Goldman Sachs Asset Management seen as riding out parent's storm

BY KEVIN OLSEN AND DOUGLAS APPELL

PUBLISHED: MARCH 16, 2012

Article from Pension and Investment

Goldman Sachs Asset Management shouldn't see a major fallout from a scathing op-ed piece in the New York Times earlier this week by Greg Smith, former executive at parent Goldman Sachs, industry sources said.

Mr. Smith, who resigned this week as Goldman executive director and head of U.S. equity derivatives in Europe, the Middle East and Africa, wrote in his op-ed Wednesday that the environment at the firm now “is as toxic and destructive as I have ever seen.”

“Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,' sometimes over internal e-mail,” Mr. Smith wrote. “Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn't feel right to me anymore.”

One fund executive overseeing more than $1 billion in assets, who declined to be named, said if a GSAM client were looking for an excuse to fire the firm, this example of headline risk could provide one. But he predicted no major fallout, noting that the “scandal” touches on questions of moral fiber and character, rather than any directly attributable losses for clients.

However, James Wilbanks, executive director of the $10 billion Oklahoma Teachers' Retirement System, Oklahoma City, said the op-ed piece furthers the pension fund's belief that conflict can occur when hiring a manager that is owned by a bank.

“I would say we have certain biases when hiring investment managers,” Mr. Wilbanks said in a telephone interview. “We have a bias against asset managers owned by banks and insurance companies. Those asset managers can forget who they work for. They can be working for the bank instead of the clients, which is me.”

Oklahoma Teachers terminated GSAM earlier this year from a $480 million domestic large-cap growth mandate because of personnel changes; it does not have contracts with any money managers that are owned by banks in its active investment portfolio now.

“We've always been very, very keen on culture for our due diligence process,” Mr. Wilbanks said. “We are very cognizant of the qualitative issues.”

Nothing in that article would surprise anybody who has read “Liar's Poker,” Michael Lewis' book about his experiences at Salomon Brothers 20 years ago, noted Erik Knutzen, chief investment officer at consultant NEPC. The “headline” impact may give momentary pause to plan sponsors, but it merely serves as a reminder of the importance of assessing the pros and cons of working with a Wall Street-based money management firm, he said.

In the op-ed, Mr. Smith calls out Goldman Sachs CEO Lloyd C. Blankfein and President Gary D. Cohn for losing hold of the firm's culture under their watch. Messrs. Blankfein and Cohn responded in a statement posted on Goldman's website defending the services the firm provides and cites an intraoffice survey that shows 89% of employees said the “firm provides exceptional service to (its clients).” It says a similar percentage resulted from the responses from nearly 12,000 vice presidents, a group that included Mr. Smith.

“Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients,” Messrs. Blankfein and Cohn stated in a news release posted on Goldman's website.

Morgan Stanley CEO James Gorman said he told his staff not to circulate the op-ed criticizing Goldman Sachs' environment and that he does not understand why the New York Times would publish the piece with Mr. Smith attacking the top managers and treatment of clients, according to information from Bloomberg News.

“There but for the grace of God go us,” Mr. Gorman said.

— Contact Kevin Olsen at kolsen@pionline.com and Douglas Appell at dappell@pionline.com

Article from Pension and Investment

Do Too Many Fund Managers Love Apple?

March 14, 2012, 1:24 PM
Article from The Wall Street Journal
By Jonathan Cheng

 

Photo illustration by Justin Metz for The Wall Street Journal

Everyone loves Apple. But not everyone loves that everyone loves Apple.

As we explained in this morning’s Journal, one reason the tech giant’s stock price has fared so well is that Apple has found buyers in nearly every corner of the investment world. This includes (but is not limited to): small-cap funds, mid-cap funds, dividend income funds, international (read: ex-U.S.) funds and even one high-yield bond fund.

(Our razor-sharp online team has cranked out a sortable table with a list of the mutual funds holding Apple. Play around with it here.)

This is great for Apple shareholders, who are now looking at Apple up over $590 (at last glance) and quickly zeroing in on $600. But Apple’s near-ubiquity on Wall Street hasn’t sat well with everyone, who see signs of a herd mentality in all the hubbub. Have a look:

Russel Kinnel, director of mutual-fund research at Morningstar: “While I think ‘value’ and ‘growth’ are in the eye of the beholder, I don’t think that’s the case for a small-cap manager… There are legitimate reasons for some of these funds to own Apple, but if it isn’t consistent with their mandate, then there are serious consequences, because people are using these funds to set their portfolios and to properly diversify.”

Dennis Houlihan, a registered investment advisor with about 150 clients in Fort Wayne, Indiana:  “It just goes to show there’s no discipline…If they’re just putting the hot name in there to impress investors or chasing momentum stocks, that just doesn’t do the job… When I buy a high-yield or an international fund, I’m buying it for diversification purposes. If I want Apple, I’ll buy a technology fund or buy the stock… If they want to play these games and get loose with their investment charter, hey, so be it. There’s nothing illegal about it, per se, but does it pass the smell test? But if you’re a shareholder and you’re holding something far outside the investment charter of the fund and that stock blows up, then what’s he going to say?”

Mercer Bullard, a professor at the University of Mississippi School of Law, who in the late 1990s started a letter-writing campaign to pressure regulators into forcing fund managers to reflect their funds’ names: “Investors are supposedly buying exposure to a particular asset class, and investing outside that asset class completely contradicts the investor’s intent. If you have a fund name that says you invest in one thing, you should only be able to invest in that thing. The name should reflect the actual market risk in the fund.”

Rick Brooks, an investment advisor with Blankinship & Foster in Solana Beach, Calif.: “When you’re buying a smaller company fund expecting smaller companies, the last thing you want is the largest company on the planet to be a part of it… From a legal perspective, there’s always wiggle room, but that’s the attorney talking, not the fund manager. If I’m buying a fund specifically for small-cap exposure, I don’t want to see mega-caps in that portfolio unless I can identify the reason why.”

Larry Swedroe, director of research at Buckingham Asset Management in St. Louis: “They write their prospectuses specifically to give them that flexibility, but how many investors even bother to read the prospectus? We can’t ever know what’s in these funds — they’re so opaque and we don’t have time to read quarterly updates, so we generally avoid them… By buying mutual funds, you’ve lost control of your investment.”

Michael Gibney, a financial planner in Riverdale, NJ: “People see the return on Apple and they think it’ll go on forever…They could very well start paying a dividend tomorrow, but the fact that they’re not paying one now and you’re managing a fund that is supposed to be holding dividend-paying stocks, I’d say you’re jumping on the bandwagon… Even if they do benefit from this, it’s still something that shouldn’t have happened.”

It should be noted that not everyone feels this way about Apple worming its way into unconventional portfolios. “The unwritten rule in all investing is you want to win,” says Michael Lipper, president of Lipper Advisory Services. “You’re given a main bucket and an alternative, and if the alternative can produce enough of a gain, then your shareholders are ahead.” Just because it’s unusual, Mr. Lipper adds, “doesn’t mean it’s wrong.” “If, after a clear mature judgment, they want to do it, that’s fine.”

Article from The Wall Street Journal