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Management’s Discussion and Analysis
The following table sets forth a summary of the changes in our assets under management:
Changes in Assets Under Management
Year Ended November 30
(in billions) 2007 2006 2005
Balance, beginning of year $676 $532 $452
Net inflows/(outflows)
Alternative investments 9 32 11
Equity 26 16 25
Fixed income 38 29 16
Total non-money market net inflows/(outflows) 73
(1)
77 52
Money markets 88 17
(2) 11
Total net inflows/(outflows) 161 94
(3) 63
Net market appreciation/(depreciation) 31 50 17
Balance, end of year $868 $676 $532
(1) Includes $7 billion in net asset inflows in connection with our acquisition of Macquarie
—
IMM Investment Management.
(2)
Net of the transfer of $8 billion of money market assets under management to interest-bearing deposits at GS Bank USA, a wholly owned subsidiary of Goldman Sachs.
These deposits are not included in assets under management.
(3) Includes $3 billion of net asset inflows in connection with the acquisition of our variable annuity and life insurance business.
2006 VERSUS 2005. Net revenues in Asset Management and
Securities Services of $6.47 billion for 2006 increased 36%
compared with 2005.
Asset Management net revenues of $4.29 billion increased
45% compared with 2005, reflecting significantly higher
management and other fees, principally due to strong growth
in assets under management, and significantly higher incentive
fees. During the year, assets under management increased
$144 billion or 27% to $676 billion, reflecting non-money
market net inflows of $77 billion, spread across all asset
classes, money market net inflows of $17 billion
(2)
, and market
appreciation of $50 billion, primarily in equity and fixed
income assets.
Securities Services net revenues of $2.18 billion increased 22%
compared with 2005, as our prime brokerage business continued
to generate strong results, primarily reflecting significantly
higher global customer balances in securities lending and
margin lending.
Operating expenses of $4.04 billion for 2006 increased 31%
compared with 2005, primarily due to increased compensation
and benefits expenses, resulting from higher levels of discretionary
compensation due to higher net revenues, and increased levels
of employment. Non-compensation expenses also increased,
primarily due to higher distribution fees. In addition, market
development costs were higher, reflecting increased levels of
business activity. Pre-tax earnings of $2.44 billion in 2006
increased 45% compared with 2005.
(2) Includes the transfer of $8 billion of money market assets under management to
interest-bearing deposits at GS Bank USA. These deposits are not included in
assets under management.
2007 VERSUS 2006. Net revenues in Asset Management and
Securities Services of $7.21 billion for 2007 increased 11%
compared with 2006.
Asset Management net revenues of $4.49 billion for 2007
increased 5% compared with 2006, reflecting a 29% increase
in management and other fees, partially offset by significantly
lower incentive fees. Incentive fees were $187 million for 2007
compared with $962 million for 2006. During 2007, assets under
management increased $192 billion, or 28%, to $868 billion,
reflecting non-money market net inflows of $73 billion
(1),
primarily in fixed income and equity assets, money market
net inflows of $88 billion, and net market appreciation of
$31 billion, reflecting appreciation in fixed income and
equity assets, partially offset by depreciation in alternative
investment assets.
Securities Services net revenues of $2.72 billion for 2007
increased 25% compared with 2006, as our prime brokerage
business continued to generate strong results, primarily reflecting
significantly higher customer balances in securities lending and
margin lending.
Operating expenses of $5.36 billion for 2007 increased 33%
compared with 2006, primarily due to increased compensation
and benefits expenses resulting from higher discretionary
compensation and growth in employment levels, and higher
distribution fees (included in brokerage, clearing, exchange and
distribution fees). Pre-tax earnings of $1.84 billion in 2007
decreased 24% compared with 2006.
(1) Includes $7 billion in net asset inflows in connection with our acquisition of
Macquarie
—
IMM Investment Management.
60 Goldman Sachs 2007 Annual Report