GE CIO Harshal Chaudhari
Harshal Chaudhari, the CIO at GE speak about his early days in the industry, his take on the current market environment and the Fed and his views on ESG.
Participate, contribute, and diversify.
For savers who have access to a 401(k), those are three of the key steps that can eventually lead to a comfortable retirement. That’s according to Bob Hunkeler, who should know – he’s responsible for International Paper’s US defined benefit (DB) and defined contribution (DC) plans, along with a few other smaller trusts, that total about $18 billion in assets.
Like so many in his role, Hunkeler took a fascinating route to the pension and DC world, which he shares with us in our latest Vantage Point. He also offers some fascinating history surrounding International Paper, his views on active versus passive management, and his love of soccer and Switzerland, among other things.
Let’s start from the beginning. How did you find yourself in the investment world in the first place?
Quite by accident. I started my career after spending my last year of college in Switzerland, in a study-abroad program. I studied chemistry, and before coming back to the US I thought I would test the waters in Switzerland. I was able to work for two years as a lab technician, but after that I decided that chemistry was really not my first love, and when you don't know what you want to do you get an MBA! I kept in contact with my company in Switzerland, and when I finished, they rehired me in the finance area. I did that for about three years, and I was at a point where I knew if I took my next assignment in Switzerland I probably would never return to the United States. So I applied for work with the same company in New York, and frankly the only job that was available was in the area of pensions. And that's how I started off in pensions. Thirty years later now it turned out to be a lucky choice.
International Paper has an interesting history. It’s estimated that in its very early years the company supplied about 60% of the newsprint in the US.
The company was founded in 1898 and was formed by 17 pulp and paper mills in the Northeast, with quite a few million acres of timberland in the Northeast and Canada. I guess back then being American and Canadian made you international, and that’s where the name came from. I would say if you looked back over the company’s entire history, it's one of mergers, acquisitions, and divestitures, and a constant state of change to adapt to the prevailing marketplace. Like many other companies, IP has gone from a conglomerate philosophy to one of being much more narrowly defined. Today, we are in three focused areas: industrial packaging, cellulose fibers, and paper.
Let’s look more specifically at the DB and DC spaces. The idea of focusing on income in retirement, versus simply accumulating assets, has been gaining traction. Can you talk about your views on income-type solutions?
I think this is part of the evolution of the 401(k) plan. When I look back over the first 30 years of 401(k)s, everything was about accumulation, and that worked. But now we have people approaching retirement or in retirement saying, "Well, it's not enough to just get to a large sum of money. What do I do with it now?" We recognized that this is a very complex problem, and we wanted to provide some solutions that would help people to decide how much money they think they'll need in retirement, and also how much they can spend during those years. We also wanted to provide these things so that people would feel incentivized to stay in our plan, that they don't have to leave in order to get those questions answered. We think a corporate 401(k) plan under a fiduciary umbrella is still the best place for participants to be.
While some parts of the world are much further along than others, Environmental, Social and Governance (ESG) is increasingly becoming a driver of investment decisions around the globe. How does International Paper view ESG investing?
IP is very much an ESG story. Its very existence depends on the sustainability of the forestlands that supply its raw material. As for myself, I’m trying to keep an open mind towards ESG investing, but at the end of the day my position will be driven by ESG’s expected impact on investment performance. I know that the managers in our portfolio are taking it very seriously and factoring it into their investment decisions. I also like to distinguish between the individual parts of ESG because to me the ‘E’ and the ‘G’ are far more straightforward than the ‘S’. Environmental risks are pretty easy to understand, so if your managers aren’t paying attention to those risks, they’re probably not doing a very good job of risk management. On the governance side, who doesn’t think that governance is one of the most important things driving company results? But the social side is more complicated, irrespective of which side of an issue you stand on. For example, should you boycott a firm because you’re not happy with something it’s doing, or do you invest in it so you have a seat at the table and can engage with management? ESG investing can be very complicated, so we want to be sure to hear both sides of the story.
What’s your take on the ‘active vs. passive’ debate?
I always start by saying, ‘I’m not anti-passive.’ There are many good places for index management. That said, I do believe when you work for a large organization like mine, with tremendous resources and extremely talented people, you’ve got a competitive advantage you can and should exploit. All of our pension investments are actively managed, as are virtually all of our savings plan investments. In the corporate world, it’s really on the savings plan side where you see a split. By that I mean, when you look at other large corporate plan sponsors, most are heavy users of active management in their DB plans, but when you look at their DC plans there’s a lot more indexing going on. I understand why, given the potential legal risks on the DC side, but we try to provide our DC participants with our very best investment ideas. Those ideas are found in our pension plan. So, whenever possible we offer the same investments in our DC plan as we have in our DB plan. Since we believe in active management for the pension fund, we also believe in it for the savings plan.
If you had a wish for policymakers or for the industry to continue to enhance the system, what would it be?
As a member of CIEBA (the Committee on Investment of Employee Benefit Assets), one of the messages we're trying to get across is that we want policymakers to help us create a runway for innovation. We'd like to see a greater tolerance for new investment ideas – whether it be real estate, hedge funds, private equity, or other alternative investments. There are all kinds of things, if done in a prudent way, we think are appropriate. The other thing on my wish list is to figure out how we can expand the adoption of retirement plans to the entire country. Retirement plans have never covered much more than half the country’s workforce. It would be wonderful if we could take all of the learnings of the past 30 or 40 years, often times from large companies, and apply them as a blueprint to the rest of the country.
There must be no shortage of challenges in your role. What are some of the biggest?
On the pension side, it would be our funded status. We’re close to fully funded and need to ensure we can safeguard it while trying to build it up over the next few years. On the DC side, it’s trying to get all our participants to contribute enough to get the full company match, which is still a challenge. The other DC challenge is convincing our participants to stay in our plan after they leave the company. We think we have a great plan with many benefits and that our participants would do better if they stayed in our plan. On a personal note, it’s letting go. I’m nearing the end of my career and managing pension investments is something I’ve been doing for a long time. I’m passionate about it, so it’s hard to think about giving it up.
What do you like to do to relax outside the office?
Aside from family, my two passions are soccer and Switzerland. I play soccer with a group of old-timers a couple times a week (we call our group the “Old Socks”) and when I’m on the pitch I feel like a kid again. As for Switzerland, my wife and I are dual nationals, so we like to return to our second homeland as often as possible. A few years ago, we renovated a 300-year-old farmhouse that once belonged to my mother and her sisters. It’s near a lake with the majestic Swiss Alps in the background. We can’t wait to get back there.