Learning from Goldman Sachs's investment picks for the rich
Filed under: Goldman Sachs , Comcast
Goldman Sachs Group (GS) makes executives wealthy when it handles their companies' initial public offerings or when it advises them on mergers and acquisitions. Then it often signs them up to manage that wealth. So the folks at Goldman have plenty of strategies for maximizing these clients' wealth. Yesterday I had lunch with a Goldman partner who explained six ideas for such well-to-do families. But you don't have to be rich to glean some useful insights from these ideas. In fact, the average investor can approximate three of them.
Before getting into the details of these investment ideas, I thought it was interesting that the partner spent time discussing the differences in how Goldman manages some internal operations and how it accounts for its balance sheet in comparison to some of its competitors.
The partner said that at Goldman, the risk-management staff reports to the chief financial officer rather than to the traders -- so Goldman's risk managers are taken seriously. He also said that the firm marks its balance sheet to market values -- rather than to a model, as do some of its peers. My interpretation is that Goldman believes it has a better handle on its risks and keeps its books accurately and conservatively.
That said, here are three of the investment ideas he shared that average investors can learn from if they are seeking to preserve capital while earning better returns:
- Municipal and general obligation bonds. The typical money market fund yields less than 1 percent. If an investor buys municipal and general obligation bonds with the right credit conditions -- e.g., the issuers have high odds of being able to repay their obligations -- and the appropriate tax jurisdictions, investors can earn after-tax yields as high as six percent. While you probably can't get such high returns without buying those individual bonds, the average investor can seek out municipal bond funds that provide higher after-tax yields than money market funds.
- BBB Corporate Bonds. The partner also mentioned that some BBB-rated corporate bonds from companies that are able to meet their obligations can also offer fairly high yields (BBB is the lowest "investment grade" bond rating; below that are "speculative grade" -- or junk -- bonds). He mentioned the bonds of Comcast (CMCSA) as an example of such high-yielding corporate bonds. While it might be hard for the average investor to buy such bonds, corporate bond mutual funds -- such as Fidelity Capital and Income -- offer similar yields and some diversification.
- Oil and Gas Pipeline Master Limited Partnerships (MLPs). Oil and natural gas is distributed over pipelines, and since those pipelines have near monopolies, they can charge high rates and generate huge profits. The MLPs are supposed to pay out all their cash to investors, but they create complex tax-reporting and record-keeping requirements. If you're up for that, the average investor can buy such MLPs because they're publicly traded. One example from SeekingAlpha is Boardwalk Pipeline Partners (BWP), which yields 7.7 percent.
Here are some other Goldman picks for the rich that the average investor can't touch because regulations generally require that investors who buy these must have a minimum net worth in the seven figures:
-
Secondary market interests in private equity firms. Many limited partners in private equity firms, such as university endowments, have been desperate to raise cash over the last year. As a result, they've been eager to sell their previously illiquid interests in private equity firms. After considerable due diligence on the future cash flows from the private equity firms, Goldman has scooped up some of them at a discount. The firm believes that its investors can earn returns in excess of 20 percent on these.
-
Customized market index securities. Goldman has noticed that ETFs designed to track market indexes don't actually track those indexes. Goldman has fixed this problem by creating customized securities that track the indexes more accurately, and it expects these customized securities to regularly outperform the indexes by as much as 20 percent.
-
Hedge funds. The partner told me that of all the different kinds of hedge funds out there, he's comfortable with those that meet two conditions: their portfolio managers have almost their entire net worth tied up in their funds, and the funds are seeking significant capital appreciation. Goldman screens the hedge fund universe and puts its clients in what it considers the best of the funds that pass these two tests.
Wealthy clients generally have different investment objectives than the average person. But if you have any spare cash, it wouldn't be a bad idea to find a somewhat better way to keep it safe while it delivers a higher return. Some of these ideas might help.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.
D-Day for Harry Reid: Can he wrangle 60 votes for Senate health reform bill?
Fed stalls on Chinese bank deal, costs taxpayers $1.7 billion
Dell in a handbasket: Should founder Michael Dell resign?
Reader Comments (Page 1 of 1)
11-03-2009 @ 12:32PM
diplobrat said...
Apparently most of us (with eyes glazed over) will never profit from any of these strategies. That's why the rich are becoming richer. The whiz-kids at "Sacks of Gold, MAN!" do well- they ARE rich. And have market strategies in place to make sure that they STAY that way. It's reciprocal, in that the risk guys generate profits for their clients, and their clients gradually take a larger and larger and larger chunk of the pie. Then the clients re-invest these chunks, and get fatter still. See how it works?
