Goldman Sachs 2013 Annual Report Download - page 57

Management’s Discussion and Analysis
2013 versus 2012. Net revenues in Investment Management
were $5.46 billion for 2013, 5% higher than 2012, reflecting
higher management and other fees, primarily due to higher
average assets under supervision. During the year, total assets
under supervision increased $77 billion to $1.04 trillion.
Long-term assets under supervision increased $81 billion,
including net inflows of $41 billion 1, reflecting inflows in
fixed income and equity assets, partially offset by outflows in
alternative investment assets. Net market appreciation of
$40 billion during the year was primarily in equity assets.
Liquidity products decreased $4 billion.
During 2013, Investment Management operated in an
environment generally characterized by improved asset prices,
particularly in equities, resulting in appreciation in the value of
client assets. In addition, the mix of average assets under
supervision shifted slightly compared with 2012 from liquidity
products to long-term assets under supervision, primarily due
to growth in equity and fixed income assets. In the future, if
asset prices were to decline, or investors favor asset classes that
typically generate lower fees or investors withdraw their assets,
net revenues in Investment Management would likely be
negatively impacted. In addition, continued concerns about
the global economic outlook could result in downward
pressure on assets under supervision.
Operating expenses were $4.35 billion for 2013, up slightly
compared to 2012, due to increased compensation and
benefits expenses, primarily resulting from higher net
revenues. Pre-tax earnings were $1.11 billion in 2013, 20%
higher than 2012.
2012 versus 2011. Net revenues in Investment
Management were $5.22 billion for 2012, 4% higher than
2011, due to significantly higher incentive fees, partially
offset by lower transaction revenues and slightly lower
management and other fees. During 2012, assets under
supervision increased $70 billion to $965 billion. Long-
term assets under supervision increased $67 billion,
including net inflows of $18 billion 2, reflecting inflows in
fixed income assets, partially offset by outflows in equity
assets. Net market appreciation of $49 billion during 2012
was primarily in fixed income and equity assets. In
addition, liquidity products increased $3 billion.
During 2012, Investment Management operated in an
environment generally characterized by improved asset
prices, resulting in appreciation in the value of client assets.
However, the mix of average assets under supervision
shifted slightly from asset classes that typically generate
higher fees, primarily equity and alternative investment
assets, to asset classes that typically generate lower fees,
primarily fixed income assets, compared with 2011.
Operating expenses were $4.29 billion for 2012, 7% higher
than 2011, due to increased compensation and benefits
expenses. Pre-tax earnings were $928 million in 2012, 8%
lower than 2011.
Geographic Data
See Note 25 to the consolidated financial statements for a
summary of our total net revenues, pre-tax earnings and net
earnings by geographic region.
Regulatory Developments
Our businesses are subject to significant and evolving
regulation. The U.S. Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), enacted in
July 2010, significantly altered the financial regulatory
regime within which we operate. In addition, other reforms
have been adopted or are being considered by other
regulators and policy makers worldwide. The Dodd-Frank
Act and these other reforms may affect our businesses. We
expect that the principal areas of impact from regulatory
reform for us will be increased regulatory capital
requirements and increased regulation and restriction on
certain activities. However, given that many of the new and
proposed rules are highly complex, the full impact of
regulatory reform will not be known until the rules are
implemented and market practices develop under the
final regulations.
See “Business — Regulation” in Part I, Item 1 of the 2013
Form 10-K for more information on the laws, rules and
regulations and proposed laws, rules and regulations that
apply to us and our operations. In addition, see “Equity
Capital — Revised Capital Framework” below and
Note 20 to the consolidated financial statements for
information about regulatory developments as they relate
to our regulatory capital, leverage and liquidity ratios.
Impact of Increased Regulation and Restriction on
Certain Activities
There has been increased regulation of, and limitations on,
our activities, including the Dodd-Frank prohibition on
“proprietary trading” and the limitation on the sponsorship
of, and investment in covered funds (as defined in the
Volcker Rule). In addition, there are increased regulation
of, and restrictions on, over-the-counter (OTC) derivatives
markets and transactions, particularly related to swaps and
security-based swaps.
1. Fixed income flows for 2013 include $10 billion in assets managed by the firm related to our Americas reinsurance business, in which a majority stake was sold in
April 2013, that were previously excluded from assets under supervision as they were assets of a consolidated subsidiary.
2. Includes $34 billion of fixed income asset inflows in connection with our acquisition of Dwight Asset Management Company LLC and $5 billion of fixed income and
equity asset outflows related to our liquidation of Goldman Sachs Asset Management Korea Co., Ltd.
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