Goldman Sachs 2003 Annual Report Download - page 9

GOLDMAN SACHS 2003 ANNUAL REPORT 7
Letter to Shareholders
ability to generate attractive investment performance
and the ability to raise new assets.
During 2003, our investment performance, together
with our distribution strength, allowed us to generate
$15 billion of net client inflows across non-money
market asset classes. These increases were offset by
$19 billion of outflows in money market assets, as
economic prospects improved and higher returns were
being generated in other asset classes.
Within our Securities Services business, net revenues
were $1.01 billion, up 17% from 2002. This business
continues to benefit from the creation and growth of
new and existing hedge funds. In addition, the rally in
equity markets helped to increase customer balances.
We believe our Asset Management and Securities
Services business represents one of our best opportuni-
ties for substantial growth.
EXPENSES
Managing expenses in this challenging environment
has been one of our highest priorities. During 2003,
excluding the impact of acquisitions, we reduced our
headcount by 7%. While painful, these reductions
were necessary to scale our operations to the available
opportunities and were a key factor in our ability to
generate an attractive return in 2003.
Our largest expense—in a people business —is
compensation, and we track this expense as a percent-
age of the net revenues we generate in our businesses
overall. For 2003, the ratio of compensation to net
revenues was 46% versus 48% in 2002.
We remain focused on controlling our non-compen-
sation expenses. However, there are some areas that
remain difficult to forecast. For instance, in 2003 we
took provisions of $159 million for a number of litiga-
tion and regulatory proceedings. Given the range of
litigation and investigations underway, these expenses
may remain high.
STRATEGY AND COMPETITIVE DYNAMICS
Goldman Sachs is not a financial services conglomerate
but an integrated investment bank, securities firm and
asset manager. This focused strategy has allowed us
to build a strong global franchise—we take pride in
being a market leader in Europe and Asia as well as
the United States. It has also allowed us to benefit
from the long-term growth of the global capital mar-
kets which we believe will continue to provide us with
excellent growth opportunities over the cycle.
We aspire to be the preeminent global provider of
advisory, financing, investment and risk management
services to corporations, institutions, governments and
high-net-worth individuals. To succeed in this mission,
the firm has always placed great reliance on attracting
and retaining outstanding people. And we work hard
to foster teamwork and encourage creativity, client
focus and innovation. We believe that our unique cul-
ture, coupled with the quality of our people, is
Goldman Sachs’ most important competitive strength.
Our business has always been highly competitive
and cyclical. We face strong competition today, as in
the past, from larger competitors, but we don’t view
our size as a competitive disadvantage because we
have never been constrained by a lack of capital. We
believe our biggest challenge is to strengthen our culture
of teamwork and excellence in the face of the growing
size and scope of our business. We are determined to
meet this challenge because we believe our ability to
do so is critical to our continued success in executing
our global strategy and serving our clients.
STRATEGIC TRANSACTIONS
In 2003, we completed a number of strategic transac-
tions. Our first announcement involved our $1.25
billion investment in SMFG, which we mentioned
above. We are pleased with the performance of our
investment as well as the other aspects of our relation-
ship with SMFG.
With the credit loss protection provided by SMFG,
we initiated our William Street credit extension pro-
gram. This capability has given us an innovative way
to extend credit selectively to our investment-grade
clients, while reducing our credit and liquidity risks.
By the end of fiscal 2003, $4.32 billion of credit com-
mitments had been made under the program. In addi-
tion, our business cooperation agreement with SMFG
has already resulted in a number of initiatives. In
October, we announced the formation of a joint venture
to facilitate the corporate recovery of certain SMFG
borrowing clients and to accelerate SMFG’s plans to
improve its asset quality.
In September, we combined our Australian opera-
tions with JBWere to create a new venture called
Goldman Sachs JBWere. We own 45% of the new entity,
one of the leading investment banking and securities
firms in Australia.
We also made several acquisitions in 2003. Our
approach to acquisitions is to strengthen our business
and build shareholder value, principally through empha-
sizing bolt-on deals where we can add new clients or
acquire new products to provide to our existing clients.
2003 offered us a number of such opportunities.
In July, we acquired The Ayco Company, a leading
provider of sophisticated, fee-based financial counsel-