By Charles Skorina
We’re retained by the boards of institutional money managers to find chief investment officers and other senior people, so we usually track the pay and performance of individual executives. But, in this article we broaden our focus to the investment performance of the largest U.S. corporate pensions and compare them to U.S. and Canadian non-profit funds. The results are revealing and, in some cases, surprising.
One reason we did this study was to salve our own curiosity about the relative performance of the largest corporate pensions.
The big endowments like Harvard and Yale announce their annual investment returns with a flurry of press releases. And, when the big public pensions post bad numbers there are rumbles in the legislatures and letters to the editors.
The corporate pensions, however, rarely publish explicit percentage rates of return. The information is there implicitly, of course, in the bowels of their annual reports. But the financial press is usually interested only in how much money will have to be diverted from current earnings to keep the pensions funded, information which moves the markets and affects the stock price. But required annual contributions are also driven by actuarial and economic factors; investment returns are only a piece of that puzzle.
Besides, when a big public pension stumbles, everyone knows that it’s the taxpayers who are on the hook, sooner or later. But, if the GE pension fund is underperforming, and their profits consequently pinched by a few cents per share to make up the difference, the world in general doesn’t take much notice.
So, when we dug out the numbers, we were as surprised as anyone at how the corporate pensions stacked up against other comparable investors.
What we know about Ford Motor Company is that they make cars and that, unlike their Detroit peers, they didn’t quite go bankrupt in 2008. They hired a guy from Boeing to run the company, and he seems to be doing pretty well.
But they also manage almost $60 billion in pension funds, and, if you judge their recent performance by Sharpe ratio, they’re doing it better than anybody.
Their absolute return for 2007-2011 was a very good 5.6 percent; exactly the same as the Harvard endowment. That ranks them 11th overall for return and number one among the December FY cohort.
But look at that Sharpe number: it’s 0.45! Harvard, with the same 5.6 percent return, had a Sharpe number of only 0.18.
The Sharpe number is a widely-used financial measure of how much a fund is earning relative to the riskiness of its portfolio. A high Sharpe number implies that an investor is getting a lot of return per unit of risk.
So, the Ford Treasury team matched Harvard on absolute return, and did it with significantly less variance. Or, as most people are willing to say, they earned the same return with less risk.
By our calculations Ford had the lowest standard deviation of returns among all 45 funds, and the lower the standard deviation, the higher the Sharpe number.
Ford’s performance on a risk-adjusted basis was better than any U.S. endowment, foundation, or public pension. It was also better than the excellent big public investors up in Canada. And, of course, they beat all their peers among big corporate pensions.
Did you know that? We didn’t.
Boeing, Canada’s AIMCO, and the Columbia University endowment, were all tied for a close second-place with a Sharpe number of 0.41.
The man responsible at Ford is Neil Schloss, Ford’s VP and Treasurer since 2007 (coinciding almost exactly with our 5-year span). As with most corporate treasury staffers, Mr. Schloss’ team in Dearborn hasn’t been stove-piped into portfolio management for their whole careers. They’ve typically rotated through the whole gamut of treasury functions before landing with the asset management group in mid-career.
For reference, here are the top 10 U.S. corporate plans by assets, ranked by returns for the five fiscal years 2007 – 2011.
The 60/40 Index represents the returns of a notional fund holding 60 percent U.S. equities and 40 percent U.S. bonds. This mix is often used as a benchmark for large institutional funds, although actual asset allocations vary widely from fund to fund.
Here are the top 20 Sharpe rankings for all five types of institutions we looked at: endowments, foundations, public pensions, and large Canadian public funds (regardless of fiscal year end):
Treading right on heels of Ford is not Harvard or Yale, but Boeing. Again, all we know about Boeing is that they make big airplanes. And that the guy who probably should have gotten the CEO job there, but didn’t, was hired by Ford.
The Boeing Company had an even higher absolute return than Ford: 6.3 percent, ranking them third overall. Only two veteran endowment managers — Narv Narvekar at Columbia and Erik Lundberg at University of Michigan – earned better returns: 8.8 and 7.3 percent, respectively.
Like Ford, Boeing has a de-risked portfolio with a modest standard deviation. Their Sharpe number ranks the airplane company right behind the car company.
