- 1. PerspectivesInsights on Todays Investment IssuesRe-thinking
the Active vs. Passive DebateExecutive SummaryActive and passive
investments do not need to be mutually exclusive. Just as
allocations tothe developed and new growth markets, or to equities
and bonds, can be complementary,we believe that active and passive
investments can serve different needs in the same portfolio.Over
the past decade, we have seen periods of extreme macro-driven
equity performance,the proliferation of index investment options
and numerous articles favoring passivemanagement. Increasingly,
investors have been presented with the argumentwhy not just
gopassive? While we believe that passive investing has its benefits
there are several variables,such as time horizon and index
distortion, that investors should consider before making adecision.
In our view, investors seeking to make a strategic allocation to
equities shouldobtain a more nuanced understanding of both active
and passive approaches to determinetheir optimal investment
strategy.How we define and measure active managers is critical to
evaluating performance. Severalarguments supporting passive
investing might change significantly when investors considerthe
following:I. Assessing active management in the appropriate context
We believe investors should define active as more than not passive,
and exclude enhanced index funds and closet index funds. In
addition, we advocate employing the active share concept to
identify the better-than-average manager. Lastly, we believe an
extended time horizon is critical in assessing the benefit of
active management.II. Costs and risks of passive investingTracking
error and fees for passive investments can be significant. In
addition, volatilityand the distortion of the indexes impose risk
and can lead to substantial variance dragfrom down markets.III.
Impact of market environments We expect to see a favorable
environment for active management going forward. We believe greater
company differentiation and stock-level dispersion, particularly
between high- and low-quality stocks, will create a fertile
environment for active management. In addition, the impact of
active management can be greater during periods of lower returns.
This material is provided for educational purposes only and should
not be construed as investment advice or an offer or solicitation
to buy or sell securities. Nothing in this material should be
construed as an offer to provide any advice or services except as
otherwise permitted under relevantSTEVEN BARRY, CIOlaws and
regulations. Please note that Goldman Sachs Asset Management does
not maintain any licenses, authorizations orGSAM FUNDAMENTAL
EQUITYregistrations in Asia ex Japan, except that it conducts
businesses (subject to applicable local regulations) in and from
the following jurisdictions: Hong Kong, Singapore, Korea, Malaysia
and India.NOVEMBER 2010
2. Perspectives | Re-thinking the Active vs. Passive Debate
Assessing Active Management in the Appropriate Context Defining
passive investing is easy. Essentially, it is the replication of an
index or benchmark. Active investing, however, is more difficult to
define. Many investors, we believe, immediately connote active
investing with portfolio managers and teams of analysts using
fundamental analysis to make stock decisions. Yet, many of the
analyses of active management apply an extremely liberal
definition: not passive. Therefore, many of the funds used in these
studies include enhanced index funds, which seek to optimize
returns largely based on an index-like portfolio, or closet index
fundstheoretically making active portfolio decisions but taking
less risk in practice. Pooling the results of these funds with the
returns of truly active managers dampens the overall results and
masks the performance of the real active managers. The evidence
suggests that truly active and skilled managers can and do generate
returns above the market net of fees. We suggest a look at the
study, entitled How Active is Your Manager? A New Measure that
Predicts Performance, by Martijn Cremers and Antti Petajisto of the
International Center for Finance at the Yale School of Management1
as well as the recently published follow-up Active Share and Mutual
Fund Performance,2 from Antti Petajisto in September 2010. In the
original paper, Cremers and Petajisto differentiate between the
various types of active equity managers using data from 2,650 funds
between 1980 and 2003, while Petajisto extends the analysis through
2009. Furthermore, as suggested in the title of their paper, the
authors not only propose a way to measure the activeness of a
manager, called active share, but also prove the link between truly
active managers and superior performance. Active share By
definition, active share is the percent of the portfolio that
differs from the benchmark. While an index fund would have an
active share of 0%, the authors find that a truly active portfolio
should range from 60-100%. Cremers and Petajisto conclude that
active management, as measured by active share, significantly
predicts fund performance. Funds with the highest active share
outperform their benchmarks both before and after expenses, while
funds with the lowest active share underperform after expenses. In
the follow-up study, which includes data through 2009, and captures
the impact of the financial crisis, Petajisto similarly concludes
that: . . . the most active stock pickers have been able to add
value to their investors, beating the benchmark indices by about
1.26% per year after all fees and expenses . . . . Closet indexers
have essentially just matched their benchmark index performance
before fees, which has produced consistent underperformance after
fees. Economically, this means that there are some inefficiencies
in the market that can be exploited by active stock selection.
