NEW YORK - In 1934, German engineer Ferdinand Porsche invented the "people's car," known today as the Volkswagen Beetle. Affordable and reliable, it was arguably the first car within reach of the everyday consumer and almost instantly brought mass motoring to the streets of Germany. Over its lifespan, it has accounted for more sales worldwide than even Henry Ford's Model T.
Taking a cue from Herr Porsche, Goldman Sachs Asset Management (GSAM) has launched a sort of "people's fund," the Goldman Sachs U.S. Equity Dividend and Premium Fund. With a relatively thrifty management fee of 75 basis points and a minimum investment of $1,000 that would hardly imply exclusivity, the new equity fund is a retirement-oriented product that targets a broad demographic of individuals and institutions.
The Goldman Sachs name, however, might be more popularly associated with high-finance investment banking and private money management for the nation's wealthiest individuals, rather than prudent retirement investing products for everyday consumers.
It's a fact that isn't lost on GSAM's marketing team, and they're hoping the new fund will go far in correcting that perception.
"We've been in the third-party business for quite some time now, with more than 40 mutual funds [available] to distributors that include wirehouses, mutual broker/dealers, trust departments, RIAs, and the platform clearing houses that RIAs might use," explained James A. McNamara, head of GSAM's U.S. third-party distribution business, noting that Goldman's high-net-worth, private client management is a separate business from GSAM.
"So, to that end, it's not a change in strategy for Goldman Sachs. We think our brand is a powerful brand and [the new fund] is giving people access to the expertise of Goldman Sachs through intermediaries who provide the advice and guidance. We think it's a perfect opportunity for us to grow our business in the mutual fund space," McNamara said in an interview at the firm's headquarters in lower Manhattan.
Although the fund's target consumer is loosely defined, McNamara said GSAM will work closely with advisers to identify clients who might benefit most from the fund's makeup.
The fund was launched on Aug. 31, and as of Sept. 28, assets totaled $12 million. As a unit, GSAM manages $520 billion in overall assets and $77 billion in equity assets.
The fund also enhances GSAM's presence in the retirement area, which, with 77 million Baby Boomers retiring in the coming years, represents the industry's hottest growth market. It complements the Goldman Sachs Tax Managed Fund, which targets individuals who will be gaining wealth during retirement.
But beyond its everyman appeal, what truly sets the Goldman Sachs U.S. Equity Dividend and Premium Fund apart from its peers is its departure from traditional retirement investing strategies, its particular usefulness for retirees with defined contribution plans like 401(k)s and its tax efficiency, said Donald J. Mulvihill, a managing director with GSAM and product manager for the firm's tax-efficient investment strategies unit.
"Conventional ways of thinking say that when you turn 65, you have to start loading [your portfolio] up on bonds and getting out of the stock market, but entering retirement you still have a very long horizon and you need growth," he said.
For example, Mulvihill offered, defined pension plans provide a benefit check every month based on some actuarial assumptions, while the more popular defined contribution plans earn interest on a principal. A retiree's spending, therefore, is based on the interest that is earned. After taxes, however, bonds simply do not generate sufficient spending for retirees, who are leaving work earlier and living longer. Nor do they typically keep pace with inflation, he added.
"So if your thought is to generate spending and maintain the value of your portfolio, or defer as long as possible before you start running it down, bonds really don't do the trick of allowing for both generating cash and preserving the real value of your portfolio," he said. "So generating cash flow from an equity portfolio was the genesis of this."
To generate that attractive yield, company officials said, fund holdings will emphasize higher dividend-paying stock from large-cap issuers within each industry and sector of the S&P 500. Holdings will also maintain industry and sector weights similar to the S&P 500 and could possibly move to exchange-traded funds and foreign equities.
Portfolio holdings will be between 100 and 150 stocks. Portfolio turnover will be limited to minimize the high tax rates that accompany short-term gains, the Goldman executives said, and securities with a higher tax basis will be sold before those with a lower tax basis to further discourage harsher tax implications.
To further generate cash, the fund's portfolio team will regularly write call options against the S&P 500 Index to generate a premium that, when combined with the portfolio's dividend yield, can offer a more attractive after-tax cash flow to investors. Premiums received might also help reduce the fund's price volatility, officials said. The call options will generally have expirations of three months or less, but beyond the government's 61-day minimum to protect the fund from capital gains taxes, and the fund will sell the options in an amount between 25% and 75% of the value of the fund's portfolio.
Along with potential price appreciation of the portfolio's underlying equity securities, officials added, cash flow from dividend income and from premiums will comprise the fund's total return.
Mulvihill said the fund is targeting a 7% cash flow, which is comprised of an anticipated 3% dividend yield and a 4% annual premium on the call options. Those targets, however, hinge greatly on the market's future performance, he admitted. In fact, Mulvihill added, the fund was conceived under the prevailing notion on Wall Street that the stock market is reverting to the mean and single-digit returns are on the horizon.
"We certainly had good returns in the 1980s and 1990s - it would have been a nice time to move into retirement - but going forward, we may see some very different situations. We could go a long way without a lot of growth in the market," he said.
A rising market, he noted, could compromise the fund's performance, as the call options exchange cash at the time of purchase for profit that might be realized later from an increase in the stock's value.
"If you were bullish, you would not buy this fund, because you are giving up some of your upside," Mulvihill remarked.
Time may only tell, then, if Goldman Sachs will make Herr Porsche proud.
(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.