So, apparently that liability-driven investment stuff, with its tilt away from equities and toward long-duration credit and high-quality bonds, actually works. At least it worked in this 5-year period, executed by managers who knew what they were doing.
Much of Boeing’s performance can be attributed to Mark Schmid, who ran their pension investments until 2009, when he was recruited to run the University of Chicago endowment. His impressive returns at Boeing were undoubtedly a factor in that hire.
He turned the Boeing job over to his young second-in-command, Andrew Ward. I’ve had some exchanges with Andrew, and, since he’s a nice guy and a Chicago MBA, I can almost forgive him for getting that job at age 38.
After admiring Ford and Boeing’s performance (and noting that AT&T and NorthrupGrumman also did very well), we wondered how the real pros were doing.
After all, Bank of America and General Electric (via GE Capital) are major asset managers in their own right. They charge other people for financial services, so they must know what they’re doing.
In fact, BofA and GE are way down on the bottom of the Sharpe rankings, ranked 42 and 44, respectively. Their SRs are actually negative! Their absolute return numbers were no better: they ranked 42 and 44 on that scale, as well. GE’s absolute return was a sad 0.4 percent, as compared to Boeing’s robust 6.3 percent.
Now, the mathematicians will tell you that the SR is a “dimensionless” number which is meaningless taken by itself. But a Sharpe number which is close to zero, or negative, has a very straightforward meaning: it means the investor could have made as much or more money just by laddering 3-month T-bills for five years and saved themselves a lot of trouble.
We don’t profess to understand why the guys who make cars and airplanes are better investors than GE Capital and Bank of America. We’re sure the explanation is complicated.
We note however, that both GE and BofA are currently freezing their defined-benefit pension plans and pushing everybody into 401Ks as fast as they can. Whether low investment returns are a cause or effect, we can’t say.
We also note that both Ford and Boeing operate in blue states, facing strong unions. They are not going to be walking away from their DB plans anytime soon, so they need to make a virtue of necessity and get the best returns they can.
Asset allocation also figures into it, of course. Even without doing a deep dive into those numbers, some differences stand out.
In 2011, Ford had 47% in fixed income; but GE had only 27%. In this period, returns on investment-grade bonds have been very good. Yields are low, of course, but we’re looking at total return. The Barclay’s 5-10 year credit index had a 5-year return of 6.7% in 2007-2011. Bonds lost a lot less than stocks in 2008-2009, and they boomed in 2010.
Whatever the reasons, it’s hard to believe that either BofA or GE is devoting their best talent to pension fund investing, based on these numbers.
We couldn’t figure out who was running the BofA pension portfolio, so we just listed CEO Brian Moynihan. His revenue is down 50 percent, and he’s busy trying to cut 16,000 jobs, so we don’t think he’ll even notice one more problem on his plate.
Jay Ireland was president and CEO of the GE Asset Management unit through most of 2007-2011. GEAM runs about $120 billion, which includes portfolios for institutional investors around the world in addition to the GE retirement assets. Whether those outside customers got better returns than the GE pensioners, we can’t say.
Mr. Ireland left last March to take the newly-created post of president and CEO of GE Africa. We presume this is the regular rotation that upward-bound execs at GE expect every few years, and may have nothing to do with pension returns.
He was succeeded in the GEAM job by Dmitri Stockton in December.
Assets and returns for the corporate pensions we analyzed include all plans clearly labeled “pensions,” wherever they’re domiciled. Some of these firms have distinct pension schemes for foreign employees in, e.g., the UK. We have taken them all together, as seemed proper to us. The extent to which investment policy is centralized in the U.S. isn’t always clear, but we assume that it ultimately rests with the board of the U.S. parent and we therefore treat them as one entity. All assets for corporate non-pension post-retirement plans (e.g., medical plans) are excluded from our calculations.
Charles A. Skorina & Co is retained by the boards of institutional investors and asset managers to recruit chief investment officers, portfolio managers, and financial professionals.
Charles Skorina earned an MBA at the University of Chicago and began his professional career at Chemical Bank (now JPMorgan Chase), completing the management training program then working as a credit and risk analyst in New York and Chicago. After a stint with Ernst & Young in Washington, D.C., he founded his own search firm headquartered in San Francisco, focused on the global financial services industry.