Remarks From GSAM’s CIO: Where Do We See Opportunity?
Conference Call Series
September 15, 2009
Eileen Rominger Chief Investment Officer GSAM
4:15 PM Eastern Dial in number: 888-337-8259 (Operator Assisted) Confirmation code: 3541040
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.
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Conference Call Series
Goldman Sachs Asset Management
Overview
In our view: Recent market movements have been extreme, but not unprecedented — such market activity still presents investment opportunities across various asset classes, despite the markets coming substantially off their lows. Developed Market Equity — dislocated valuations in targeted companies allow investors to actively rebalance portfolios. Emerging Market Equity — despite a significant rally, we are still well below the peaks of 2007, presenting interesting opportunities for both traditional, as well as quant investors. Credit Markets — idiosyncratic volatility has risen exponentially, making credit selection critical.
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Market recap
Equity market indices Jan 2007 to August 2009
160
Equity market indices
Peak to Trough Drawdown Developed Markets -54% -55% -45% -57% -61% -49% -58% -61% -73% -71% -64% -79% Trough to Current 53% 56% 48% 54% 38% 49% 81% 88% 131% 101% 107% 98% Peak to current -30% -30% -19% -34% -46% -25% -24% -27% -38% -42% -26% -57%
140
MSCI World Developed MSCI Emerging Markets
120
106
US
81% -58% 75
100
UK Germany Japan Australia
80
-54%
60
Oct 08 Mar 09 53%
Emerging Markets Brazil
40
20
China (H Shares) China (A Shares)
0 Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
India Russia
Key Drivers Lack of credit availability Dramatic insolvency concerns Followed by…
Moderately improving credit markets, resulting in some of the insolvency getting priced out of the equity markets
Source: DataStream, IMD Investment Strategy Group 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.
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Developed Market Equity Investing
We believe opportunities are abundant in well positioned businesses
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Have investors missed the rally?
S&P 500 (June 2007 – August 2009)
1650 1450 1250 1050 850 650
Aug 2007 Feb 2008 Aug 2008 Feb 2009 Aug 2009
-30% Last 2 Years
S&P 500 (YTD 2009)
1050
S&P 500 Level
S&P 500 Level
950
+ 13% YTD
850
750
650 Dec Jan Mar Apr May Jun Jul Aug
S&P 500 returns as of 8/31/09 Source: Stifel Nicolaus, S&P, The International Center for Finance at Yale Ibbotson Old NYSE project return data.
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We believe the opportunity costs of not rebalancing are great
S&P 500 bear markets – past 12 cycles1
Cumulative Returns AFTER the Trough Peak
1 2 3 4 5 6 7 8 9 10 11 12 13 09/7/29 03/10/37 05/29/46 08/2/56 12/12/61 02/9/66 11/29/68 01/11/73 11/28/80 08/25/87 07/16/90 03/24/00 10/9/07
Trough
6/1/32 4/28/42 6/13/49 10/22/57 6/26/62 10/7/66 5/26/70 10/3/74 8/12/82 12/4/87 10/11/90 10/9/02 3/6/09
Length in Months
33 62 37 15 6 8 18 21 20 3 3 31 17 21
Total Decline
-86% -60% -30% -22% -28% -22% -36% -48% -27% -34% -20% -49% -57% -38%
1 Year After Trough
121% 54% 42% 31% 33% 33% 44% 38% 58% 21% 29% 34% ? 45%
3 Years After Trough
118% 97% 80% 37% 59% 27% 56% 55% 83% 46% 56% 54% ? 64%
5 Years after Trough
263% 92% 111% 41% 75% 37% 31% 76% 225% 93% 96% 101% ? 103%
Historical Average (1-12)
1
Source: Goldman Sachs Global Investment Research.
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The case for fundamental, active management
Current Dynamic Majority of deleveraging completed Greater dispersion of return b/w winners and losers Resulting in… Stocks trading more on fundamentals Rich environment for potential alpha generation
MSCI World cross-sectional volatility (dispersion of stock returns)1
25%
Cross-sectional stdev of stock returns (4 weeks)
20%
15%
Higher cross-sectional vol means greater dispersion between winners and losers, making a rich environment for alpha generation in our view
10%
5%
0% Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09
Source: FACTSET 1 MSCI World Index. Monthly to Jan 2009. 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.
