Technology stocks kept soaring, and General Electric Co.'s board was concerned. Some of the 17 directors wanted to know why the man who looked after GE’s multibillion-dollar pension fund hadn’t enthusiastically hopped onto the tech stock bandwagon. So on March 10, 2000, John Myers, CEO of GE Asset Management, found himself facing a tough crowd in GE’s Fairfield, Connecticut, boardroom, armed with only a PowerPoint slide show.
Myers chose Cisco Systems as defense exhibit A. Why didn’t GEAM own that stock? he asked. Well, at $132 a share, Cisco had a triple-digit price-to-earnings ratio of 114. What this implied, Myers said, was t hat sometime in the future, Cisco would be earning $100 billion a year, 50 times what it made in 1999.
Assuming such phenomenal growth was somehow possible, he continued, was it reasonable to suppose that the telecommunications equipment supplier’s market value would someday be equal to one quarter of the U.S.'s GDP?
Myers calmly made other salient points to justify his aversion to high-flying tech companies, then concluded his presentation -- and was greeted by dead silence. GE’s CEO at the time, the fabled Jack Welch, may have looked a little skeptical. Board member Scott McNeely, CEO of Sun Microsystems, was no doubt annoyed. Later that day the tech-stock-laden Nasdaq index hit 5,408, representing a 25 percent gain for just the first few months of the year. In three years the index had soared some 400 percent.
But as it happened, 5,408 was the Nasdaq’s peak. Within a month of Myers’s presentation, the index had plunged 30 percent. By contrast, the GE Pension Trust’s biggest equity portfolio has outperformed the Standard & Poor’s 500 index by 4 percentage points on average every year since the tech bubble burst and is on track to do so again this year.
Myers doesn’t practice market timing, but he does keep his ear to the ground. “Working for GE opens up doors,” he explains. “In this business it’s okay to steal other people’s great ideas, and I do talk to everybody, but eventually I have to formulate my own opinions on things. The buck stops with me.” Myers’s ad hoc adviser list is eclectic. Among those he regularly consults are economists Lawrence Kudlow and Arthur Laffer, for their generally bullish perspective on stocks; economist Gary Schilling, for his more bearish take; University of Chicago Graduate School of Business professor Marvin Zonis, for his geopolitical insights into the Middle East; moguls Donald Trump and Peter Ueberroth, for their deal sense; and hedge fund masters Leon Cooperman and Arthur Samberg, for their market savvy.
Indeed, it was Samberg, head of Pequot Capital Management, who alerted Myers that many tech stocks were becoming dangerously overvalued. So in 1998 and throughout 1999, GEAM whittled and then hacked away at the pension fund’s technology weighting; Myers sold off $840 million of $1.5 billion in technology investments in 1999 alone. By that point most tech stocks were becoming absurdly overvalued by GEAM’s own rigorous growth-at-a-reasonable-price standard.
Myers’s methods -- part traditional, disciplined investing and part informal market reporting -- may seem unorthodox, but they certainly work. GE Pension Trust, the company’s defined benefit plan, continues to set an industry standard, as does Myers, who has emerged as one of America’s most influential pension managers.
At a time when so many corporations are grappling with underfunded pension plans, GE’s is actually overfunded: Assets exceed future liabilities on a present-value reckoning by more than $5 billion. GE hasn’t had to contribute a nickel to the trust since 1986, despite paying out $27 billion in benefits since then. Indeed, in 1999, 16 percent of GE’s operating earnings, or $1.4 billion, came from surplus earnings on its pension investments.
“For a major corporation our size to not have to worry about making pension contributions is like an ace in the hole right now,” GE CEO Jeffrey Immelt tells Institutional Investor . “It’s one less thing I have to worry about. Do I get involved in managing the asset management business the way I would, say, our turbine business? No. I leave it entirely to Myers and his staff.”
Adds longtime GE board member Kenneth Langone, a founder of Home Depot: “Myers is the rare guy in money management with a keen investment mind and strong leadership abilities. What he has done with asset management is a classic example of GE raising the bar. He inherited a world-class operation, and he made it better.” Former Olympics coordinator and Major League Baseball Commissioner Ueberroth says simply, “Myers is probably the best at what he does.”
