STAMFORD, Conn. -- John Myers, president of GE Asset Management, and his top strategists made an educated guess this year that technology stocks were about to plummet, and they pared equities in the General Electric pension fund.
"We cut U.S. equities by 3% to 46% and international equities by 3% to 16% or 17%," said Mr. Myers in a recent interview at his Stamford headquarters. "We felt a slowdown was coming and decided to reduce our exposure. Now, we're looking at the market to see if it's reached bottom."
GE Asset put the $2 billion in proceeds into cash, which it is starting to invest again in select stocks.
"We're cautiously optimistic. There's been a nice redistribution accomplished," Mr. Myers said. "The silliness in high-tech stocks with no earnings and high multiples has been corrected, and it's had an impact on tech companies whose valuations are unsustainable. Market breadth is improving. Value is outperforming growth."
Although Mr. Myers has a staff of 100 investment professionals to track the ups and downs of the Dow Jones industrial average and the Nasdaq composite, he pays close attention, too, to be sure the firm sticks to its basic bottom-up investment philosophy, which strives for growth at a reasonable price. That investment strategy is carefully applied to most of the $86 billion in domestic and international equity assets managed by GEAM, and it is used across all platforms, including the rapidly expanding external business.
In addition to the external business, the pending acquisition of Honeywell Inc., Morristown, N.J., with $21.5 billion in pension assets, means that those platforms are likely to expand even more in the next two years. Dennis Dammerman, vice chairman of the board of GE and chairman of GE Capital Services, is heading a company-wide team that is working on the acquisition of Honeywell and the subsequent integration of the two businesses. "The team includes professionals representing all functional areas and businesses across GE along with their Honeywell counterparts," said Tim Benedict, a spokesman for GEAM. He added that it was too early in the process to be more specific, or to say who is overseeing the integration of pension assets.
As of Sept. 30, GEAM, which is the investment arm of General Electric Co., Stamford, managed a total of $123.5 billion in assets. Of that, $51.6 billion was in defined benefit assets and $36.6 billion in defined contribution assets for GE employees. It also managed $35.3 billion in external assets, with $10.3 billion of that in defined benefit plans.
Although GEAM has been managing money for outside pension fund clients since 1989, in the past 18 months it has made a concerted effort to add assets and increase its visibility, which is paying off. The unit has taken in $6.4 billion in new assets so far in 2000 and expects to add another $2.5 billion by year's end, said Mike Cosgrove, president of GE Asset Management Services, the business unit that markets and sells GEAM's investment products.
Sales and marketing staff in the past two years has nearly doubled, to 180 people now from 69 people at the end of 1998. Some of those people were transferred from the GE Asset Management staff, which is projected to number 240 by year's end. The new push in sales and marketing personnel includes overseas markets such as Japan, where 29 people have been hired in the last year and a half.
"We want to tell our story, let people know we're in business. As the world becomes more global, we are building out our investment capability in certain regions of the world. A strong effort is being made in Japan to offer products there through an international portfolio team," Mr. Cosgrove said.
Mr. Cosgrove said that in the last year, 49 institutional clients were added to the roster, bringing the number of external clients to 190. Among new clients, the $18.8 billion Teachers' Retirement System of the State of Illinois, Springfield, hired GEAM for a $700 million large-cap value equity strategy, while the $25.4 billion pension plan of DaimlerChrysler Corp., Stuttgart, Germany, an existing client, allocated an additional $33 million, which was divided between private equity, international and emerging markets. GEAM also manages $100 million in a domestic large-cap value strategy for the $3 billion pension fund of The Williams Cos., Tulsa, Okla.; $49 million in an international equity strategy for the $85 billion pension fund of Hitachi Ltd.; and $119 million in a multistyle domestic equity strategy for the $1.6 billion pension fund of Constellation Energy Group, Baltimore.
Running whole pension funds
GEAM also offers clients total pension fund management, where it will work with a plan's consultant and provide investment management along with periodic asset allocation consulting. It provides this service to six defined benefit clients -- including the $15 million pension plan of London Fog Corp., Eldersburg, Md; the $41 million pension plan of Noble Drilling, Inc., Houston; and the $381 million pension plan of Penske Truck Leasing, Reading, Pa. -- and 38 defined contribution clients, including the $178 million pension plan of Promus Hotel Corp., Memphis.
