Learning from Goldman Sachs's investment picks for the rich
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.