How has he managed to pull off standout performance year after year at GE Pension Trust? A huge advantage for the trust -- and one which other large pension plans are only beginning to figure out -- is Myers’s commitment to making a sizable allocation to hedge funds. About 3.5 percent of the pension trust -- roughly $1.4 billion -- is distributed among 14 hedge funds run by 11 different managers. Several, including Omega Advisors, handle more than $100 million. The managers include Andor Capital Management; Angelo, Gordon & Co.; Blackstone Group; Palisade Capital Management; Pequot; and Straus Asset Management. Hedge fund investments have helped generate an extra 50 basis points of alpha per year for the pension fund over the past decade, Myers estimates.
“When you get down to the basics, we have a set of expectations for our pension fund,” he says. “We aim to achieve an 8.5 percent return. From our traditional investments, stocks and bonds, we assume we should be able to get about 8 percent. The alternative investments put us over the top.”
Myers functions as much more than GE’s de facto chief pension officer. He is the steward of some $178 billion in total assets at GEAM, where his formal title is president and CEO. In addition to the GE Pension Trust, Myers oversees $99 billion for GE Insurance Cos., $6 billion for the Elfun Funds (internal mutual funds for GE employees to supplement their pensions) and $32 billion for external clients. Some $16 billion, net, has flowed in from outside clients in just the past four years.
Although GEAM has been aggressively ramping up this business, officials contend that it remains focused on its primary goal. “We are here for one reason and one reason only,” explains Michael Cosgrove, president of GEAM Services, the firm’s sales and distribution arm, “and that is to make sure retirees have money in their pocket. Period.”
Myers, who acts as CIO as well as CEO for the 600-employee GEAM, has five sector CIOs under him: David Carlson for U.S. equity, Ralph Layman for international equity, Robert MacDougall for fixed income, Donald Torey for alternatives and William Wright for insurancefixed income. Each oversees several portfolio managers and analysts.
Myers, who was at GEAM for 11 years before becoming CEO in 1997, has consistently been a pioneer in pension management. In the mid-1980s he helped aggressively expand GE’s real estate allocation at a time when property was still virgin territory for most conventional pension funds. Of course, the real estate bubble proceeded to pop in the early 1990s. “I paid my stupid tax early,” Myers wryly admits. He nonetheless views that experience as a lesson in working through duress.
Today real estate constitutes 7 percent of the trust’s portfolio, and since 1997 the allocation has returned about 10 percent a year on an average annualized basis. Some of the more notable real estate deals in which Myers has had a hand include the merger of Doubletree Hotels and Promus Hotels and the combined hotel chain’s subsequent sale to Hilton Hotel Corp.; the purchase of the Pebble Beach golf club and resort by a consortium that included GEAM, Ueberroth, golfer Arnold Palmer and actor and director Clint Eastwood; and the building of the Trump International Hotel and Tower at New York City’s Columbus Circle.
In the early 1980s, GE was one of the first ERISA plans to venture into international equity. So rarefied were foreign stock investments among pension plans at the time that consulting firm Greenwich Associates’ annual survey of pension funds didn’t even report allocations to international equity until 1986. That year the typical fund invested just 3 percent of its assets abroad; GEAM was by then allocating 10 percent of its money to foreign markets (a proportion that the average fund wouldn’t reach for another decade). GE Pension Trust’s overseas emphasis was entirely consistent, however, with GE’s corporate strategy under Welch and his No. 2, Paolo Fresco, of aggressively pursuing investment opportunities of all kinds outside the U.S.
GEAM began its international explorations by outsourcing management of foreign stocks to established firms that included Schroders Investment Management America and T. Rowe Price Associates. Later GEAM would significantly build up its own international management capability under Layman, a Templeton International alum, who was hired in 1990 by Dale Frey, Myers’s predecessor as head of GE’s asset management arm.
Myers himself worked closely with Layman in shaping the international investment program and attributes its success today to “access to GE’s global talent and business knowledge as a unique tool that adds to our research-driven process.” GEAM’s internal international portfolio managers, based mostly in Stamford but also in Canada, the U.K. and Japan, can plug into the many GE subsidiaries around the world to gain a bird’s-eye view of global trends in technology, aerospace and manufacturing.
Pushing into yet more unexplored territory, Myers started investing GE pension money in hedge funds almost a dozen years ago. At the time, he was head of GEAM’s private equity and real estate team, and hedge funds were regarded as wildly exotic for institutional investors. His long-standing ties to such notable hedge fund managers as Angelo Gordon’s John Angelo, Omega’s Cooperman and Pequot’s Samberg have allowed him to forge friendships with and gain access to some of the smartest market minds.
