Michael M. Santiago
The Goldman Sachs Group, Inc. (GS) appears to be changing its business strategy again.
There was a time that Goldman Sachs was on top of the world, and even though the world seemed to be changing, Goldman was Number 1, and did not change.
The time period…the end of the Great Recession.
There was no question about who was the “best in the world,” and so Goldman kept its business model.
In 2009, Goldman Sachs earned an 18.58 percent return on capital.
Morgan Stanley (MS) was near the bottom, earning a negative 1.76 percent on its capital.
Morgan Stanley changed its business model. It chose a new CEO, James P. Gorman, to lead the firm, and Mr. Gorman changed the business model.
Instead of an up-and-down future based on trading and advising on deals, Mr. Gorman “built a thriving arm managing the assets of the wealthy.”
His goal was to generate “reliable profits.”
And, that is just exactly what Morgan Stanley produced.
Here are the Morgan Stanley results for the last 14 years.
Return on Capital
December 31, —-
2009 — 1.76 % 2016 + 7.08 %
2010 + 5.86 % 2017 + 7.04 %
2011 + 3.01 % 2018 +10.23 %
2012 — 0.04 % 2019 +10.29 %
2013 + 3.94 % 2020 +11.41 %
2014 + 4.37 % 2021 + 13.57 %
2015 + 7.46 % 2022 + 13.65 %
Company filings.
Not only did Mr. Gorman increase the yield that Morgan Stanley achieved, the increases were relatively steady in an upward direction.
That is exactly what Mr. Gorman wanted.
Mr. Gorman was helped out in achieving this by the monetary policy following the Great Recession.
The Federal Reserve was guided by Chairman Ben Bernanke as the economy came out of the Great Recession.
A part of Mr. Bernanke’s plan for recovery was called “Quantitative Easing,” a program where the Fed purchased a given amount of securities for its portfolio every month for an extended period of time.
Mr. Bernanke believed that this program would result in a rising stock market, but also one in which the increases were steady and extended.
Mr. Bernanke oversaw three such periods of quantitative easing: Q1, Q2, and Q3.
Mr. Gorman, at Morgan Stanley, got his wealth management program going at just the right time. Value investing was not the way to go. Market portfolios were the winning strategy during the 2010s.
The figures presented above conform to this viewpoint.
As far as Goldman Sachs was concerned, it missed the boat.
Where it emphasized trading and deal-making in the past, trading and deal-making tended to prosper off of the swings in the market, something that the return on capital numbers for Goldman supported during the decade of the 2010s.
Return on Capital
December 31, —-
2009 +18.58 % 2016 + 8.16 %
2010 +10.29 % 2017 + 4.31 %
2011 + 3.52 % 2018 +11.36 %
2012 + 9.92 % 2019 + 8.69 %
2013 + 9.93 % 2020 + 9.61 %
2014 + 9.92 % 2021 +20.35 %
2015 + 6.41 % 2022 + 9.17 %
Company filings.
First, you can see that Goldman Sachs earned higher rates of return than Morgan Stanley did during this period.
But, you can also see that the returns that Goldman Sachs earned were quite variable.
The market environment that the Federal Reserve created during this period was much more conducive to the business model that Morgan Stanley created, a model less dependent upon swings in the market, changing interest rates, and so forth.
The performance of Goldman was looked on during this period of time as being much less desirable than the one put up by Morgan Stanley.
Goldman Sachs:
“[T]ried over the past few years, to get into retail banking.. This has not gone well, and now the company is pulling back.”
“Efforts to expand the transaction banking and wealth management operations have met with only modest success.”
“The result is that Goldman is still overwhelmingly dependent on trading and investment banking–capitally intensive, volatile businesses where most of the returns go to the employees.”
“The bank’s reward is a low valuation.”
So, what is Goldman Sachs going to do?
What is Morgan Stanley going to do?
That should depend upon the overall market environment we are moving into.
Note, Morgan Stanley timed its diversification efforts quite well, because the environment that the Federal Reserve created rewarded diversified financial portfolios.
Goldman Sachs didn’t move and consequently faced lower returns and greater volatility of returns.
Goldman Sachs admitted that should have changed its business model at the start of the 2010s because it attempted to diversify its efforts to be more in sync with the quantitative easing the Fed was conducting.
Now, Goldman has backed off and maybe this will be the right time for them.
Market volatility has actually risen over the past two years or so.
This market is more in line with the business model Goldman now has.
The markets are anything but stable.
The Future
Morgan Stanley is doing well.
No one is really suggesting that they change their business model from what was created by James Gorman.
But, there are a lot of suggestions being offered to the current leaders of Goldman Sachs.
The problem is that we don’t know what the future holds.
There is going to be some kind of a market disruption in 2023 caused by the Federal Reserve System and all the “unknown, unknowns” that now exist.
But, the future?
Is the future going to be dominated by a monetary policy that is akin to the quantitative easing that has arisen in the 2010s and had moved into the 2020s?
This would support portfolio building and a focus on aggregate market movements.
Or, will be retreat back to earlier days, where value investing dominated the financial world and where building aggregate market portfolios was not such a good idea?
The evolving environment will make a big difference to portfolio performance.
Watching how Goldman Sachs and Morgan Stanley perform will still tell us a lot about how the differing business models are doing.
This should be interesting.
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