Asset management division's stumbles tarnish Goldman Sachs

By Richard Teitelbaum
Bloomberg News
Saturday, February 5, 2011; 9:47 PM

On Jan. 2, Jim Clark, a founder of such technology icons as Netscape Communications and Silicon Graphics, was at home in Palm Beach, Fla., when he got an e-mail from an executive at Goldman Sachs Group's private wealth management division.

Goldman was offering Clark a chance to invest in the closely held social-networking company Facebook. The deal - through a fund overseen by Goldman Sachs Asset Management - was being extended to other Goldman investors at the same time. The firm would levy a 4 percent placement fee on clients. It would also require investors to surrender 5 percent of any profit, known as "carried interest," according to a Goldman Sachs document.

Clark, 66, turned Goldman down. In June 2009, he had yanked most of the roughly $400 million he had invested with the firm because of what he considered bad advice and poor performance, including a big hit from GSAM's Global Alpha hedge fund.

This offer, he says, just irked him further. A few months earlier, he had bought a stake in Facebook through another firm for a lower price, he says, and without the onerous carried interest.

"I don't think it's reasonable," Clark says. "It's just another way for them to make money from their clients."

Clark isn't the only investor unhappy with GSAM. The division managed most of the $840 billion in assets Goldman oversaw in December, a figure that dwarfs the money managed by major firms such as Legg Mason and Franklin Resources. Yet evidence suggests the behemoth inside the 141-year-old investment bank is generating subpar returns for investors and is a persistent headache for its chairman, Lloyd Blankfein.

The CEO has dispatched a series of lieutenants on missions to fix the listless asset manager. Investment management is now run by Ed Forst and Timothy O'Neill, who are the eighth and ninth Goldman investment chiefs in eight years.

Last year pension funds in California and Nevada withdrew a total of more than $900 million from GSAM because they were unhappy with its performance and concerned about turnover. At the same time, the asset management division has become increasingly important to Goldman as the firm's trading powerhouse has idled.

Revenue from Goldman's Fixed Income, Currency and Commodities trading division dropped 37 percent in 2010 from a year earlier, and the firm's investing for its own accounts could further suffer when new rules, including strict limits on proprietary trading by banks, kick in.

Goldman declined to make Blankfein or any other executives available to comment.

A big chunk of GSAM's assets are its separate accounts - pools of money invested for institutions and wealthy individuals. EVestment Alliance, an Atlanta-based research firm, tracks about $300 billion held in the accounts and finds that Goldman trailed its peers in 73.8 percent of the categories EVestment looked at during the five years ended Sept. 30.

Chicago-based financial publisher Morningstar tracks Goldman mutual funds and found that the 338 fund share classes it looks at trailed the average return of their respective peers in every broad category, including U.S. diversified equity, foreign stock and taxable bonds, over the 3-, 5- and 10-year periods ended Dec. 31.

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