Like most hedge fund investors, however, Myers has also had to develop patience. Confides Cooperman, “I had a couple of bad years there [in 2001 and 2002], and instead of crapping all over me, he had the sense and courage to double down.” This year through September 30, Omega was up 46 percent. On the other hand, Samberg’s Pequot, which headed into 2003 with a 19 percent average annual return since its 1986 inception, has been struggling.
“So Art is down, but Cooperman is knocking the cover off the ball; that’s the way it goes,” Myers says. “Look, I need to know what hedge funds are thinking and doing. Pension plans own stocks. Hedge funds rent stocks. Even though hedge funds are only 10 percent of the money in the market, they are 50 to 60 percent of the trading. So while they may have a different agenda, I need to pay attention.”
Accordingly, Myers asks a lot of questions. “I want to know what portfolio managers believe and why they believe it,” he says. “If a manager has a lot of good news, fine, but I’ll press for worst-case scenarios.” One well-known hedge fund manager who is a friend of Myers’s recalls the GEAM chief telling him, “By the time I’m done looking at a hedge fund manager, I want to know all of his kids’ names.” GEAM’s U.S. equity CIO Carlson says of his boss, “If we have a question about management, you just know that John knows the guy, or three guys that know the guy, well.” Money manager John Levin of John A. Levin & Co. suggests that “Myers makes you feel comfortable, so it is easy to share information with him.”
A true GE man, Myers is a stickler for progress reports. “It’s the only way to stay on course,” he says. Although some pension officers meet with their money managers once or twice a year, Myers huddles with his outside managers -- all 40-plus of them -- once a quarter. “When he asks questions he isn’t trying to show you how smart he is,” Samberg says. “Myers integrates the facts with the person who’s delivering them. He reads people extremely well.”
At a recent meeting at GEAM’s Stamford headquarters, Myers wanted to know why Angelo Gordon, which manages a $200 million multidiscipline alternative portfolio for the GE Pension Trust, was 65 percent into distressed securities. Recalls Angelo: “I told him that we felt it was the best-performing asset class right now. His response was, ‘Well, if it’s the place to be, why aren’t you 100 percent distressed?’ I tried to say that we were just being prudent, and he actually pushed us to be more aggressive.”
In early 1992, Myers braved the scorn of skeptics to become the first institutional client of Cooperman’s Omega, investing nearly $50 million of GE’s pension funds with the long-short hedge fund. Myers and thenGEAM CEO Frey knew Cooperman well from, among other things, private dinners with executives from Goldman, Sachs & Co.; Cooperman had been chief of the firm’s asset management division until he quit to start his fund in late 1991. Cooperman’s intensely bottom-up, stock-by-stock style was a perfect fit with GEAM’s own philosophy. As Myers puts it, “We felt he was a horse worth betting on.”
Hedge funds represented a great way to add alpha without taking on more risk, and Myers kept his eyes open for other opportunities. Frey, a sophisticated investor in his own right, was supportive. Early in 1993, Myers invested an additional $50 million or so in hedge funds, this time with Angelo Gordon, which ran a multistrategy fund as well as its distressed-debt fund. Later that same year he invested a similar amount with Julian Robertson’s Tiger Management. Ultimately, Myers relieved Tiger of its duties for GE when the hedge fund switched from the bottom-up, long-short format that he was comfortable with to global macro. Besides, Robertson didn’t much like sharing information, and Myers says he won’t invest in anything he doesn’t understand completely.
“The goal of our hedge fund portfolio is to contribute consistent returns above and beyond what we can achieve investing in public markets over the long term,” says Myers. By that standard, hedge funds have more than fulfilled their mission: GEAM calculates that over the past decade the pension trust’s hedge fund portfolio has produced about 4 percentage points of average annual outperformance vis-à-vis the S&P 500.
The trust’s hedge fund allocation is carefully thought out (see box). Myers indicates some basic criteria that invariably come into play: “We look for transparency of process, proven long-term track record and alignment of interest, meaning we like to see substantial personal capital invested alongside us.”
MYERS WAS BORN IN RICHMOND HILL IN THE New York City borough of Queens in 1945, the elder of two boys. His father, Jack, worked two full-time jobs, as a deliveryman for Fisher Bread in the mornings, starting at 4:00 a.m., and as a salesman for Times Square Stores, a department store, in the afternoons. Many evenings he also scooped out a little extra income at the local ice cream parlor. Myers’s mother, Edna, took care of the home.