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Opportunity: Quality businesses have not rallied
YTD performance by S&P equity quality rating
35% 31% 30% 26% 25% 21% 20% 15% 15% 10% 5% 0% (5)% (10)% A+ AA B+ B BNA C (4)% 4% 9% 23%
Source: Haver, ICI, Bloomberg, Morgan Stanley Research. As of Aug 31, 2009.
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Emerging Market Equity Investing
It is not too late!
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EM Equities have moved significantly off the bottom, but we still see long term value
MSCI EM index Dec 1995 to September 2009
1400 1200 1000 800 600 400 200 0 Dec-95 Dec-98 Dec-01 Dec-04 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-07 Dec-06 Dec-97 Dec-00 Dec-03
-54%
-66% +88%
-59%
Source: Bloomberg, MSCI EM. Data through 11-Sep-09 Drawdown is the measure of the percentage decline from peak to trough
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Valuations are not demanding, especially when adjusted for below trend earnings
JP Morgan estimates that one-year forward earnings are 20% below trend, putting the MSCI EM index on a 2010 P/E of 11x based on midcycle earnings.
Feb-94 22.3X
Sep-09 15.2X Sep-09 13.8X
Dec-02 8.9X
Source: UBS data via IBES. Data as at 13-Sep-09. The price of a stock divided by its earnings per share. Shown on a one year forward basis. 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.
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Earnings: Tug of war of expectations and reality
Earnings expectations for 2009 have been adjusted to reflect sharp negative growth.
Consensus EPS growth for MSCI EM
With positive economic surprise factor on the rise, consensus estimates may lag behind.
E=IBES Aggregates estimate Source: IBES, FactSet, Morgan Stanley Research, as at 11-Sep-09. 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.
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11
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Emerging economies continue to lead global economic growth
Emerging markets are increasingly the engine of global growth.
Real GDP growth
10
Industrialized Economies
8
Emerging Market
Passing a baton is painful, primarily because the financial economy is still US centric, whereas the real economy is increasingly multi-polar.
6
4
2
0
(2)
(4)
2003
2006
2007
2004
1990
1991
1994
1995
1996
1997
2000
2001
2002
2005
2008
2009E
Source: IMF, Morgan Stanley Research. Estimates from Morgan Stanley Global Economics Team. 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.
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2010E
12
1992
1993
1998
1999
Conference Call Series
Goldman Sachs Asset Management
The secular growth story for EM is very strong
1. Rise in urbanization and labor force
EM vs. Developed: Working Age Population (15-64 yrs old as % total)
70 68 66 64 62 60 58 56 54 52 1950 1955 1960 1965 1970 1975 1980 50 70 68 66 64 62 60 58 56 54 2030 2035 2040 2045 2050 52
Emerging
1985 1990 1995 2000 2005
Developed
2010 2015 2020 2025
1,400 1,200
2. Significant future productivity gains
Worldwide handset shipments
Millions
1,000 800 600 400 200 0 147 162 153 168 160 173 166 180 171 187 179 190 501 647 734 799 849 901
2005
2006e Western Europe
2007e
2008e
2009e
2010e
North America
Emerging Markets
Source: United Nations World Population Prospects 2005 Revision, Morgan Stanley Research. 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.
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Strong EM growth requires non-consensus views
Example: Chinese Banks - PBR does not fully reflect ROE strength The market typically focuses on PBR, with limited consideration for the corresponding ROE profile. For the most part, the market looks at shorter term multiple, e.g. 1-year forward PBR. China banks are under-going a transformation phase with structural changes on their scope of permissible activities, product differentiation, risk pricing of assets, and reform of prudential standards (CAR, loan loss reserves etc). Past P&L and balance sheet structure of a bank is a poor guide to its future.
