Goldman Sachs Asset Mgmt’s Lackluster Outlook
Goldman Sachs (NYSE:GS) asset management makes up around 10% of its stock value according to our estimates. While trading is the main division to move the stock’s needle driving over 50% of its valuation, asset management is an area that has been in focus given recent macro concerns regarding the European debt crisis and a broader trend moving towards passive funds, which has been a key focus of asset management titans like Blackrock (NYSE:BLK), State Street (NYSE:STT) and Vanguard. Goldman also competes with other banks that have large asset management businesses like Morgan Stanley (NYSE:MS), JP Morgan (NYSE:JPM), Credit Suisse (NYSE:CS) and UBS (NYSE:UBS). Our $164 price estimate for Goldman’s stock is around 20% ahead of the current market price.
Fees as % of Asset Under Management May Decline
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Fees as a percentage of asset under management is a key performance indicator of Goldman’s asset management business. It represents the average fees earned by this division as a percentage of the total assets that it has under management. The fees as % of asset under management fell considerably during the recent economic downturn with returns across assets classes diminishing. In 2010, assets recovered in part driven by increasing commodities prices and a rebound in emerging market equities.
This year commodities and emerging market equities are proving to be constraints on the asset management returns for Goldman. For example the Goldman Sachs BRIC Fund (GBRAX), which focuses mainly on Brazil, Russia, India and China has posted lackluster returns of over -5% this year. This is partly due to weaker commodity prices.A broader trend towards more passive management is also impacting average fees as major ETF providers have seen the majority of inflows this year.
During our forecast period, we expect the fee as % of asset under management to increase by the end of 2011 from 2010 levels, driven by a broader recovery across asset classes after the recent economic downturn.
However, if the current volatility in commodities and emerging markets persists, and is further compounded by factors such as the continuing sovereign debt problems in Europe, there can be a downside to our forecasts.
If the fee as % of asset under management falls from around 0.47% in 2010 to 0.27% by the end of 2011, there can be a downside of around 5% to our current price estimate for Goldman’s stock.