General Electric builds on base of pensions assets
When General Electric began managing money for its own pension assets in 1927 the company could not have imagined that by the turn of the next century financial
services would be a core part of its business.
Then again, GE might not have thought it would become the world’s largest company until the enigmatic Jack Welch took the helm.
By 1935 the group had already set up its first mutual funds called Elfun Trusts – created for employees within the ‘Elfun’ organisation, a part of the group working for charities and local communities. Significantly, for a company that has married stability with innovation throughout its history, the Elfun funds are still in place.
It was not until 60 years later, however, in 1988, that GE decided the expertise it had acquired in managing its own, by now substantial, pension assets, could be a viable business branch in itself.
As Jan Konstanty, president of GE Asset Management (GEAM) in London, says: “That was when the success and credibility of this business was seen to be so clear that the thinking was, why not offer this service outside the company.
“The company looked at the growth rate of its own pension plan, which was slowing due to it’s fully funded status and that’s when the initiative gained momentum.”
He notes that in the US the implementation of a fully-fledged investment management structure did not happen overnight.
Nevertheless, GEAM’s 200-plus institutional clients are now spread across sectors and include the New York city board of education, firefighters and police, as well as household names like Hitachi, DaimlerChrysler and Air Canada.
“It took a while to create the infrastructure and start getting the assets in,” says Konstanty. “But today in the US we run money across the whole spectrum, from separate institutional money to 401k plans through to mutual funds for employees and an extensive range of mutual funds for consumers, which can be bought over the internet through our on-line
The group currently runs around $126bn (f147bn) globally. Konstanty claims a major advantage for GEAM is that they know exactly what corporations need for management and administration of pensions money.
“The asset management company has grown out of the need to manage money successfully for GE,” he says. “Essentially the largest part of the money we manage here is GE employee pension and savings assets, but third-party money is invested alongside and not treated any differently than our own assets.”
This, Konstanty says, reflects the stability and consistency of investment that corporates want and he claims the company’s culture is very robust: “For example, the GE asset management team has been together for 10 years.”
Konstanty believes that, for a number of reasons, asset management will be a key component for ambitious corporations, and as such a commercially viable business proposition. “Plan sponsors today have visibility in their pension arrangements and one of the biggest issues employers are facing is retention of staff in a world where the skilled labour force is shrinking,” he says. “As a result, staff have to feel good about growth in their income and related benefits.
“The bottom line, though, is that performance has to be good – and we have top quartile figures for a large part of our business and top decile for some asset classes. I also think that the revenue growth potential in this business far outstrips the medium-term cost growth, which will make it an important business line for the future.”
According to Konstanty, if the third-party business is aggregated out then the figure reaches around 27% of GEAM’s assets. In terms of investment strategy, Konstanty explains that risk awareness is at the heart of the company’s philosophy.
“Plan sponsors and trustees are fully aware of the heightened level of event risk as a result of the consolidation of the fund-management industry,” says Konstanty. “We believe we are relatively less exposed to this risk.”
He continues: “We also believe that in terms of timing and the analytic approach we have for investment we are extremely disciplined, which relates to our company’s engineering background and our focus on process-improvement tools like 6 Sigma.”
It’s a recipe that GEAM is exporting from the US in a serious assault on the European market. “We are convinced that this market is extremely interesting,” says Konstanty. “Looking at asset levels the European market ranks up there with the US and Japan – but when you look at the growth rates for pension assets then this will be the fastest growing market for the next five to 10 years.
He notes that, to begin with, GEAM will launch a more limited spectrum of products in Europe than in the US and will focus on the larger pension funds. “For the business model, going into a growth market gives us an extra boost,” he claims. “However, with the magnitude of the market we don’t need a big market share to do well and our ambitions, I think, are reasonable.”
Konstanty mentions Germany as particularly fertile ground for GEAM as it looks to its medium-term European expansion. “In Germany, tax rules relating to investment vehicles are changing and there are plans to set up new pension provision with one to four per cent of salaries going into a new pension plan – these become big numbers.”
Acknowledging that the market currently has relatively small pension assets compared with, say, the £1.4 trn (f2.3 trn) UK market, Konstanty points to the potential. “If Germany was at the level of the UK there would be around £2
trillion in assets.” He also believes that the advance of ALM studies, specialist mandate uptake and further asset allocation shifts toward international equities could benefit GEAM.
The company will start looking at Europe on the segregated side of the business, but Konstanty says corporates will not be the only focus. “We want to look at sectors like local authorities, which in themselves are a very interesting arena. We have looked at this sector in the UK already.”
Within the segregated approach GEAM will predominantly offer global, international, US and European equity products, although fixed-income, private-equity, real-estate, emerging-markets and some high-yield debt products will be available. “We want to build up the asset base to begin with, but we already have a Dublin platform and are planning to expand that so that we can run pooled assets,” says Konstanty.
He believes global equity will be the interesting niche, however, and suggests that the group’s structure and culture could be an important factor in its favour here. “As a bottom-up house, our work comes in analysing why a certain stock should be chosen against another in a particular industry and the relative value,” he says. “This first step does not depend on geography but is industry focused and 70% of the research is in-house analysis.”
As for portfolio construction, he adds: “We will take positions against the index if we think those markets have features or problems that merit it. In fact we have some such positions right now.
“The third element is risk analysis and control done through BARRA and a number of dedicated departments within GE . The end result is an attempt to get good returns with less risk,” he says.
An important addition, he believes, is the company’s record on training and staff retention “The way we train and incentivise our people is all part of the in-house approach,” he says “We have people here who have grown up in the GE environment and it forms how they approach their work.”
The size and scope of GE’s business empire means it has little to fear when investing on the world stage, as Konstanty notes: “All the different businesses that GE has in its geographical areas mean we can link in to a whole host of local contacts. In Hungary, for example, we have a country manager (a former professor) who has been with GE for decades and his awareness of the country and how it operates on a political, commercial and practical level is unparalleled.
“It is essential to understand industries globally and business prospects locally and to be able to quickly access that knowledge.
“This is what we call global reach,” he says. “Getting a true feel for these environments to see which companies will have the growth or the surge in cash and therefore support a valuation which is underpriced today. We think this is part of the reason why we can sustain better results.”
Konstanty offers a personal view on how the market may begin to break down in the future. “I think we could see two segments – one being multinationals where you need to understand how their business model works across the geographical areas and this is one type of complexity.
“The other area will be local companies. The skill set in being able to pick stocks of smaller local or regional companies – a different type of complexity or value creation.
“The ability to operate across these two environments will be vital,” claims Konstanty.