Exhibit 1a is an excerpt from Petajistos follow-up analysis and
details the gross and net returns of the most active managers,
which he describes as stock pickers, moderately active managers and
closet indexers. He uses data from 1990 through 2009, having
concluded that closet indexing was rare prior to this time. 1 How
Active is Your Manager? A New Measure that Predicts Performance, by
Martijn Cremers and Antti Petajisto of the International Center for
Finance at the Yale School of Management, January 2007. 2 Active
Share and Mutual Fund Performance, by Antti Petajisto of the NYU
Stern School of Business, September 2010.2 | Goldman Sachs Asset
Management 3. Perspectives | Re-thinking the Active vs. Passive
DebateExhibit 1a Active stock picking outperforms closet indexing
over the last 20 yearsCategoryActive ShareGross Return Net
ReturnStock Pickers (High Active Share) 97%2.61%1.26%Moderately
Active (Moderate Active Share) 83%0.82% -0.52%Closet Indexers (Low
Active Share)59%0.44% -0.91%Difference between Stock Pickers and
Closet Indexers 2.17%2.17%Source: Active Share and Mutual Fund
Performance, by Antti Petajisto of the NYU Stern School of
Business, September 2010. Data reflectsannualized performance of US
all-equity mutual funds from 1990-2009. Gross returns are the
returns on a funds stock holdings and do not includeany fees or
transaction costs. Net returns are the returns to a fund investor
after fees and transaction costs. Index funds, sector funds and
fundswith less than 10M in assets were excluded from the results.
Measurements of Active Share reflect the mean value for the
category.Furthermore, the follow-up study reveals that the
representation of closet index funds andtraditional index funds
have risen to the point where they now represent approximately 40%
ofthe active universemaking the exercise of differentiating them
from true active managers moreimportant than ever.Exhibit 1b An
increasing percentage of closet index funds muddies the results of
truly activemanagers (1980-2009)80-100%60-80% 40-60% 20-40%0-20%
100Share of mutual fund assets (%)80 Truly Active6040 Enhanced
Index20 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
2002 2004 2006 2008Source: Active Share and Mutual Fund
Performance, by Antti Petajisto of the NYU Stern School of
Business, September 2010.Average active manager vs. true active
managerStudies suggest that passive investing has generally
outperformed the average active manager, netof fees. This statistic
includes both active managers who have underperformed due to a lack
ofskill, as well as those who underperform net of fees because they
are closet indexers. In additionto the work by Cremers and
Petajisto cited earlier, other papers and studies, even those
makingthe case for passive investing, reveal that good active
managers can and have delivered betterreturns. William Sharpe, in
his oft quoted 1991 article The Arithmetic of Active
Management,3which largely makes the case for passive investing,
notes that: It is perfectly possible for someactive managers to
beat their passive brethren, even after costs . . . . It is also
possible for aninvestor (such as a pension fund) to choose a set of
active managers that, collectively, provides atotal return better
than that of a passive alternative, even after costs. Not all the
managers in theset have to beat their passive counterparts, only
those managing a majority of the investorsactively managed funds.3
The Financial Analysts Journal Vol. 47, No. 1, January/February
1991. Goldman Sachs Asset Management | 3 4. Perspectives |
Re-thinking the Active vs. Passive Debate Time horizons Most
investors would generally agree that one- and three-year periods
are subject to market or short-term performance noise. However,
many might define long term as a period of five years. Yet as we
consider the data series on active manager performance, we see a
meaningful shift from median manager underperformance in five-year
periods to outperformance when extended to 10 and 15 years.