In July, GEAM began marketing to its affiliates. Hires among those include a $66 million global select ex-U.K. international equity mandate from the London-based GE Common Investment Fund; and $50 million in the same mandate from the insurance general account assets for GE Insurance Holdings, the London-based European division of GE Financial Assurance.
It also has been hired to manage US$3 billion in Canadian pension assets, including a $102 million large-cap value equity mandate from the Toronto Transit Commission and $1 billion in Japanese pension assets.
Mr. Cosgrove pointed out that GEAM offers external defined contribution clients a choice of products beyond the internally managed strategies. The options are offered through its alliance program, whose managers include Pacific Investment Management Co., Newport Beach, Calif.. for its balanced fund; State Street Global Advisors, Boston, for its Standard & Poor's 500 stock index fund and growth and income fund; Nicholas-Applegate Capital Management, San Diego, for its high-yield fund; and Royce & Associates, New York, for its opportunity fund, a small-cap value strategy.
Most defined benefit clients hire GEAM for its in-house products, particularly its domestic large-cap value equity and emerging market equity mandates. A newer product, rolled out in October, is a domestic enhanced index fund, known as a broad research portfolio, which the GE pension fund has used successfully for the last five years. There is now $2 billion in this strategy, which is market neutral, in the GE Pension Trust. GEAM analysts pick the stocks in their sectors that they expect to outperform the S&P 500. The pension fund also has another $1 billion in an S&P 500 index strategy, but the remaining U.S. equities are actively managed.
Mr. Cosgrove said the early reception of the strategy has been good, as it has been introduced to consultants, and it has taken in $50 million so far. In recent years, GEAM has been bringing more strategies in house. As of Sept. 30, of $123.5 billion in total GEAM assets, only $12.6 billion, or 9.8%, were externally managed, but 17% of assets in the G.E. pension fund were externally managed. Among all strategies overseen by GEAM, 8.5% of $70.1 billion in U.S. equities were externally managed. Most of the externally managed U.S. equities are small-cap strategies, an area GEAM has not built up internally. In other GEAM strategies such as fixed income, only $149.2 million is externally managed out of a total $25 billion; in international equities, only $705 million of $14.1 billion is externally managed.
"Internal management is efficient and cheaper than using external managers if you can generate comparable performance over the long term," emphasized Mr. Myers.
GEAM is not trying to be all things to all people, he said. "We have taken our investment philosophy ... and have been selling it to GE employees and other clients. If they're looking for someone who forecasts interest rates or focuses on Internet funds, that's not us. If they're looking for a fundamental bottom-up research-driven stock selection manager of international and domestic equities, that's us."
Stock selection is a critical component of GEAM's domestic equities strategy. Gene Bolton, director of U.S. equities, said that after cutting back on technology last year, his group still was able to do well because of its careful stock selection, even during a year when stocks underperformed. "Year-to-date, our U.S. equities are 500 basis points ahead of the S&P 500," he said. He added that the equities team is now finding good values in non-technology companies, and is adding selectively to capital goods and pharmaceuticals. "We're also looking at technology companies such as Dell (Computer Corp.) and semiconductors, as they get to more reasonable valuations," he said.
Private equity thriving
The GE pension fund also has been doing well with its private equity program, Mr. Myers noted, particularly the venture capital unit. Three years ago it started an Internet incubator portfolio, investing $100 million in 26 companies. "We have more than doubled our original investment, with a nice 30% to 40% (internal rate of return). We did particularly well with Cobalt Network Inc. and I Village, Inc., investing in both of them early and exiting early." Cobalt went public and then was bought out by CISCO Systems Inc., after which GEAM exited. "In a portfolio like that some companies do well, some don't," said Mr. Myers, adding that four of the companies didn't make it. "Our approach is to get in early on the original investment and look to sell once a company goes public."
GEAM has cut back on real estate in recent years. It now represents 3.5% of assets in the G.E. pension fund -- the lowest it's been in 20 years -- and 2% of all GEAM assets. GEAM sold $2 billion in assets to real estate investment trusts in the last five years. "We're not buyers of REITs, so we took cash, not stock," Mr. Myers said. His view is that no new net space is needed now and that the market must be reaching its top in New York City because such trophy properties as 50 Rockefeller Center, the World Trade Center and the General Motors building are for sale.