5.5x 5.0x 4.5x 22.0% 4.0x 3.5x 3.0x 2.5x 16.0% 2.0x 1.5x 1.0x
Dec-08 Dec-09 Dec-05 Dec-06 Dec-07 Mar-06 Mar-07 Mar-09 Mar-08 Jun-06 Jun-07 Sep-06 Sep-07 Jun-08 Sep-08 Jun-09 Sep-09
P/B (LHS) ROE (RHS)
26.0%
24.0%
20.0%
18.0%
14.0%
12.0%
Source: Bloomberg, Company announcement, and GSAM As of August 31, 2009 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.
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A unique approach can capture change
Example: Chinese Banks - Estimating fair value in a bank’s life cycle On a 1-year forward basis, 2.5x P/B seems stretched. However, we think near term P/B multiple does not fully reflect value of the business. We attribute FV to a bank based on the value* generated over its life cycle. In this case, implied fair P/B is 3.5x.
* This methodology is akin to a EVA approach for non-financials.
RMBm 120,000
Residual income over life-cycle
100,000
80,000
Development stage
60,000
40,000
Strong growth stage post reform
Maturing stage
20,000
0
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
Value (RMBm) Beg of year BV Sum of PV of value creation (5 years) Value in maturity stage (20 years) Aggregate intrinsic value Intrinsic value per share Current share price (HKD)
Source: GSAM As of August 31, 2009. For illustrative purposes only.
% Value Distribution 28% 29% 43% Implied P/B (x) 1.1 2.5 2020E BVPS 2009E BVPS
467,562 476,501 718,362 1,662,425 RMB 7.11 6.31 28.0%
% upside (adj for FX)
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2029
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In our view, the risks of NOT having emerging market equity exposure continue to be significant
MSCI EM share global market capitalization1
35 30 26 25 20 15 11 10 5 0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Jun-08 Dec-08 Jun-09 4 5 5 7 8 12 9 12 25 22
% of ACWI % of GDP Wtd ACWI
31 28
NA
Source: MSCI, Morgan Stanley Research 1 Free Float adjusted.
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Fixed Income Investing
Credit Markets
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How did we get here?
Start of the vicious credit cycle Subprime originator problems Higher credit losses leading to rating instability
Market withdrawal Origination market closing Tighter underwriting standards
Global Credit Crunch Losses on subprimerelated investments in portfolios of banks and hedge funds globally
Liquidity Crisis Liquidity crisis fueled by crisis of confidence and global deleveraging Funding markets deteriorate
Financial Institutions Problems Deleveraging intensifies The collapse and rescue of Bear Stearns
Govt Intervention Fed and Government Policy Responses help stabilize the market Housing and Economic Recovery Act Initial signs of stabilization Govt’s takeover of the GSEs Intensified distress within financials Lehman, Merrill, WAMU, Wachovia TARP FDIC Temporary Liquidity Guarantee Program Capital Purchase Program TARP focus shifts Fed MBS Purchase Program
100
Price ABX (AAA, CMBX)
100 90 80 70
Price (AA)
90 80 70 60 50 40 30 Nov -07 20 Oct-07 Jul-07 Jan-07 Jun-07 F eb-07 May-07 Apr-07 S ep-07 Aug-07 Mar-07 Nov-08 Oct-08 Jun-08 Jan-08 Jul-08 May-08 Apr-08 A ug-08 Sep-08 Feb-08 M ar-08 Dec-07
60 50 40 30 20 10 0 May-09 Jun-09
Homeowner Affordability and Stability Plan TALF announced PPIP announced
Jan-09
F eb-09
Mar-09
A BX.HE 07-1 AAA (LHS)
CM BX.NA.3 (LHS )
AB X.HE 07-1 B BB- (RHS)
Source: JPMorgan, GSAM, as of August 1, 2009. 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
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Dec-08
Apr-09
Jul-09
18
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Spreads have tightened as systemic risk has declined, but remain at historically wide levels
Figure 1: Investment grade credit
700 Spread over Tsy (bps) 600 500 400 300 200 100 0 Aug-03 Aug-01 Aug-05 Aug-08 Aug-99 Aug-02 Aug-06 Aug-09 Aug-00 Aug-04 Aug-07 Spread 10-Yr Avg.
