Performance Comparison between J.P. Morgan Assets Management and Goldman Sachs Assets Management

Performance Comparison between J.P. Morgan Assets Management and Goldman Sachs Assets Management

Introduction

The last few years has indicated an increasing number of mutual funds established by large commercial banks. This trend has in turn attracted billion of dollars as many investors are constantly searching for investment options that will earn them good returns. This has created the need to evaluate data or results which have been presented by the market’s fund families who are at the forefront of large business activities (Bastos, Kamil, Sutton & Monetary, 2015). In this regard, it is ideal to critically examine and investigate the performance of funds managed by JPMorgan Chase Commercial bank as well as Goldman Sachs Asset Management. Therefore, this paper will evaluate performance of funds in these two investment banks and seek to compare their particular revenue drivers, investment philosophy as well as their approach to risk.

Investment philosophy

Evaluated data indicated that JPMorgan Chase’s mutual funds only managed to do better than their assigned analysts’ benchmarks. However, despite such underperformance the bank indicated that its investment engines are effective in the provision of diversified sources of returns besides performing well in a challenging market (JPMorgan, 2015). This means that the investors are guaranteed an information advantage that is research driven. Thus, investors are provided with a network of career research that is growing and entirely focused on evaluating or studying companies as well as industries (National Academy, 1996). Moreover, the company has placed focus on processes of risk management that leads to a repeatable, consistent approach on a market that is unpredictable and one that is guided by research and practices that are standardized platforms.

Moreover, the firm has established over nine hundred investment professionals who are spread across twenty three countries (JPMorgan, 2015). About three hundred and forty career analysts among this number of professionals possess an average of fifteen years of experience. This means that JPMorgan Chase has placed enough focus on establishing enough assets. Part of this reason has contributed for it to be ranked as United State’s eighth best and largest mutual company having an estimated amount of $1.7 trillion assets placed under its management across the world. Data reported in 2015 indicated that under Asset Management of JPMorgan’s assets were estimated to be about $318 billion (JPMorgan, 2015).

It is important to compare JPMorgan’s funds with those of Goldman Sachs Asset Management mutual funds companies so as to investigate how much investors have been earning in returns. This is because both mutual banks have depressed book or price ratios making them both to change hands below a book value that is tangible, a conservative measure of equity shareholders that does not take into considerations important factors such as goodwill derived from intangible assets as well as acquisitions (Bastos et al., 2015). For this reason, the low book price tends to accentuate advantage of buybacks as the repurchases obtained below a book value that is tangible are accretive to a particular book value that is also tangible.

Currently, Gold Sachs Asset Management Inc. is exploring ways that would ensure that the declining trend in profitability is eliminated. The company had been able to make huge acquisitions, increase assets as well as improve the performance of funds under the new management. Assets have increased to more than $1 trillion dollars. These units account to about seventeen percent of revenues earned by the company and also an eleven percent pretax earned profit in 2014. Additionally, aiming for higher revenues and profit the company introduced such strategies such as cutting stakes in both hedge funds as well as in private equity funds that had established a trend of producing about $10 billion in revenues since 2010 (Barron’s, 2016).

Goldman Sachs Asset Management Inc. has established that its revenue growth rate would be determined from alternative business activities such as winning mandates as well as lending to individual clients. This is because business environment is characterized by growth in insurance companies besides pension plans companies that outsource and manage many clients’ assets (Albagli, Hellwig, Tasyvinsi & National, 2011). The company predicts that such strategies have a high likelihood of improving the mutual funds performance besides attracting more money to the firm.

Risk

Moreover, it is important to note that there are factors that currently worry investors and as result, their investment decisions in these mutual fund reserves. For instance the exit or fallout of Brexit may influence the Federal Reserve to lift those short rates in the subsequent years. This impacts investors’ decisions as they may take longer to decide on rates which consequently results in an increase in the net interest margin of the banks. This means that Bretix exit was followed by underwriting and trading activities that were weaker in both JPMorgan and Gold Sachs Asset Management Incorporations (Albagli et al., 2011).

