W. Allen Reed, president and chief executive officer of General Motors Investment Management Corp., New York, since 1994, has spent most of his career as a plan sponsor. But he also became a money manager about two years ago when General Motors Asset Management was formed to seek assets of outside clients. Before joining GM, Mr. Reed was vice president and treasurer at Hughes Electronics, a subsidiary of General Motors, and president of Hughes Investment Management Co. He has a BA from the Auburn University School of Engineering and an MBA from Georgia State University. Mr. Reed started in the pension business at the Delta Airlines Inc. pension fund in 1974. In an interview at GMAM's New York headquarters shortly before GM's second-quarter earnings announcement generated news stories about its pension liability, Mr. Reed talked to reporter Ricki Fulman about what it's like to wear the dual hats of plan sponsor and money manager.
Q Do you view yourself as a money manager or a pension fund executive?
A I view myself as both. The GM pension trust has historically been a buyer and user of asset management services. Now that GMAM is a provider, we have the benefit of understanding those markets and what's important to investors. We're learning more about the subtleties of marketing and distribution channels. We are finding there are lots of distribution channels and more strategic relationships for marketing investment products, as well as a lot of territory to cover. We have had to move up the learning curve.
Q How did you do that?
A We had to determine where we could distinguish ourselves; identify where the market was for our services; and determine how to access those potential buyers. The first two are pretty straightforward, but the third has been more complex.
Q Are you offering hedge funds as a product?
A We funded some absolute return strategies in mid-2001 (in the pension fund), but it's too early for us to offer them for third-party participation. When we do something new, we test-drive it first. We're putting together a narrow subset of hedge funds, designed to be market neutral, relatively low risk, with targeted rates of returns from the high single digits to the low double digits. We're building a diversified portfolio, which at this point is a very, very small percentage of total assets.
Q What do you personally do in the role of money manager?
A I'm spending some of my time in the marketing and client service area. Myra (Drucker, chief investment officer at GMAM) is the lead on outsourcing for both areas. But I'm very involved, meeting with fiduciaries on committees as I did before.
Q What's the main thing you have had to learn as a money manager, other than gaining access?
A To be more efficient in building a client service model. As plan sponsors, we tend to like a lot of detail. It can be hard to convey that level of detail to clients. If they want to have a two-hour meeting with us, to get all the important information, they may not want a 100-page loose-leaf notebook on a strategy. So the question becomes, how can we deliver a lot of important information in a concise manner to organizations that don't have the depth to wade through so much material. We're spending the time developing client service for such plans. The material has to be timely as well as concise. And to be timely involves getting information from others such as banks and custodians, so we have to orchestrate that. It's one of the challenges of the asset management business.
Q Are you making changes to the General Motors pension fund in light of the poor markets?
A The percentage of return that will come from active management will have to be substantially more than it was in the 1990s. In an environment where returns may only be in the 8% to 9% range, 100 basis points earned from active management becomes much more important than it was with 14%-plus returns. All you needed then was an S&P 500 index fund. So we're looking at ways to increase our exposure to active management across the board, particularly in international equities, emerging markets, high-yield bonds, small-cap equities. We could increase these allocations or change their character. In our domestic equity program, we're increasing the focus on the midcap area. We will have five or six midcap managers using different styles in the program.
Q What interests you most about finance and investing?
A It's a business that's intellectually challenging. There is no right or wrong way of doing things. What works today doesn't work tomorrow. So you need to decide what your fundamental beliefs are and how to execute them in a world that has a high degree of uncertainty.
Q What are your beliefs about investing?
A Mine have evolved, but one fundamental issue holds true: The return on capital is a function of the demand for capital. Demand tends to meet supply, so I look for areas where there is a demand for capital and where people don't want to make those investments.
This has led to a contrarian approach. In running a large fund, it's the only way to make meaningful investment returns.
One of the best examples for me has been high-yield bonds. I made the first commitment to those while at the Delta Airlines pension fund in 1979, when there were only three investment firms with institutional-quality high-yield programs. There was also a lot of academic work being done on these then. I met with a guy named Mike Milken, who seemed to know a lot about these early in his years at Drexel. In the early '90s, as a result of the real estate bust and the recession, there was a huge buying opportunity in these bonds. The (issuers') companies weren't investment grade, but they were viable businesses that weren't going to go bankrupt. So we bought them and got equity-like returns on them, and contractual obligations from the issuers, unlike common stock. The key to investing in these bonds is to invest with people who understand them. There are still just a few who are really good at it, who can discriminate between truly bad credit and those that look bad.
Q What do you do to relax?
A I took up golf four years ago, and that's a challenge. And I travel with my wife. We go to different places, or to our home in Charleston, S.C., which is on a golf course and beach, where we can go salt water and shallow water fishing.