Figure 2: High yield
2000 1800 1600 1400 1200 1000 800 600 400 200 0 Aug-99 Spread over Tsy (bps) Spread 10-Yr Avg.
Aug-00
Aug-04
Aug-08
Aug- 09 Aug-08
Aug-03
Aug-07
Aug-02
Aug-06
Aug-01
Aug-05
Figure 3: Bank loans
Spread over LIBOR (bps) 1400 1200 1000 800 600 400 200 0 Aug-01 Aug-02 Aug-05 Aug-09 Aug-06 Aug-99 Aug-03 Aug-07 Aug-00 Aug-04 Aug-08 Spread 10-Yr Avg.
Figure 4: Convertibles structural cheapness
Discou nt to F air Value (% ) 8 6 4 2 0 -2 -4 Aug- 01 Aug- 05 Aug-02 Aug-06 Aug-00 Aug-04 Aug-99 Aug-03 Aug-07
Source: GSAM, Credit Suisse. Discount Margin B (3-year life), JP Morgan, Merrill Lynch, Barclays Capital, Yieldbook as of August 31, 2009.
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Aug-09
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Investment grade credit offers robust returns
Scenario analysis: projected total returns (July 2009 – July 2011, % ann.)
Scenario 1: Recovery Scenario 2: Recession
12 12
Scenario 3:Deep recession
Current YTM
Governments = 3.8% IG = 6.6%
Annualised return, % 8 8 Investment 4.97% 8 12 Investment Grade 11.79%
10
10
10
Governments 8.11%
6 4
6
Governments 4.11%
6
4
4 Investment 1.34%
2 0 -2 -1.3% Governments
2
2
0 -2
0
-2
Government bond holders pay for liquidity regardless of whether they need it
These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. Refer to the back for assumptions. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
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Unprecedented levels of default are still priced in
40 Average 5 year default rate (Global from 1920) Worst 5 year default rate (Global from 1920) Implied default rate assuming 0% recovery Implied default rate assuming historical recovery 28% Default Rate (%) 23% 20 15% 12% 10% 6% 2% 0 US Investment Grade Euro Investment Grade UK Investment Grade 2% 6% 2% 6% 34%
Source: Merrill Lynch, GSAM as of Sep-09. Moody’s historic defaults from 1920. Global data used as proxy for all markets. Assumes defaults occur in a linear fashion. Historic recovery values: IG – 62%, HY – 40%. Annualized default rates = [(Spread/100)/(1-Recovery rate)]. 5 year cumulative default rates = (1-((1-(annualized default rate/100))^5))*100.
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Idiosyncratic volatility has risen exponentially making credit selection critical
40% 35% 30% Idiosyncratic Volatility 25% 20% 15% 10%
I-G Corporates
Investment Grade Corporates High Yield Corporates Corporate Universe Lehman Brothers bankruptcy
HY Corporates
Corporate Universe
5% 0% Nov-03 Nov-07 Nov-02 Nov-06 Jul-08 Jul-04 Jul-05 Nov-05 Nov-04 Nov-08 Mar-03 Mar-04 Mar-07 Mar-08 Mar-02 Mar-06 Mar-05 Mar-09 Jul-09 Jul-03 Jul-07 Jul-02 Jul-06
Source: Barclays Capital, GSAM as of 31-Jul-09
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Dispersion can create opportunities
High yield universe (by Issue) As of March 31. 2007
25
High yield universe (by issue) As of June 30, 2009
25
20
20
15
YTW (%) YTW (%)
15
80th Percentile
10
80th Percentile Median 20th centile
Median
10
20th Percentile
5
5
0 0 2 4 6 8 10 12 14 16 18 20
Maturity (years)
0 0 2 4 6 8 10 12 14 16 18 20
Maturity (years)
Average yields are higher and dispersion between issues has increased significantly As investors increasingly differentiate between good and bad companies, security selection is of growing importance Long / Short and Relative Value investing increase the opportunity set from which managers can capture discrepancies in valuations
Source: GSAM, Barclays. 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.