Myers inherited his dad’s work ethic. Growing up, he had a job after school and on weekends as a soda jerk at Al’s Optimo Cigars on Liberty Avenue, across from the A train subway entrance. In his free time Myers played basketball with neighborhood kids.
Enrolling at Staten Island’s Wagner College in 1963, Myers was a scrawny but scrappy 5-foot-8 and 140 pounds. (He would experience a six-inch growth spurt in college that would earn him the nickname “Spider.”) He battled his way on to the freshman basketball squad as a backup guard, but to help pay his tuition he had to quit the team to take a job as a locker-room attendant and assistant to Wagner’s athletic trainer.
(Now, every Tuesday night Myers rents out the gym at the State University of New York Purchase College’s suburban New York campus for a pickup basketball game. Over the years he has played hoops with a varied bunch: Phil McConkey, the former New York Giants wide receiver who’s now head of equity sales for block-trading firm GGET; William Shanahan, the longtime Colgate-Palmolive president; and Pequot’s Samberg are just a few of his court pals. “Art uses those sharp elbows down low,” Myers lets slip. What most distinguishes the 6-foot-2 Myers’s game is that even at age 58 he’s a zealous rebounder.)
In the summers during college, Myers unloaded United Parcel Service trucks during the day and mixed chemicals at night at a Pfizer plant in the Bedford-Stuyvesant section of Brooklyn.
Throughout school Myers excelled at math, and he decided to make it his major at Wagner without any particular career in mind. By his junior year, however, the Vietnam War was escalating. Initially, he resigned himself to being drafted, but on the advice of a family friend, he took preemptive military action: He enlisted in the navy, spending the summer of 1966 at Officer Candidate School and, after graduating from Wagner the following year, attending guided missile school in Dam Neck, Virginia.
In March 1968 the navy shipped Ensign Myers to the Gulf of Tonkin aboard the USS Long Beach , a nuclear-powered cruiser. He spent two yearlong tours as a missile officer. In the spring of 1968, the Long Beach fired a Talos missile that brought down a MiG-21 in what is considered the first-ever ship-to-air missile kill.
“My experience in Vietnam was the first time I’d ever been anywhere outside the U.S.,” Myers says. “I came home with a better appreciation for how good we have it here in America.” (His 25-year-old son, David, a U.S. Marine Corps intelligence officer, just returned from Iraq. Myers and his spouse of 30 years, Jody -- he calls her his trophy wife -- have four kids, ranging in age from 17 to 27.)
Back home in Queens, Myers was eager to get started on his career, though he wasn’t quite sure what that should be. A fellow officer on the Long Beach had told him of GE’s financial management program, and Myers had applied. In the meantime, he took a job as a substitute math teacher in Canarsie, Brooklyn. A month after he started teaching, GE called to say he had won a slot.
Myers’s first job as a GE trainee (at $8,000 a year) was “collections specialist": He had to reconcile discrepancies between a general ledger and a receivables ledger. Armed with a primitive, typewriter-size calculator called a comptometer, Myers dutifully toiled away. In time, he took a position that nobody else particularly wanted -- “specialist of international investments.” GE had a slew of investments in overseas companies, including Toshiba in Japan, West Germany’s AEG Telefunken and power company Iberduero in Spain; the specialist was mainly responsible for tracking dividend checks.
In classic GE fashion, Myers made this clerical assignment into a genuine opportunity. “I turned the job from something that was part historian, part accountant, into a profit center by exploring ways of monetizing those investments,” he says. Rather than just collecting and salting away dividends that were in the guise of stock warrants, Myers, with his supervisors’ blessing, started selling large blocks of the warrants for cash by cold-calling U.S. investment bankers, thereby augmenting GE’s return from its foreign investments. At one point he arranged through his Wall Street contacts to begin selling GE’s 10 percent stake in Toshiba.
Myers went on to stints at GE subsidiaries in Frankfurt and Milan (where he impressed GE Italy chief Fresco, who would become Welch’s deputy). In 1982, as deputy treasurer of GE, Myers got his first crack at running an investment portfolio. Several years earlier the company had bought Utah International, a coal, oil and gas business, as an inflation hedge. When Welch decided to sell it, Myers was given the task of coming up with an investment strategy for the proceeds -- $2.5 billion in cash -- while they awaited deployment.
