John Myers, the former president and CEO of GE Asset Management who had worked for General Electric Co. since he completed a stint in the U.S. Navy during the Vietnam War, helped turn a corporate pension office into one of the largest institutional money managers in the world.
Twenty years and $192 billion in assets under management later after first taking on the CIO role, he's moving on to the next phase of his life. He officially retired from GE Asset at the beginning of this month.
Mr. Myers took over as GE Asset Management's CIO in 1985 — "When I finally found out what I wanted to be when I grew up at the age of 40" — and he never looked back.
GE Asset Management, which took on its first external clients in 1988, now runs more than $72 billion in external assets for clients around the world. That's in addition to managing General Electric's $53 billion defined benefit plan (to which the company hasn't had to make a contribution since 1987, despite paying out more than $2.5 billion a year). It also runs $54 billion in GE Insurance and $14 billion in proprietary GE employee mutual funds.
What prompted you to turn GE's pension operations into an external money manager? Our group reports directly to the CEO. We always viewed it as an operating business. But in the mid-1980s … we saw that our work force was aging. At the time, it was 1.5 active employees per every retiree; we could see … that there were going to be more retirees than employees at some point. The pension was for the U.S. (employees only), and our employee base was growing internationally. We concluded that we were not going to grow assets as much as we would like to keep this organization vibrant and exciting. Without growth, you're not going to attract very good people. We felt we could take the GE model (of managing pension assets) and export that — that was the genesis. ...
What enabled you to actually execute this model? Our culture … wasn't looking into the past. That helped us, because in the money management industry people look backwards too much. … It's difficult to sell something new or to be a contrarian. But you have to take risks and you have to think different. From an investment perspective, our pension fund was the first to ever invest in real estate; we were one of the first to start investing in private equity and international equity.
What development in the overall investment world do you think has been most significant? Asset allocation is far more understood and much more of a disciplined process than it was 20 years ago. Pension funds, in their infancy, were managed by trust departments. They were predominantly invested in bonds. You have a long-term liability, so the idea was to use an asset that you could closely approximate cash flows, and then invest in it. Then in the '70s and '80s, equities came in vogue. People realized that for long-term liabilities, equities were the best asset; it's going to outperform bonds over the long run. Bonds are not always a perfect match for liabilities. …
The liability depends on life expectancy, which was increasing at the time, and the salary of the employee. You have to make a lot of assumptions and bonds were not necessarily the best investment for this.
What about the liability-led investing and liability matching theories now? I think it's the dumbest idea I have ever heard. I just believe that a diversified, balanced, equity-biased, long-term strategic asset mix is the best way to fund liabilities long-term.
I think what's happened now is that a lot of academics and actuaries have come up with these theoretical ideas of liability matching and they are going back 50 years. You want to be moving forward.
Our pension fund system in the U.S., if you take out the airlines and autos, is in pretty good shape. Now that interest rates are approaching normal levels again, all of a sudden those liabilities are lower. Here you had Wall Street trying to create this panic over the last couple of years that you've got to immunize your liabilities at historic levels of interest rates. Now people who bought those at 4% interest rates are pretty sorry. We had just gone through the worst three years in the financial markets since the 1930s in 2000-2002. In 2003 the Wall Street community is saying, "We need to change the investment model," because they are looking strictly at what happened over the three years prior. I think it is doing a disservice to the long-term future of the defined benefit plan.
So what's the risk of moving to such an investment model? I think there is a risk that it could ruin the DB business model. As pension reform and accounting is being discussed, a lot of companies are saying DB plans don't work under new rules. This is going to hurt the country and the economy over the long term if it continues because all it is going to do is take the burden away from a funded DB model, which has been proven to generate higher returns, and throw it on the backs of some other less-efficient models, or throw it on the backs of the government, which is then going to come back to the taxpayers.
The problems of the airlines and the autos couldn't be solved by any model. Warren Buffett couldn't come up with an investment model that would deliver the promises made by many of the airlines and autos. They were overpromised and didn't face the reality of what could be delivered. Now the investment models are being challenged when it was never the investment models that were the problem.
What about the move to DC from DB? Have companies made a mistake? I don't think it's necessarily a mistake for the company. I think it's a mistake for the employee. My belief is that a retirement plan should have three legs — defined benefit, defined contribution and Social Security. A normal GE employee is now retiring at close to 100% of their last year's pay with a combination of those three factors. I don't know why other companies can't have the same model if they have the patience and discipline to do it.
Why didn't other companies follow your approach? I think we were a first-mover in a lot of areas that weren't necessarily great performers at first. … We started hedge funds in 1991. Actually, the years we invested in hedge funds, they weren't outperforming the S&P 500 but they were giving us the good, solid mid-teen returns that we were looking for. But when the markets turned downward in 2000-2002, that's when they really came into play. And we didn't get into it for downside protection necessarily, we got into it because it was a diversified play and it was more absolute-return driven than relative-return driven.
What do you think of the shift to DC? Defined contribution has its benefits — it's portable and they (participants) can invest in whatever asset classes they like. But the returns have been substantially lower than DB for two reasons: the fees are much higher; and DB plans are run by 24/7 investment professionals. DC plans are selected by individuals whose primary job isn't in the investment business. Hopefully that will evolve and companies will guide and assist employees more.
If you could do one thing over, what would it be? I would have built out the fixed-income research earlier. In 1990, we really didn't have our own internal research groups. We had a couple of portfolio managers in equity and fixed income. We built our own internal capabilities over the last 13 years — 25 analysts on fixed income, built out both U.S. and international research capabilities, and then private equity and real estate. This made us less reliant on Wall Street.
