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April 18, 2005 01:00 AM

GMAM executives satisfied with firm’s modest growth

GM’s asset management sub never meant to be profit center

Arleen Jacobius
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    NEW YORK — Rolling into its sixth year with only enough outside clients to fill a Blazer, General Motors Asset Management Corp. might look like a lemon. But GMAM's top executive says the firm never wanted more clients than a Chevy Express would hold.

    The investment management subsidiary of General Motors Corp. was not created to be a profit center, W. Allen Reed, president of GMAM, New York, said in an interview.

    "Building assets because we want to build a profitable business to provide equity value has never been our mission," Mr. Reed said. "From the beginning, we always understood our primary mission is to generate investment returns, which is important to (the automaker) and other clients. That's what we focus on."

    An industry pundit familiar with the creation of GMAM said the goal was to reduce GM's pension costs to zero. Mr. Reed said that wasn't the intention, although economies of scale reduce costs for all GMAM clients, including General Motors.

    Currently, 90% of its more than $150 billion under management comes from the pension funds of GM and its affiliates, including $91 billion in GM pension assets.

    GMAM also manages $10.2 billion in pension assets from former GM affiliate Delphi Corp., Troy, Mich., and $7.1 billion in pension assets from Xerox Corp., Stamford, Conn., which outsourced its pension assets to GMAM in 2001.

    GMAM also has seven pension clients investing in such GMAM strategies as real estate and private equity.

    By comparison, GE Asset Management Inc., Stamford, Conn., spun off from General Electric Co. in 1988, has 200 outside clients and $178 billion under management, said Jack Boyce, senior vice president of institutional investments. GE executives registered GE Asset Management as an investment adviser to attract and retain talent and to become a profitable area for GE.

    "We … knew our future success would be driven by the asset management organization," Mr. Boyce said.

    "In the late 1980s and early 1990s, we were a large pension plan with some third-party clients. Today, we are a better and better asset management firm with General Electric as one of its clients," Mr. Boyce said.

    Still, like GMAM, GE Investment Management's third-party business makes up only a small portion — $29 billion — of its assets under management.

    American Beacon Advisors Inc., formerly AMR Investment Services Inc., Fort Worth, Texas, also is considered a profit center for parent AMR Corp. Some 42% of its $36 billion in total assets come from the defined benefit and defined contribution plans of American Airlines, whose parent also is AMR Corp. Most of the remaining money was gathered through its family of no-load mutual funds, for which American Beacon serves as a manager of managers.

    Although its marketing program has been on hold for two years, GMAM is beginning to look for a few non-GM-related pension fund investors that have particular interest in its specialty asset classes.

    "We don't have a large marketing organization and don't plan to create one because we are principally in the business of investment management and generating investment returns," Mr. Reed said.

    "We have some new products now that fall into the specialized category that will be the focus of our marketing effort going forward."

    GMAM executives have had a couple of meetings with pension executives to show off their 2-year-old absolute-return strategy, he said. The firm registered its in-house hedge fund of funds, the GMAM Absolute Return Strategies Fund, with the Securities and Exchange Commission in 2003. But it could not market the fund until it developed a track record, said John Stevens, managing director of absolute-return strategies.

    That fund has $2 billion in assets from the pension funds of GM, Delphi and Xerox.

    GMAM put its new business development program on hold in 2003, Mr. Reed said. Executives marshaled company resources to invest more than $30 billion in cash coming from the parent. About $18.5 billion was GM's 2003 contribution to its pension plan; the remainder was the carmaker's investment in a special retiree health-care trust fund known as a voluntary employees' beneficiary association that GMAM also manages.

    GMAM executives altered the pension fund asset allocation in 2003, adjusting its risk profile by investing more assets in actively managed strategies and reducing market risk. They also created a new strategy, the "alpha program," for $15 billion of its 2003 contribution. Under that program, 40% is being invested in non-traditional investments including high-yield debt, emerging markets debt, REITs, private equity and arbitrage; 30% is in a conservative absolute-return strategy; and 30% in large portfolios given to a relatively small number of money managers of non-traditional investment strategies with full discretion and a mandate to produce alpha.

    Unique opportunity

    Mr. Reed said the extra cash produced a unique opportunity to grow the pension fund without disrupting the existing investment program or incurring transaction costs in exiting an investment.

    "We did not want to invest a lot in large-cap equities and quality bonds," he said. "We wanted to invest in markets where active management can add returns."

    The cash also seeded the new real estate and absolute-return investment strategies GMAM plans to market to outsiders. It also helped to start its private equity funds, now being marketed by its new joint venture with Performance Capital Management LLC, Greenwich, Conn. Performance Capital was formed by GMAM's private equity team; GMAM owns 49% of the firm (Pensions & Investments, March 21).

    Consultants say they have no way of judging GMAM's investment savvy because GMAM does not reveal returns.

    "GMAM is not really on our radar screen," said Howard Yata, managing director of Wilshire Associates Inc., Santa Monica, Calif. "They don't report and do not participate in our database."

    "I've been with Wilshire for 20 years and no one from GMAM has ever called on me," Mr. Yata said. "But it makes sense they would not go to Wilshire," because GMAM's manager-of-managers approach competes with consultants.

    By comparison, both GE Asset Management and AMR Investment Services call on Wilshire and participate in its database, he said.

    "GMAM is involved in outsourcing and total fund management and in a way, that's what we do," Mr. Yata said. "If you are a fund of funds or a fund of managers, why would you go to a consultant?"

    Mr. Reed acknowledges that GMAM's contact with the consulting community is limited.

    "We don't market to consultants,' Mr. Reed said. Instead, the investments that GMAM is marketing are meant to be sold directly to plan sponsors. GMAM's marketing emphasis is shifting toward areas where GMAM can add value, such as absolute-return, private equity and other non-core strategies."

    As for the future, Mr. Reed said, "we are always willing to discuss our funds with like-minded pension plan sponsors."

    "We have investment programs, not investment products."

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