The most promising businesses at Goldman Sachs are the ones no one ever asks about
Goldman Sachs has been building up businesses that, by comparison to the high-flying world of dealmaking and trading, are downright boring. Its things like managing investments for insurers and pension funds.
These businesses are giving investors something to get excited about, giving Goldman a stream of revenue that's likely to withstand the ups and downs of the markets and chief executive's appetite for deals.
Even as the bank's third-quarter earnings disappointed this month - with shareholders focused on a sharp slowdown in revenue from fixed income trading and in portions of the investing and lending business - one thing stood out: the slow and steady improvement in the performance of the investment management business.
Investment management revenues increased to $4.65 billion through the first nine months of the year, a record for the period. Assets under supervision hit $1.2 trillion, with net inflows of $41 billion during the quarter.
The performance of that division, led by Tim O'Neill and Eric Lane, contrasted with that of its peers. Seven of the largest asset managers lost more than $500 billion combined in assets in the third quarter, according to the Financial Times.
The investment management division has been an area of focus for Goldman Sachs in the wake of the financial crisis.
It has enjoyed particular success in winning business from insurers, with the firm managing more than $180 billion in insurance assets, and via its global portfolio solutions business, which acts like an outsourced chief investment officer for pension funds and endowments. That business manages around $80 billion in assets.
Still, the business barely attracts any attention from Wall Street analysts. It was hardly mentioned on the third quarter earnings call.
Boring business
The appeal of businesses like asset management is that they are more stable and annuity-like, in contrast to volatile earnings one tends to find in sales and trading and traditional investment banking.
The shift in emphasis is noticeable in the make-up of Goldman Sachs' revenues. Investment management made up around 17.5% of revenue through the first nine months of the year, up from 16.7% in the same period a year ago, and 12.5% for the first three quarters of 2009.
It now ranks at the third biggest business line by revenue, ahead of investing and lending and narrowly behind investment banking. Institutional client services remains the biggest business by revenue.
Chief financial officer Harvey Schwartz said on the third quarter earnings call: "While some of our businesses are experiencing year-to-date growth, for example, Investment Banking and Investment Management, other parts of the business are in a more difficult part of the cycle.
That has the benefit of making Goldman's earnings more predictable, and the group a little more boring.
It isn't just asset management where this dynamic is at play.
The bank agreed a deal in August to acquire GE Capital Bank's online deposit platform. As part of the deal, it is taking on $16 billion in deposits, made up of $8 billion in online-deposit accounts and $8 billion in brokered certificates of deposit.
And according to a Morgan Stanley note out Monday, a much bigger percentage of the bank's investing and lending business is now in loans. The bank has more than tripled its investing and lending loan balances over the past two years, with loans now making up 43% of I&L assets.
That has the potential to smooth out Goldman Sachs' earnings over time, and could even lead to Goldman enjoying a higher multiple on its earnings.
"Longer term, [the] multiple could expand as GS migrates portfolios toward more annuity-like," revenue, Morgan Stanley's analysts wrote.