Rolling out its own
Eventually, the business plan is to sell its homemade Promark Funds to other companies’ pension plans. But for the time being, General Motors Investment Management division is busy making them work and perform well, compared to external managers’ funds.
The $80bn (e86bn) GM pension funds are quite innovative in their approach to investing. Two years ago they decided to divide their assets into several different pools, focused on asset classes: six US equity funds (large cap blend, large cap value, large cap growth, mid cap blend, small cap value, small cap growth), two international equity funds (international, emerging markets), two fixed income funds (high quality bond, high yield bond), one real estate securities fund. Then the internally managed funds were given the Promark Funds trademark .
Within GM Investment Management there is a business unit for each different asset pool and Promark Fund: the unit has the responsibility of both managing internally the Promark Fund and selecting and monitoring the managers for the externally managed assets. Around 10–15% of all assets are managed in internal portfolios; 85–90% are managed by more than 70 different outside managers (some of them manage more than one portfolio).
Every three to four years GMIM revises the long-term investment policy according to an asset liability model, trying to define the right asset mix for every pension plan in the group. “We recently revised it,” explains Charles (Chuck) Tschampion, GMIM managing director . “But we made very few adjustments. Our current asset allocation is about 60% in equities and 40% in bonds. We are fairly aggressive in favour of international equities – which are up to one third of all our equities – and high yield bonds, one fourth of all our bonds. Besides, 10% of our equities is in private equity and 10% of our fixed income is in the real estate business.”
After deciding the asset allocation, step number two is focusing on the asset classes with the business units. “The whole approach is very active,” says Tschampion. “The goal is to add value to the benchmark and all internal portfolios are actively managed. But each business unit is free to use indexed external managers, if they feel it’s useful to control the volatility of the results.”
GM selects the external managers according to risk-wise criterions. “We are very benchmark oriented,” says Champion. “We are not interested in absolute performances, but we want to know how a money manager achieved a certain performance, how many risks he took, what his tracking error was, how he controlled the volatility.” The external managers are monitored for at least three years to check how they perform during a whole market cycle. “We don’t terminate them frequently,” says Tschampion “and when we do so, it’s not always or only because of poor performances. It may be related to a major change in their methods, organisation, management.”
To select the external managers, GM uses consultants like Frank Russell. “But we are increasingly relying on the internet,” adds Tschampion. “The use of the internet is increasing in our industry; it’s moving to the electronic age. So for the managers’ search we look at dot.coms with great databases, great software, like InvestorForce.com or PSN.”
GM won’t give publicity to the performance obtained by individual managers. But it’s possible to have an idea about how internal managed funds perform in comparison to external ones, by browsing the website devoted to GM 401(k) plan members, www.gm401k.com. The GM 401(k) plan assets are $23bn. The plan offers a menu of investment options provided by two managers: Fidelity and the in-house Promark funds.
GM helps employees build up their portfolios, suggesting choices from three different ‘pathways’ available on the website, according to how much time they want to spend on their investment selections and their level of investment experience.
According to the latest available data, Promark Funds’ performance has not been brilliant. In the first 11 months of 2000, in most cases Promarks underperfomed their benchmarks.
Only Promark Small Cap Growth Fund clearly overperformed its benchmark, the Russell 2000 Growth Index: –19.01% against –26.9%; while Fidelity Small Cap Blend was down 3.85% against –10.69% of Russell 2000 Index.
Nonetheless, GM 401(k) plan’s participants don’t look too scared by the recent stock market weakness. “They have been reacting buying on dips,” says Tschampion. Actually, 25–30% of employees invest in fixed income; many invest only in the company stock, which account for 20% of all GM 401(k) assets. Another 40% of assets are in Fidelity funds, the same percentages in Promark Funds. The most popular Promark products are the Large Cap Index, which has very low costs, and the IncomeFund.
“Most participants concentrate their investments in just one fund and never change,” explains Tschampion. “We try and educate them, financially speaking, working together with our human resources management and with Fidelity. Our communication programme is in three pieces: first the Pathways to build the portfolios; second, a quarterly magazine sent to all participants; finally, our website, which is full of educational stuff and tools.”
GMIM has already one corporate client, Delphi Automotive Systems, which was spun off from GM in 1999 and is now a completely separate company. “We started thinking that Promark Funds were a good way of leveraging our DB expertise in favour of DC members. Now our business plan is to attract other companies to invest with us,” confirms Tschampion.