InterSec Research published the paper The Benefits of Active
Management in Non-US Equities in May 2009, which examined rolling
time periods in an attempt to compensate for the effect of
survivorship bias embedded in the longer-term annualized numbers.
Furthermore, InterSec found that By lengthening the period of
performance evaluation from rolling one-year to rolling five- and
10-year periods, it becomes evident that the median active EAFE
Plus manager has consistently added value over the benchmark. An
additional analysis of US Large-Cap Core managers measured the
frequency of outperformance of the median manager using rolling
time periods over 10 years (Exhibit 2). The results show that the
median manager outperformed 100% of the time in the three-, five-
and seven-year time periods. Exhibit 2 Frequency of outperformance
by median US large-cap core managers 100% 100% 100%100 8073% 71%
61%Frequency (%) 60 40 200MonthlyQuarterly1 Year 3 Year 5 Year 7
Year Source: eVestment, gross of fees. As of June 2010. Two
conclusions can be drawn here: 1) Active management accrues
benefits as the time horizon is extended and through market cycles.
2) Shorter-term periods can be heavily influenced by other factors
such as market conditions,making it difficult to evaluate an active
managers skill. Therefore, for investors who intend to allocate to
a specific asset class for a relatively short period of time, a
passive approach is probably prudent. However, we believe longer
periods of time favor an active approach.4 | Goldman Sachs Asset
Management 5. Perspectives | Re-thinking the Active vs. Passive
DebateThe Real Costs and Risks of Passive InvestingIndex
VolatilityThere has been a rising popular acceptance of indexing as
a safer or appropriate defaultstrategy based on the misguided
notion that it is less risky. For investors conditioned to
thinkingin terms of relative performance, indexing will eliminate
benchmark and manager risk. However,these investors are completely
exposed to volatility, a measure of market risk that can have
asignificant impact on absolute performance over time. For the many
investors who actually focuson absolute performance or place
greater value on a smoother ride, we believe passive
investingoffers little in the way of decreasing risk and could
actually prove to be the riskier option. TheSharpe ratio, which is
a measurement of return per unit of risk, provides an interesting
metric toevaluate risk from volatility and its impact on index
performance in absolute terms. Numerousanalyses have shown
traditional market cap-weighted benchmarks have lower Sharpe ratios
thanportfolios constructed on the active basis, as a result of
higher volatility. Variance drag, defined as amathematical term in
which a large decline must be followed by an even larger gain to
make upthe loss, is a large part of the problem, particularly when
compounded over longer periods of time.This is likely to be a
greater risk in market cap-weighted indexes as they are inherently
momentumdriven, allocating to stocks that have recently done well
but may now be overvalued.4 Furthermore,in down years, more active
managers tend to outperform indexes, which can eventually
addgreater value than outperforming in an up year to due to the
effects of compounding.5Herd mentality and index distortionFor an
investor, owning the index can actually have as much, or more, risk
than taking activebets, particularly in extreme environments when
indexes may become distorted. In the late 1990s,unprecedented
valuations for tech stocks inflated their market caps and caused
the technologyweighting in the Russell 1000 Growth Index to balloon
to 44% after an extraordinary 80% risethat year. In 2000, an
investor in a Russell 1000 Growth Index would have owned more
than50% in Information Technology (IT) stocks, including almost a
5% position in Cisco6, whichhad appreciated 130% the prior year,
only to endure the sectors loss of over a third of its valuethat
year (-35%) as the tech bubble burst. In contrast, an active
manager had the opportunity tomake a valuation and diversification
judgment, trim its technology holdings and re-invest theproceeds in
many quality blue chip stocks trading at rarely seen valuations.As
Mark Twain is quoted, History may not repeat itself, but it does
rhyme. And so it was thecase with Financials stocks in the Russell
1000 Value Index in the past few years. This time,valuations,
market caps and weightings were not as inflated as the IT sector in
the 1990s, however,going into 2007, Financials stocks had risen to
over a third (36%) of the Russell 1000 ValueIndex just ahead of the
first waves of the looming financial crisis. Investors in an index
fund atthe beginning of 2007 would have suffered the Financials
sector decline of 21%, followed by acrippling loss of over 50% in
2008. This investment would have also had over 3% invested infive
Financials companies, each of which declined over 97% during 2008
as the crisis erupted.An active manager, who may have concluded
from diligent analysis that some companies hadsignificantly more
risk than others, had the opportunity avoid these names and
underweight theFinancials sector generally.4Source: Goldman Sachs
Asset Management Quantitative Investment Strategies, Is Indexing
the Optimal Equity Strategy?, August 2010.5Source: ISI6Source:
Cisco was the largest IT holding in the Russell 1000 Growth as of
December 31, 2010. Goldman Sachs Asset Management | 5 6.
