In 1999 and early 2000, as U.S. stocks set record returns and share prices soared, Allen Reed, MBA 1976, had a problem. As CEO and president of General Motors Investment Management Corporation (GMIMCo), he had money to invest a lot of it - but he felt challenged. To his experienced eye, everything looked overpriced, and he had difficulty in locating value. In contrast, in the current declining market, Reed's job has gotten easier. "Frankly, my job is more interesting when the market is going down because there are more opportunities," he said.
For Reed, those opportunities cover a wide portfolio of investments in domestic and foreign markets that includes stocks, bonds, real estate and commodities such as gas and oil. With more than $100 billion in assets and 120 employees, GMIMCo boasts capabilities in virtually every area of fund management, managing pension and 401K plans for General Motors and a variety of other clients as well as offering a wide range of investment services. Working from a large investment platform that allows it to mix and match offerings, GMIMCo customizes allocations to meet companies' individual goals with a common underlying strategy. Simply put, that strategy is to provide the highest rate of return at the lowest risk.
"We are constantly moving from higher risk to better value," Reed said. "We invest for the long term, buying assets at good value that in the long run will give us a good return. We might limit the investment if the risk is too great - if, for example, we perceive the fundamentals are changing or the initial price is too high. Our crystal ball is not any better than anyone else's, and we don't make investments based on forecasts. That being said, we do think we can recognize value and risk. Consistency is our aim."
Under Reed's tenure as CEO at GMIMCo, the company's pension fund has seen a stability that was lacking in earlier years when both positive and negative returns routinely spiked its progress. From mid-1995, the fund has accumulated steady above-market returns with only a few downturns. Many business writers and financial analysts directly credit Reed for the success through his moves to discourage managers from undue risk taking and rewarding those that performed respectably above benchmark goals. He has transformed GMIMCo from one of America's most under-funded plans in 1994 to an investment company so successful today that it offers its services to other plan sponsors.
No free lunch
Although he tries to minimize risks for investors, Reed knows that some risk is inherent in any business that seeks higher returns. "There is no free lunch," he said. "If you invest for returns that are higher, you're going to have to take a risk. Sometimes, you have to be willing to go where other people won't." Reed defines his approach as contrarian, one that embraces investments that others shun.
In the current high-yield bond market, for example, GMIMCo is interested in below-investment-grade bonds, issued by corporations with a lot of credit risk. "People tend to love or hate the bond market. It goes from very depressed to very overvalued," Reed said. "Now we feel it is an attractive place to invest. In the current period, we will be buyers when people are feeling like they don't want to take a risk."
GMIMCo is also a player in emerging markets where high risks are balanced by great opportunities. These investments are not easy to manage, according to Reed, requiring extra attention where governments and even the business environment itself is unstable. However, with expert people in the field continuously analyzing and monitoring the issues in these developing markets, Reed feels they are one more essential component in a diversified portfolio.
Diversification is the key component to GMIMCo's strategy. Each of the different types of assets directed by the fund managers has its own cyclical value. To stay on top of those many areas, Reed said he has to "know a little something about a lot of things. More importantly, you've got to know where to find the experts on what you need to know." He's spent 25 years in the business of fund management compiling a "book of relationships" made up of experts in various fields who he can either formally retain as asset managers or consult as informal advisers.
How to use the information from those experts to create the highest return at the lowest risk is perhaps the biggest challenge of Reed's job. "This business lends itself to sophisticated analysis," he said. "There is no shortage of models out there. The only thing we know for sure is that none of these things works all the time. Experience pays off. We try to identify good investment processes and hope that they deliver, but we diversify our risks in case they don't. Judgment is an extremely important part of making investments."
Engineering a career
Reed didn't start his career on the financial track. This Nashville native once considered coaching football, and later at Auburn University he completed an engineering degree. However, an interest in pursuing business began to grow while completing a tour of duty in the U.S. Navy after graduation. "I was floating in a boat off the coast of Vietnam, and I had a lot of free time for reading," Reed said. During service, he subscribed to many financial periodicals, and inspired by his growing knowledge, he enrolled in the MBA program at Georgia State when he completed his military obligation.
At the time, the field of quantitative analysis and decision making was just emerging. Reed benefited from an early exposure to the new theories he was encountering in classes. "I had a good grasp of mathematics from my engineering background, but I didn't understand how to apply those skills to the real world," Reed said. "I think the most important thing I learned during my graduate work was how to use these sophisticated math models to assist in financial decision making."
Reed also got a break at Delta, where he was working days while attending school at night. He landed a position in Delta's treasury department, and based on his graduate studies, he began to shape the company's pension fund investments and eventually advanced to the role of assistant treasurer. "I was lucky because I got into institutional asset management when it was in the early stages of growth," Reed said. "Back then at Delta, we had three people who managed those assets, and I was fortunate to learn the business from the ground up."
From Delta, Reed moved to the Atlanta firm of Allen & Associates, where he worked as an investment buyer, and then on to Hughes Electronics in Los Angeles, where he ran the pension plan and was named treasurer. In 1994, he found himself at the head of a list of candidates to take over GMIMCo. He has transformed the company by hand-picking and monitoring investment managers, balancing its assets and liabilities, expanding its defined-contribution plan offerings and packaging its investment services for other plans, all in a span of seven years.
Reed admits the job has its share of stress. "The business is dynamic. You never get comfortable. There is always something happening in the world that is affecting what we are doing." He spends most of his time trying to stay abreast of those conditions, processing an overabundance of information from business periodicals, the Internet, meetings with clients or visits to unfamiliar markets. As much as one-half of his time is spent traveling.
Still, Reed can't imagine doing anything else. "This is an interesting, stimulating and challenging business. I'm always learning something new, and hopefully that is enhancing all that I know and the decisions I make. I don't think I would enjoy anything else as much."
- Rhonda Mullen