Contrasting with JPMorgan, Gold Sachs Asset Management has made efforts aimed at creating confidence towards the investors. For instance, Global Alpha hedge fund lost about forty percent of the total revenue funds in 2007 while another case had to be rescued. For a three-year period ending 2010, the return on its mutual funds was reported to trail the peers average. Moreover, the division was managed by five different people in a span of twelve months. However, management efforts have seen a turnaround that contributed to an eleven percent increase in revenue. This was the highest reported amount since the financial crisis that had characterized the Asset Management bank. Moreover, the bank reported an increase in its financial assets that were estimated to amount to about $111 billion dollars (Barron’s, 2016). Gold Sachs Asset Management Inc. has been optimistic in its operations since they hold both wealth management and asset management to be key components.

Furthermore, Gold Sachs Asset Management Inc. is guided by its organizational culture of avoiding retail brokerage business operations. The company instead trades earnings which are smaller but multiple making its profitability to remain higher than other firms such as JPMorgan Asset Management Inc. which has a high mass market appeal (Hallendy, 2016). However, a major investor’s concern is that the model created by Goldman Sachs Asset Management Inc. only allows the company to start its operations after every quarter. This means that the corporation is over reliant on quarter-to-quarter market operations or activities. This may probably results to employing negative impacts on its multiple. Moreover, if there is a reported growth rate of about twenty percent in investment management, there would be improved earnings and thus, multiple (Hallendy, 2016).

In 2005, the bank reported that it had placed strategies in place that would result to an increasing growth rate in all its divisions and thus, surpass most of its market competitors. However, the company failed to establish any profit targets or public revenues as is a common practice in JPMorgan’s diverse divisions. Moreover, the bank decided to decline requests from investors who sought to provide the firm’s goal of return on equity (JPMorgan, 2016).  This is because Goldman Sachs Asset Management has established mutual funds that earn the firm’s half revenue in total. This is by operating large investor’s portfolios such as insurance companies as well as pensions, which are aimed at increasing the firm’s revenues at an average rate of ten percent each year. Moreover, the firm predicts that the other half of firm’s businesses (Piscopo, 2013) that handle individual customers having more than $40 million in the company as well as well as a private wealth management would have an increasing growth rate.

A probe was established to investigate whether JPMorgan Chase Bank including its brokerage affiliate has in the recent past adopted a strategy that utilizes other incentives as well as bonuses. This strategy is mainly aimed at encouraging the firm’s finical advisors to improve the processes of steering client properties into structured notes, in-house funds as well as into other investments that have the capacity of generating profits (Buffic & International, 2012). Besides, this probe was established in reviewing of pensions as well as other accounts that are aimed at holding the bank to a fiduciary standard of care.

The Asset Management business of Sachs Company staggered during and after the 2008 financial crisis. The management was able to pull some money through pension funds despite the company’s general poor performance (Sarkis, 2012). A Congressional inquiry coupled by regulatory settlement developed Sachs Asset Management’s reputational issues. The inquiry was established to investigate the company’s sale of mortgage bonds at the various bank’s trading units. However, the bank was able to make a recovery the subsequent years as evidenced by the company’s turnaround of inflows which were estimated to be about $74 billion (Barron’s, 2016). Typically, the bankers have a tendency of chasing the league of tables which made the Goldman Sachs Company to boast of its profitability in the market industry.

In 2014, Goldman Sachs Asset Management firm’s mutual fund asset was ranked among the top performing investment firms. The firm’s performance had increased from forty nine percent to about seventy five percent from 2011 towards the end of 2014 (Albagli et al., 2011). Moreover the fundamental equity funds of the firm have landed the second quartile in eleven comparing to twelve last quartiles. However, many operations ran by the bank forced it to miss out on investor’s move to behave as passive exchange traded funds from active managers. This is in contrast to JPMorgan investment firm that has managed to achieve huge benefits. In the same year, United State’s active equity funds reported outflows data estimated to amount to about $98.4 billion while the passive inflows received amounted to about $166.6 billion (Albagli et al., 2011).

Trading in alternatives is the only trend that is practiced in Goldman Sachs Asset Management, which rivals passive investment options. This is because the products involved in alternatives seem to offer different types of risks and more returns than bonds and stocks. They include; private equity, hedge funds, credit fund, real estate as well as other investment options which are not publicly traded (Bastos et al., 2015). It is important to note that these alternative options typically account for about twenty percent’s of total assets in the industry and a further forty percent in revenues by year 2020 according to studies conducted by McKinsey & Co. in 2004. In addition, the bank has made efforts aimed at reaching for more alternative products through its provision and introduction of liquid alternatives (Reisz. John  & Sublahmahnjau, 2000).  These strategies tend to mimic complimentary hedge fund alternatives as they allow consumers to withdraw as well as invest their money on a daily basis. However, unlike hedge funds, this product does not fully derive all its benefits towards the customers and typically contains a higher fee as compared to bond and equity funds. It is important to note that this bank was the first in the industry to introduce such a product to its customers in 2008, during the financial crisis.