Reply
11-03-2009 @ 12:32PM
bill said...
I'd like to know how come there doing so well when I have a 401K plan with them and it sucks?
Reply
11-03-2009 @ 3:10PM
dan said...
In 2006 to 2007 Goldman Sachs saw the end to the housing bubble and sold more than $40 billion insecurities that were backed by at least 200,000 bad home loans. It was only later investors found out the triple A investments were frauds. CalPERS purchased $64 million in subprime mortgage backed bombs on March 1, 2007 and now they are worth $16.6 million. You would have to say that someone might of known what was coming before the general public did and decided to get out before they got caught, wouldn't you say? And they get a bail out???????and no one goes to jail. In 2009 it recorded $50 billion in revenues and is going to pay $20 billion in bonuses
Reply
11-03-2009 @ 3:15PM
Paulz said...
Welcome to the United States of Goldman Sachs
Reply
11-03-2009 @ 3:19PM
dan said...
And the perpetrators of this melt down in the derivatives, Black Box, Alan Greenspan, Robert Rubin, Larry Summers, and Tim Geithner. In 1998 they convince the Republican led Congress to block the CFTC head, Brocksley Born, from regulating the swaps, derivatives, over the counter market, when it was in the trillions, and now in the multi trillions, which we the tax payer are on the hook for.
Alan Greenspan is the worst because he took the oath to defend and protect the Constitution whether he believed it or not, and knowingly did not because he believed in the libertarian principles of Ayn Rand, a fictional writer of Atlas Shrugged, in that there should be no government intervention in markets and that they should be unregulated.
Well we all know where that led us too, the next depression and no lending because they are hording their bailout money because of this huge debt on their books.
Reply
11-03-2009 @ 3:51PM
dave said...
The last Treasury Secretary was a Christian Scientist, not a Jew.
Reply
11-03-2009 @ 4:29PM
David S. said...
People are funny....when the economy is booming, no one gives a rats ass about Goldman Sachs or Lehman Brothers or any of these other big corporations or their business practices....especially not the folks making money off them.
Reply
11-03-2009 @ 4:57PM
kenodave said...
It didn't hurt they had Paulson, a former CEO of Goldman Sachs, pressuring the government inot bailing out his buddies, all the while most Americans are laboring to put food on the table. No wonder everyone hates the Jews.
Reply
11-03-2009 @ 5:00PM
don said...
The word that comes to mind is "INSIDER TRADING"!
Reply
11-03-2009 @ 5:26PM
William Hansen said...
I don't understand how "customized securities that track the indexes more accurately" can "regularly outperform the indexes by as much as 20 percent." That doesn't sound like tracking to me. Perhaps the assertion is that the customized securities track the indexes that much better than the existing ETFs track them?
Reply
11-03-2009 @ 7:58PM
big keys said...
Goldman sachs owns the government, treasury, SEC, and The Federal Reserve. They are all just puppets of Goldmans wishes.
Your wealth is being stolen so the jews at Goldman can proft and kick back to the corrupt government officials!
The time for revolt has long since passed.
Wake up America!
Reply
11-03-2009 @ 8:42PM
John said...
Diplobrat - if you can't beat the whiz-kids....join them!
Reply
11-03-2009 @ 8:46PM
Bob said...
Great comments save for reference to that omnipotent D
evil/ Jew.
Reply
11-03-2009 @ 10:47PM
Russ said...
Too bad these "best and brightest" we all have to support don't have the knowledge to make all of We the Peoples 401ks earn squat.
401Ks are the fraud that these SOBs use to rob us and fund these other exotic investments.
Reply
11-03-2009 @ 10:47PM
Russ said...
Too bad these "best and brightest" we all must pay to support cannot figure out how to make We the People's 401Ks earn squat!
401Ks are the fraud today being used by these SOBs to fund their exotic investments that are only open to the select few.
Reply
11-04-2009 @ 8:55AM
Keston said...
I thought Goldman's six tips were....
1. Hire the world's brightest people to fleece the naive masses
2. Exploit every possible conflict of interest (e.g., position your past CEO as the U.S. Treasurer)
3. Convince the public that banking is not just a facilitator of the economy, but is the economy
4. Create an investment bubble; profit when it inflates and pops! (e.g., CDOs on the upside of the housing debacle and shorting on the way down)
5. Provide just enough philanthropy to claim your company is good global citizen (A good rule of thumb is a million dollars of giving for every trillion dollars of fleecing.)
6. If your company does lose money - God forbid - ensure that high paying executives keep their salaries and that any liability be transferred to the American public
Reply