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Goldman Sachs Introduces US Equity Dividend and Premium Fund

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The latest fund launch from Goldman Sachs Asset Management (GSAM) is a new US Equity Dividend and Premium Fund featuring the use of call options.

GSAM’s new fund is

The latest fund launch from Goldman Sachs Asset Management (GSAM) is a new US Equity Dividend and Premium Fund featuring the use of call options.

GSAM’s new fund is designed to appeal to investors who seek the growth potential of equities, attractive cash flow potential, and tax efficiency in their taxable portfolios. In seeking to generate an attractive yield, the portfolio management team will emphasise higher dividend-paying stocks within each industry and sector of the S&P 500 – while maintaining industry and sector weights similar to the S&P 500.

To further increase the portfolio’s cash flow potential, the team will also regularly write call options against the S&P 500 Index. The goal of each call option will be to generate a premium that, when combined with the portfolio’s dividend yield, offers a more attractive after-tax cash flow to investors. In addition to generating cash flow, premiums received may help reduce the fund’s price volatility.

Along with potential price appreciation of the portfolio’s underlying equity securities, cash flow from dividend income and from premiums will comprise the fund’s total return.

"This fund utilizes innovative investment strategies to address specific investor needs," says Donald Mulvihill, Managing Director and Portfolio Manager for Tax-Efficient Strategies at GSAM. "There are a growing number of people retiring with defined contribution plans rather than pension plans, for example. This Fund may be appropriate for such investors, who require cash flow to meet current spending needs, but also may need the growth potential of equities to offset the impact of inflation over a long retirement."

Mulvihill also believes the fund "may be appropriate in a sustained period of low but positive equity market returns."

During periods in which the US equity markets are generally unchanged or declining, the fund’s portfolio may outperform the same portfolio without the options because of the premiums received. Similarly, in a modestly rising equity market – where premium income is greater than the aggregate appreciation of the underlying index over the options’ exercise prices – the fund’s portfolio may outperform the same equity portfolio without the call options.

However, in other rising markets where the aggregate appreciation of the underlying index over the options’ exercise prices exceeds the premium income, the Fund’s portfolio is expected to under-perform a like portfolio that does not write call options.

Since tax considerations matter, the fund is also designed to be tax-efficient. As long-term gains are generally taxed at a lower rate than short-term gains — typically 15 per cent vs. a maximum rate of 35 per cent on ordinary income — the portfolio management team will seek to:

• Realize short-term losses and long-term gains
• Limit portfolio turnover that may result in short-term capital gains
• Sell securities with a higher tax basis before those with a lower tax basis
• Realize losses to offset short-term and long-term capital gains

The call options sold by the fund, which represent the purchaser’s right but not the obligation to purchase a security for a specific price within a specific time frame, will generally have expirations of three months or less. Under normal circumstances, the fund will sell call options in an amount between 25 per cent and 75 percent of the value of the Fund’s portfolio.

The fund, which will be managed by Goldman Sachs Asset Management’s Quantitative Equity team of 44 strategists, portfolio managers and research analysts, will use proprietary quantitative investment techniques – including optimization tools, a risk model and a transaction cost model – to identify a portfolio of stocks that it believes may enhance dividend yield while tracking as closely as possible the S&P 500 Index, the Fund’s benchmark, along with the Lehman Aggregate Bond Index. It is being offered to institutions and individuals in Class A and C shares with a minimum investment of $1,000, and is expected to hold between 100 and 150 stocks. The fund will also offer Institutional Class shares.

The Goldman Sachs US Equity Dividend and Premium Fund invests primarily in dividend-paying equity investments in large-capitalization US equity issuers and is subject to market risk so that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular industry sectors and/or general economic conditions.

The fund is also subject to the risks associated with writing (selling) call options. Writing (selling) call options may reduce, but not eliminate, the risk of owning stocks. However, it also limits the opportunity to profit from an increase in the market value of stocks in exchange for up-front cash at the time of selling the call option. In a rising market, the fund could significantly underperform the market.

In addition, the fund may also experience a loss on the expiration date of a call position if the value of the fund’s portfolio securities has fallen since the purchase date of the securities by an amount greater than the premium received for the option that was sold.

The fund is also subject to the risk that the pre-tax performance of the fund may be lower than the performance of a similar fund that is not tax-managed. This is because the Investment Advisor to the fund may choose not to make certain sales of securities that may result in taxable distributions. Of course, no assurance can be offered that the fund’s tax-managed strategies will reduce the amount of taxable income and capital gains distributed by the fund to shareholders.

The fund may invest in foreign securities, which may be more volatile and less liquid than investment in US securities and will be subject to the risks of currency fluctuations and sudden economic or political developments. It will also be subject to the risk of negative foreign currency rate fluctuations.

The fund may also invest in REITs. REITS whose underlying properties are concentrated in a particular industry or geographic region are also subject to risks affecting such industries and regions and may be subject to more abrupt or erratic price movements. At times, the fund may be unable to sell certain of its portfolio securities without a substantial drop in price, if at all. Investments in fixed income securities are subject to the risks associated with debt securities including credit and interest rate risk.

The fund may make investments in derivative instruments, including options, financial futures, Eurodollar futures contracts, swaps, options on swaps, structured securities and other derivative investments, which may involve a high degree of financial risk. These risks include the risk that a small movement in the price of the underlying security or benchmark may result in a disproportionately large movement, unfavorable or favorable, in the price of the derivative instrument; risks of default by a counterparty, and the risks that transactions may not be liquid.

Background notes: Goldman Sachs Asset Management is the asset management arm of The Goldman Sachs Group, Inc. (NYSE: GS), and manages USD 520 billion as of August 26, 2005. Goldman Sachs Asset Management has been providing discretionary investment advisory services since 1989 and has investment professionals in all major financial centers around the world. The company offers investment strategies across a broad range of asset classes to institutional and individual clients globally.

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