Working with Edward Malone, who ran the pension trust, Myers fashioned a diversified portfolio of long-term Treasury bonds, municipal bonds, adjustable-rate preferred stock, dividend recapture programs and interest rate swaps (commonplace enough today but then a largely untested derivative) to capitalize on falling interest rates. The portfolio generated double-digit returns over the next several years and was ultimately sold to help finance GE’s purchase of RCA in 1986. “It was a great education in financial markets,” Myers says.
When his boss of three years, then-treasurer Frey, was named head of what was called the Pension Trust in 1984, Myers soon found himself heavily recruited to go work for him. “I wanted to bring in bright financial people who had come up through the GE system,” recalls Frey. Myers, who had developed a zest for money management, signed on as the senior person overseeing fixed income, real estate and private equity.
GE had long been a pioneer in pensions. In 1912, some three decades after Thomas Edison founded the company’s precursor, Edison Electric Light Co., the aging inventor started one of the first corporate plans (for senior executives only). In the 1920s employees at a GE lightbulb factory in Cleveland formed a rudimentary mutual fund that eventually spawned the Elfun Funds. GE’s chief pension officer in the 1950s and ‘60s, Ivan (Shorty) Mahanna, famously bought shares of a fledgling technology company called Xerox Corp. for 19 cents a share and made a killing. Malone, Frey’s predecessor, had made a name for himself as a skilled institutional investor.
Well aware of this history, Frey, closely aided by Myers, transformed a pension trust unit that had grown a little complacent into a groundbreaking organization known not only for running GE’s and outside investors’ money but also for exploring alternative investments -- like hedge funds.
This has delivered benefits beyond just alpha. Frey asserted that managing outside money was crucial if GEAM wanted to attract the investment talent needed to run its own assets internally. GEAM today manages a huge chunk of its pension money in-house. Of the trust’s $17 billion in U.S. equity, 80 percent is run internally. Most of that goes into a multistyle equity portfolio that relies on a mix of growth-at-a-reasonable-price approach, value and in-house analysts’ best picks.
For its externally managed accounts, GE Pension Trust depends not only on hedge funds, of course, but also on ten traditional U.S. equity managers, which run a combined $4 billion. They comprise three large-cap managers (Fayez Sarofim & Co., J.P. Morgan Investment Management and John A. Levin), two midcap managers (Ariel Capital Management and New Amsterdam Partners) and five small-cap managers (First Pacific Advisors, Palisade Capital, Sanford C. Bernstein & Co., Warburg Pincus and Wells Capital Management). GEAM also has relationships with four international equity managers, a handful of fixed-income players and several real estate firms. Among GEAM’s private equity managers are Blackstone, Forstman Little and Warburg Pincus.
Despite its in-house fund management expertise, GEAM, as a fiduciary, still sees the need to hire external managers to give it access to particular markets or to provide special skills (such as the hedge funds) or to augment internal investment strategies. And in choosing outside managers, Myers has proved to have an eye for talent.
When he arrived at GEAM in 1986, the fixed-income group was run by one person, and its strategy consisted primarily of investing in long Treasuries. Pursuing performance meant betting on interest rates. Frey assigned Myers, who was already running private equity and real estate, to revamp fixed income. Myers brought in help, luring MacDougall from GE’s treasury department, where he managed $2 billion in securities, to lead an effort to create a more diversified, lower-risk strategy. Together Myers and MacDougall, now CIO for fixed income, hired a handful of external managers. One was an upstart firm called BlackRock that had just been founded by a young mortgage-backed-securities whiz who’d quit First Boston -- Laurence Fink.
Fink and his crew had developed the best buy-side portfolio analytics on the Street. But it was crucial to BlackRock’s success for them to land a big-name client. What could be more impressive than General Electric? “Talk about a marriage made in heaven!” says Myers. “As important as getting our account was to them, it was just as important for us to get access to their analytics.” BlackRock, of course, has gone on to manage nearly $300 billion today.
As always, Myers remains on the lookout for fresh opportunities. Sources say he now has his sights on “activist” hedge funds, which pressure managers and boards to make their companies perform better. Myers denies the rumor. But as a 58-year-old rebounder who once launched missiles at fighter jets -- and who works for GE -- Myers ought to appreciate the positive effects of pressure.