Perspectives | Re-thinking the Active vs. Passive Debate Tracking
error and fees The issue of manager fees is a large part of the
active vs. passive debate as investors question the obvious: why
should I pay more for the same results? As weve discussed, we
believe the results may not actually be the same. Additionally,
most studies are quick to factor in calculations of average
management fees for active managers as well as tracking error as a
measure of their risk. Yet the measures for passive investing are
often left in a theoretical state, rather than adjusted for the
reality of implementation. In the transition from theory to
implementation, passive investments pick up both tracking error and
fees. Index funds are constructed to approximate an index but not
replicate it, leading to tracking error. For large-cap developed
markets, tracking error and fees are generally very modest, but do
impact the end result. However, the issues are even more pronounced
in less liquid segments of the market. In an extreme example, the
EEM (MSCI Emerging Markets Index Fund) ETF fees are 0.72% and the
tracking error was greater than 6% in 2009 alone, which is
comparable to, and in some cases greater, than that of an active
manager (Exhibit 3). Even assuming zero tracking error, index funds
will inevitably underperform due to the embedded fees compounded
over time. Similarly, even if active managers perform in-line with
the benchmark net of their fees, they still outperform passive
managers. The exhibit below illustrates the potential costs of fees
and market risk associated with passive investments across a
variety of equity investments. Exhibit 3 Tracking error and expense
ratios translate into real dollars at risk for passive investors
Expense ExpenseTrackingTracking Equity BucketETFRatio (%) Ratio7
($)Error8 (%) Error8 ($) New Growth Markets iShares MSCI Emerging
Markets (EEM)0.72 $11.4 M3.24+/- $45.7 M Global iShares MSCI ACWI
(ACWI) 0.35 $5.6 M 0.74+/- $11.7 M Europe SPDR EURO STOXX 50 (FEZ)
0.29 $4.7 M 0.53 +/- $8.4 M US Mid-Cap SPDR S&P MidCap 400
(MDY)0.25 $4.0 M 0.92+/- $14.4 M US Small-Cap Vanguard Small Cap
ETF (VB)0.14 $2.3 M 0.66+/- $10.4 M US Large-Cap S&P 500 SPDR
ETF (SPY) 0.10 $1.6 M 0.78+/- $12.3 M Source: Bloomberg. Exchange
Traded Funds are shown to demonstrate passive investing. These ETFs
were selected because they constitute the largest ETFs within each
asset class. As of August 31, 2010. 7 Based off a $100 million
investment growing at 5% annually for 10 years. 8 Tracking error is
since inception for each ETF. Inception dates: EEM (4/11/03), ACWI
(3/28/08), FEZ (10/15/02), MDY (5/4/95), VB (1/30/04), SPY
(1/22/93). Look ahead Active managers use a forward-looking
orientation in their stock analysis and investment process as they
believe it gives them an important edge over backward-looking
indexes, which favor stocks that already have performed well.