Strengths and weaknesses

Being the largest bank that deals in assets in the United States, JPMorgan Chase bank performance was excellent after posting third quarter’s earnings surpassing estimates set forth by financial analysts in 2016. This was caused by strong performance that ranged from bond and stock trading to consumer lending, asset management as well as commercial banking. The financial firm was able to generate a profit of about $6.3 billion, $25.5 billion as well as a $1.58 a share. Analysts had predicted a $1.39 a share as far as profit was concerned and a total amount of $24.3 billion in sales (Smith & World, 2004). This was an important performance that improved the bank’s stock market premium relative to the peers. This performance was better than its competitors in the financial market such as Goldman Sachs Asset Management Inc.

It is important to note that JPMorgan’s performance was kept afloat by strong results in trading division as well as the recorded quarter of profits. This is because JPMorgan’s commercial banking division had risen to about eight percent year-over-year as far as revenues were concerned. Another major strength was JPMorgan’s asset management business that was estimated to be worth about $1.8 trillion where client’s loan balances had risen to new heights. Moreover, the firm’s consumer banking had doubled in growth as far as loans and depots were concerned. However, the firm’s source of weakness was derived from credit costs in consumer banking that led to an 8% decrease in overall profit (Smith & World, 2004).

JPMorgan’s third quarter trading earnings had improved significantly at its trading division since revenues had recorded a 21% increase in  a yearly basis to about $6.5 billion. The United Kingdom’s exit from the European Union contributed to that successful performance particularly at the second quarter. This is because this action contributed heavily to a increase in interest rate activity as well a significant rise of about 48% in all revenues that came from fixed income trading. Moreover, JPMorgan’s business particularly in the equity division had increased on a 1% yearly basis as a result in the Asia and United States’ strength. This was further coupled by a doubled increase in the firm’s profits in investment banking from the previous estimated $2.9 billion (Bastos, 2015).

In addition JPMorgan’s revue boost came from consumer banking where sales had risen by 4% to reach an estimated amount of about $11.3 billion. This was mostly because the bank had recorded an increase in deposit and loan activity as well as a 21% increase in mortgage banking. In this case, revenues in both business and consumer banking were estimated to be about $4.7 billion while mortgage banking increased its revenue to about $1.9 billion. However, the bank’s commerce, card as well as locomotive revenues decreased by about 1%. Rising credit expenses in consumer banking business saw a decrease in the firm’s profit coupled by a write-off estimated to be worth $175 as a result of customer bankruptcy. Additionally, mortgage servicing and auto lending were recorded to increase leading to an increase in credit expenses at about $1.3 billion, which was an 233% increase (JPMorgan, 2014).

However, it is worth noting that the JPMorgan’s source of weakness emanates from the hesitation by the Federal Reserve in raising short-term interests. This is because such a move would be a boost to the firm’s spread-related profit. Nevertheless, in 2014 the bank indicated that it had a $11.4 billion under asset management (JPMorgan, 2014). This is complemented with the firm’s Hedge Funds which are comprised of substantial number of advisory and customary accounts as well as commingled funds. This means that despite that setback the firm has been a top leader as far as innovations, performance, and risk management, due diligence, proven ability and the firm’s culture of striving to provide value when developing Hedge fund portfolios that add value to its consumers (Bastos et al., 2015).

References

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Reisz, A. S., John, K., & Subrahmanyam, M. (2000). Temporal resolution of uncertainty, the investment policy of levered firms and corporate debt yields: Theory and evidence. (Dissertation Abstracts International, 61-5.

Sarkis, N. (2012). Fear and greed: Investment risks and opportunities in a turbulent world. Hampshire, Great Britain: Harriman House Ltd.

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JPMorgan Chase & Co. Institutional Investor NamesJ.P. Morgan Alternative Asset Management“Manager of the Year” Among Large Fund of Hedge Funds Firms. Retrieved from> https://am.jpmorgan.com/blobcontent/1383191809838/83456/JPMAAM_PR_Final.pdf. Date Accessed. March 3, 2017

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