Rachel Oliver reports on its quest for pensions assets
Jack Miller is very excited. He is also very frustrated as his new project is not happening fast enough - in New York when you decide you want something, you want it now.
Miller sits in his mid-Manhattan offices at the request of the Goliath of all corporate pension plans - General Motors. As vice president business development at General Motors Investment Management (GMIM), Miller has recently been put in charge of spearheading GMIM's attack on the lucrative manager of managers market and will be competing head on with some of its own service providers being the likes of Frank Russell, SEI and Morgan Stanley. It will be competing not only in the US, but globally - and time is of the essence.
I don't think we have the luxury of that time," says Miller. "Because these windows are now open...and I think this is the time to act."
GMIM manages the $80bn (Ecu70bn) asset mountain for General Motors' defined benefit (DB) and defined contribution (DC) plans, and a large proportion of the assets is managed externally by around 45-50 different managers, the majority of whom also fall into a Goliath category of their own. You will not find many boutiques in GMIM's portfolio.
The plan also employs 'strategic partnering', a phrase coined by GTE a few years ago when it handed out four $1bn mandates in a bid to delegate more responsibility to the investment management firms they hired. "We ask them to become advisers to us," says Miller. "We may have questions on how we structure our portfolios, one of the questions we are asking ourselves is emerging markets - is the story intact? Has some fundamental underpinnings altered it? And don't just give us a stock answer, think about the things that led you to originally say that emerging markets were the place any well diversified fund should be."
Combining responsibilities has been a major theme driving the US pensions industry over the past couple of years, and has been largely influenced by plans trimming down on re-sources, shrinking back staffing levels and realising the expense and difficulty of handling issues like risk control in-house. As a result, multi-talented, multi-product managers have been in demand. It is this change in plan sponsors' buying habits which has persuaded GMIM that a natural market exists for it to take over the management of other pension plans who can benefit from GMIM's economies of scale and indirectly access those areas that seem to be slipping from their grasp.
GMIM's manager selection programme has traditionally been biased in the favour of active managers, which is where it believes it can find true value and is obviously proud of the who's who list of global managers it employs, regarding it as a real selling point. "Everybody wants to be a supplier to the world's largest corporation and as a result you get the best of the best coming to try and work with us." But the real trick, Miller admits, is to combine all their skills together so overall they can add value to the portfolio.
"What we try and do is find an objective target in terms of expected return over a benchmark, plus around that a risk parameter. So for our needs and something that we think will be appealing to others particularly in this atmosphere of less risk is to have a very well defined targeted alpha and tracking error."
So instead of going to a variety of asset managers, to achieve this value he says, why not approach someone like General Motors to do it all for them. "'Can you handle the whole package for us?' Everything from asset allocation to policy statements, to manager selection and the answer is yes, we are already doing it."
Once fully launched the initiative will be run on a co-mingled pool principle with pension plans essentially buying units in the General Motors pension plan, and Miller sees its main attraction for all parties is cutting back on fee expenditure. You would pay a market rate manager fee, but then you don't have to pay for custody, you don't have to pay for internal audit. What you are getting is units in a very, very large institutional plan, well diversified. You don't have to pay for a wire transfer from the manager to the custodian every time you make a trade, those are all implicit."
Miller believes the GMIM capability will appeal to the small to mid size plans in the US who can benefit from its vast asset base. And while the mid sized funds - which in US terms is classed as being around the $750m-$1bn mark - who want to invest $50m into large caps, for example, could admittedly find a good large cap manager themselves, even in these cases Miller believes the risk factor will make them think again. "They are paying a high fee for a single manager so you are exposed to how that manager goes, they may be a very good manager but you have got single manager risk."
For that same $50m, he says the plan could award it to GMIM who would it spread over five managers to provide a more "predictable" return for the same fee. Miller is also hopeful that the larger DB plans of $1bn and over may in fact be interested in combining assets. "I think we probably could take any plan from even $3-5bn and manage their entire business programme for less money than it would currently take and give them better diversification," he asserts confidently.
Citing funds such as Glaxo or Shell, he says GMIM can help them on individual cases, say if they were looking for large cap growth exposure, or, in the larger scheme of things if they were considering setting up a plan in a new market and wanted to save on overall start up expenses. "The nice thing is you would not have to hire a consultant with this, we are already giving you the diversification."
And of course for General Motors itself, it is saving on its own fee expenditure. Miller is hoping this new role as manager of managers will greatly contribute to the fiscal growth of GMIM and help fuel their recruitment drives. "The fact is that for every $1m you give us, you have probably $70-80m of General Motor's own money, so it is an advantage for them but is also an advantage for us. We can provide value for an outside party, and at the same time their assets allow us to continue to push our fees down."
While GMIM would ideally like to take the international expansion of its new programme a bit slower, focusing its main efforts on developing its business at home, Miller feels the current global-oriented climate does not permit a 'let's wait and see' approach, particularly when it comes to tackling Europe or Japan. It has already registered with IMRO in the UK and is managing $8bn for a non-US pension plan. "We are familiar with the regulations in_Europe, we are familiar with the market conditions and the rules"
He adds: "I think it is just a window of opportunity. The Euro, the consolidation that is taking place between now and the next two years opens up a huge number of opportunities that were never there before. You are seeing the Deutsche Banks, Société Generales, all these families are realising that they have to grow beyond their borders."
In the European context Miller is well aware of the expense involved for asset managers wanting to tackle non domestic markets. In this sense he sees a perfect marketing opportunity for GMIM to not only service the European pension plans but to continue attracting the top managers internationally to come into its manager of managers programme.
"Do they have the resources or the people or the investment processes in place to do it? Not really. Can they create them? Well yes, but it takes time and a lot of money. Or they can work with a group like ourselves which we think will be a real advantage and I think will give them an opportunity down the road to have a 'surrogate reputation' that you are dealing with a well-known organisation like General Motors, that has a very good reputation in the US."
When the manager of managers approach was initiated by Frank Russell in Europe, there was many a manager frowning in disapproval that potential business was being taken away from them. Furthermore if they were to bow to this approach they would have to continue managing money at the hands of a consultant for a lower margin. Now a pension fund is readying itself to enter not only this very business but at the same time infringing on the traditional advisory role of the consultants, which, to add to the confusion, is now also being embraced by global asset managers such as Morgan Stanley.
"We are mindful of the fact that this is something that overlaps some of their business, yet at the same time we do not see this taking a huge strip out of their livelihood," says Miller. "Frank Russell started off as a consultant and I think that is a wonderful base and they have done a very fine job. We are just starting from a different point and we think we can do an excellent job too."
Miller also has to ensure that the culture within GMIM is transformed into that of a client-driven one, something he think is not too much of a challenge, despite beliefs to the contrary. "People could say 'you are just a plan what do you know about client service?' I think we know quite a bit about client service. And I think we are going to know a whole lot more going forward."
Miller is well aware of the challenges that lie ahead for a motor company to compete in the heady world of investment management. Whether its boasted collection of class A managers will be enough of a lure for other pension plans remains to be seen but the mentality within an organisation like this is such that any initial rebuttals are not going to deter GMIM one iota. In fact they will simply be viewed as an exciting new challenge."