Active managers can evaluate their positions to buy low and sell
high, while passive investors will always effectively buy more of
the stocks and sectors that have increased in price the most and
will be increasingly underweight those that have performed the
worst. Momentum investors will essentially do the same. This works
well in rising markets with clear, easy-to-follow trends. However,
when markets display less prominent trending, investors risk
suffering sharp losses as mean reversion kicks in. Interestingly,
we believe the increased popularity of ETF investing, currently 30%
of the daily trading volume (as of August 2010), has created even
greater inefficiencies for active managers to exploit going forward
(Exhibit 4). As ETFs drive an increasingly larger percentage of
equity trading volumes, stock prices are determined by non-company
specific, technical factors and less by fundamental factors. This
can lead to excellent entry and exit points for
fundamentally-driven investors. Any reference to a specific company
or security does not constitute a recommendation to buy, sell, hold
or directly invest in the company or its securities. It should not
be assumed that the recommendations made in the future will be
profitable or will equal the performance of the securities
discussed in this document.6 | Goldman Sachs Asset Management 7.
Perspectives | Re-thinking the Active vs. Passive DebateExhibit 4
Growth in ETF assets drive stocks to trade more on technical
factors creating opportunitiesfor fundamental investors 900 800
$801 B 700 600 (USD Billions)500 400 300 200 100 0 1995 1996
199820002002 2004200620082010Source: Bloomberg. As of August
2010.Impact of Market EnvironmentsThe past several years have been
characterized by periods of volatility extremes, driven bysentiment
that became decidedly one-sided. Optimism in the persistence of
global growth fueledthe low volatility bull market of 2003-2006,
while fear drove the extremely volatile bear marketof late 2008. In
each case, the dispersion of returns at the stock level was low, as
investors treatedequities as an asset class rather than
distinguishing between individual stocks.However, going forward, we
believe the stage is set for stock pickers as the markets have
retractedfrom these extremes. Credit spreads have retreated to more
normal levels, equity multiples arecloser to the long-term historic
averages and volatility, as measured by the VIX, has come
downsignificantly from its peak. As volatility declines over time,
average stock correlations shoulddecrease (dispersion of returns
should increase), and we believe stock prices should be driven
bycompany-specific fundamentals (Exhibit 5).Exhibit 5 Stock and
sector correlations should decrease as volatility declinesa: Equity
Market Volatility35MSCI WorldS&P 500Rolling one-year standard
deviation30252015MSCI Average: 13.82SPX Average: 13.7210 5 0
200020012002 200320042005 2006 2007 20082009 2010Source: Goldman
Sachs Global ECS Research. As of September 2010.Goldman Sachs Asset
Management | 7 8. Perspectives | Re-thinking the Active vs. Passive
Debate b: Stock and Sector Correlations1.00.9 Average sector
correlation: .58.870.8 CorrelationsAverage Correlation0.7
declining0.60.5 .510.40.30.20.1Average stock correlation: .290.0Dec
89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07
Dec 09 Dec 11 Source: Goldman Sachs Global ECS Research. As of
September 2010. We believe that the pattern of stock performance
following the last downturn may be repeating itself, as evidenced
by the following exhibits. Exhibit 6a examines drivers of
performance in the strong bull market, from 2003 through 2007, that
followed the burst of the technology bubble. During the initial
period from 2003 to mid-2004, active managers struggled to beat
indexes as there was a simultaneous increase in corporate earnings
and P/E multiples, with stock prices rising faster than their
earnings and little dispersion of returns at the stock level. After
mid-2004, the environment improved for truly active investors as
stocks traded more on fundamentals. Exhibit 6b illustrates how the
macro-driven, early stage recovery repeated in 2009. In these
environments, the impact of active management is limited as there
is little differentiation in performance between strong and weak
companies or attractively valued and expensive ones. Exhibit 6
Market cycles tend to repeat, and we believe that going forward
stock prices will be driven by fundamentals a: 2003-20072.2Earnings
per share Later stage recovery Indexstocks traded
on2.0P/Efundamentals (earnings) EPS1.8Index Early stage
recovery1.6driven by macro (beta)(x)1.41.21.0P/E Expansion or
Contraction0.8Mar 03 Mar 04 Mar 05Mar 06Jan 07 Source: Based upon
S&P500. Furey Research Partners and FactSet. This information
discusses general market activity, industry or sector trends, or
other broad-based economic, market or political conditions and
should not be construed as research or investment advice. Please
see additional disclosures.8 | Goldman Sachs Asset Management 9.