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The case for active credit management
Significant dispersion between maturity, capital structure and currency denomination of the same issuer
500
To bac c o
2Q09 excess returns – large differences across sectors
450 400
Phar mace utica ls Con s umer Pr oduc ts
350
Tele c ommunic ation s
LIBOR OAS (bps)
300
W ireline s
250
Media Cab le
200
Met als & Minin g
150
Utilitie s
100
Ins uranc e
50
B ankin g
0 7/6/2009
12/27/2014
6/18/2020
12/9/2025
6/1/2031
11/21/2036
0
500
100 0
150 0
20 00
25 00
Maturity
Excess Return (bps)
Diversity of issues in Barclays Global Aggregate Corporate Index – 72 unique issues in 5 currencies, spanning the capital structure (Senior – Tier 1) All sectors earned positive excess returns in 2Q with financials leading the way
As at 30-Jul-09. Source: GSAM, Barclays Capital This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may 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 buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.
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Credit crunch – 2 years on…
1. Equity market indices – YTD Through August 2009 2. Equity market indices – October 2007 to March 2009
3. Equity market indices – August 2007 to August 2009
As of August 2009. Source: Bloomberg, MSCI BARA and S&P
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Assumptions in scenario analysis
Forecast asset class returns (June 2009 – June 2011, % ann.)
UK Sterling Investment Grade Corporate:
Associated Range of GDP Growth (7/2009-7/2011 ann. Rate) Corporate Credit Spreads (vs. Governments): Implied Change in Spread from Current Levels (Cur. OAS 3.75%) Ending Spread Level (Jul 2011) vs. Governments (%) Duration of Market (yrs) Yield to Maturity (%) Projected Capital Appreciation / Depreciation (Duration1 Expected Change in Spread, Adjusted for Survival) Default & Transition Losses (2 year Cumulative, %) Default Rate (% 2 yr Cumulative) Recovery Rate Transition Losses – IG to HY (Assuming 100bps Severity) Total Default & Transition Losses Total Return (2 year Cumulative, %) Total Return (Annualized, %) -1.7 0.5 1.5
UK Gilts German Bunds
Associated Range of GDP Growth (7/2009-7/2011 ann. Rate) Current Yield to Maturity (%) Projected Yield to Maturity (%) Duration of Market (yrs)
Deep Recovery Recession Recession
0-2.5% (3)–(1)% (7)%-(5%)
Deep Recovery Recession Recession
0-2.5% 3.7 4.9 8.5 -2.7 -1.3 (3)- (1)% 3.7 3.6 8.5 8.4 4.1 (7%)-(5%) 3.7 2.6 8.5 16.9 8.1
2.1 6.6 7.6 10.7
4.2 6.6 7.6 -2.9
5.2 6.6 7.6 -9.2
Total Return (2 year Cumulative, %) Total Return (Annualized, %)
1.8 50% 0.6 1.5 25.0 11.8
3.0 40% 0.9 2.7 10.2 5.0
4.0 35% 1.3 3.9 2.7 1.3
Current OAS UK Sterling 3.75% and Eurozone 3.39% respectively. Assumptions: Duration is maintained at index levels, Government bond yields are unchanged over period. Hedging the risk of rising rates would reduce returns by 1.5 to 3% per annum.
1
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General disclosures
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. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. 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. Except where indicated, this material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may 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 buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability. Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Simulated performance is hypothetical and may not take into account material economic and market factors that would impact the adviser’s decision-making. Simulated results are achieved by retroactively applying a model with the benefit of hindsight. The results reflect the reinvestment of dividends and other earnings, but do not reflect fees, transaction costs, and other expenses, which would reduce returns. Actual results will vary. Where indicated, data shown herein has been supplied by outside sources and is believed to be reliable, although Goldman Sachs does not guarantee its accuracy. 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 not guaranteed, 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 cannot invest directly in indices. Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated 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. Copyright © 2009, Goldman, Sachs & Co. All rights reserved. Compliance Approval 26590.OTHER.OTU
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Goldman Sachs Asset Management Conference Call Series Survey
September 15, 2009 | The Future for Investment – Where Do We See Opportunity? Eileen Rominger, Chief Investment Officer, GSAM
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9. What topics would you like us to cover in future conference calls?
10. Other comments:
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