting, benchmarking and manager selection.
“This is a growth market and we are talking to a number of pension plans, but we do not expect to win dozens of these mandates. We have to be careful about how we approach it, as it does absorb a lot of resources as it is highly customised. Working with the fund’s actuary means undertaking a lot of analysis, for example. So we have to be selective and will necessarily focus on larger clients.”
Goldman Sachs has a very active pensions group within the investment bank operations. “We do work with the pensions people who are part of the securities division in the bank. There can be opportunities to act jointly to present a more holistic solution. But Chinese walls exists between the two businesses so that we operate independently,” she says.
Her hopes for Europe are high: “I expect a strong year this year. The European market is a very fast growing part of GSAM as a whole and we are investing resources here as a consequence.
“We are active in a number of continental markets, but there are still some we are not covering yet. You will see us grow there in terms of people, but at the same time deepening what we do in our existing markets.” In Frankfurt GSAM now has 35 people; the Milan office growing, as, she says, is the small presence in France. “Also we have locally trained people based in London who look after the Dutch and Scandinavian markets.”
Other clients within the EMEA region are serviced from London. “Of our approximately $80bn European assets, some $30bn are managed in London, with the balance in other locations, including Asia.”
She adds a cautionary note as her parting comment: “The value of an asset management franchise as a business is totally connected to your success in keeping clients. The annuity revenue stream only continues as long as your clients stay with you! So that’s our first priority.”