Perspectives | Re-thinking the Active vs. Passive Debateb:
2009...2.2Earnings per share Index Index2.0P/E Early stage
recoveryEPS1.8driven by macro (beta)1.6(x) Later stage
recovery1.4stocks should trade on fundamentals (earnings)1.2P/E
Expansion or Contraction1.00.8Mar 09 Mar 10 Mar 11Mar 12Source:
Based upon S&P500. Furey Research Partners and FactSet.However,
after that initial period of exuberance, we see a leveling off in
earnings accompaniedby a contraction in P/E multiples. As earnings
growth resumed in mid-2004, P/E multiplesremained relatively
stable, indicating that share price performance, as approximated by
the indexperformance, was more closely correlated with earnings
growth. We believe we are at a verysimilar crossroads now, which
creates an environment that should favor active managers whopick
stocks based on their fundamentals.We also believe that there will
be a notable dispersion of returns on the horizon,
especiallybetween higher- and lower-quality companies. Strong
earnings growth and a high return onequity (ROE) are two metrics we
use as a proxy for quality in companies. In an analysis of
theperformance differential between the highest and lowest ROE
stocks over the past two decades,we see that the higher ROE
companies have outperformed, though they have gone throughnotable
periods of underperformance along the way, including most
recently.Exhibit 7 High quality has outperformed over the long-term
but not recentlyTop 50% ROE / Bottom 50% ROE Relative index
(12/31/91)2.42.22.01.81.6(%)1.41.21.00.80.619921994 19961998
20002002200420062008 2010Source: Based upon S&P500. Furey
Research Partners, FactSet. As of September 2010.This information
discusses general market activity, industry or sector trends, or
other broad-based economic, market or political conditions
andshould not be construed as research or investment advice. Please
see additional disclosures. Goldman Sachs Asset Management | 9 10.
Perspectives | Re-thinking the Active vs. Passive Debate When we
look at companies with the highest earnings growth, over the past
few decades, we see that higher-quality companies are currently
trading at a significant discount to their lower-quality peers
(Exhibit 8). This presents an exciting investment opportunity as we
believe high-quality stocks will outperform over the long term due
to their distinctive competitive advantages, especially in the
slower growth environment expected ahead. Exhibit 8 Quality
businesses are trading at attractive valuations vs. low-quality
counterparts S&P 500: Average Forward P/E by Long-Term Growth
Estimate Quintile 40 Highest Growth Companies (Top Quintile)Lowest
Growth Companies (Bottom Quintile) 35 30 25(x) 20 15 105Valuation
Convergence01990 1992 1994 19961998 2000 20022004 2006 2008 2010
Source: MorganStanley. For illustrative purposes only. This
information discusses general market activity, industry or sector
trends, or other broad- based economic, market or political
conditions and should not be construed as research or investment
advice. Please see additional disclosures. Greater value of active
management during periods of lower returns We believe the value of
active management is more pronounced in a lower-return environment
consistent with what we expect ahead. Using simple math, an excess
return of 2.0% would increase a portfolios performance by 50% if
the market returned only 4%, but is less impactful on a 25% market
return (8% of total return). Equally important, active managers
tend to outperform in a greater order of magnitude in negative, or
lower-return environments (Exhibit 9a). This overall ability to
preserve more capital in down markets provides a meaningful
tailwind when the markets turn, helping to mitigate the effect of
variance drag or, in other words, negative compounding. Exhibit 9a:
Active managers tend to outperform when the markets are down or in
a trading range Average Monthly Gross Excess Returns Analysis of
the Large-Cap Core Universe (6/30/1980 6/30/2010)Large-Cap
CoreRussell 1000 Difference6.0% 6.3%0.7%0.5% 0.4%0.1%-0.3% -6.8%
-7.5% Down Months Trading Range MonthsExuberant Months Benchmark:
less than -4% Benchmark: -4% to 4% Benchmark: over 4% (40
months)(233 months) (87 months) Source: eVestment.10 | Goldman
Sachs Asset Management 11. Perspectives | Re-thinking the Active
vs. Passive DebateExhibit 9b: We believe active managers outperform
the index over time 50 Large-Cap Core Russell 1000 40(USD Millions)
30$30.4 M $22.3 M 20 1001980198519901995 2000 20052010Source:
eVestment and Goldman Sachs Asset Management. Gross
returns.ConclusionWhile we believe investors can benefit from both
active and passive investments in a portfolio,we encourage
investors to critically examine studies that too easily favor
passive investing. Activemanagement is not homogenous; it comes in
many forms and with managers of varying skill, allof which can
muddy analyses of active managers. Short- and medium-term market
conditionscan also meaningfully influence performance results that
are not reflective of longer-term trends.Additionally, investors
must be mindful of real costs and risks, not just theoretical and
relativeones, when assessing active versus passive investments. We
believe successful investment approachesmust be forward-looking to
capture mispriced value, as markets themselves anticipate
change.Historical ranges and statistical relationships can be
distorted or break down completely in anuncertain or changing
environment. Therefore, investors must endeavor to be
forward-looking,despite the comfort and temptation of using
historical data as a roadmap. Experienced investorswill focus their
approaches where they believe they have an edge to take risk and
make high-conviction investments. While market conditions such as
volatility, correlations, and momentumtrends have played a large
role in equity performance over the past several years, the
environmentis in transition, and successful managers will now need
to take an active approach to investing asstock fundamentals will
likely drive returns.Goldman Sachs Asset Management | 11 12. This
material is provided for educational purposes only and should not
be construed as investment advice or an offer or solicitation to
buy or sell securities.Past performance is not indicative of future
results, which may vary. The value of investments and the income
derived from investments can go down as well as up. Future returns
are notguaranteed, and a loss of principal may occur.Indices are
unmanaged. The figures for the index reflect the reinvestment of
dividends but do not reflect the deduction of any fees or expenses
which would reduce returns. Investors cannotinvest directly in
indices.This material has been prepared by GSAM and is not a
product of the Goldman Sachs Global Investment Research (GIR)
Department except where noted. The views and opinions expressedmay
differ from those of the GIR Department or other departments or
divisions of Goldman Sachs and its affiliates. Investors are urged
to consult with their financial advisors before buyingor selling
any securities. This information may not be current and GSAM has no
obligation to provide any updates or changes.Although certain
information has been obtained from sources believed to be reliable,
we do not guarantee its accuracy, completeness or fairness. We have
relied upon and assumed withoutindependent verification, the
accuracy and completeness of all information available from public
sources.Opinions expressed are current opinions as of the date
appearing in this material only. No part of this material may,
without GSAMs prior written consent, be (i) copied, photocopied
orduplicated in any form, by any means, or (ii) distributed to any
person that is not an employee, officer, director, or authorized
agent of the recipient.This material has been communicated in the
United Kingdom by Goldman Sachs Asset Management International
which is authorized and regulated by the Financial Services
Authority (FSA).This material has been issued or approved for use
in or from Singapore by Goldman Sachs (Singapore) Pte. (Company
Number: 198602165W) and in or from Hong Kong by Goldman Sachs(Asia)
L.L.C.Copyright 2010 Goldman, Sachs & Co. All Rights Reserved.
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