The Enduring Value of Roger Murray by Paul Johnson and Paul D. Sonkin (chapter 4)

MURRAY’S FOURTH CAREER

Fund Manager (1965–1970)

Murray left full-time academia in 1965 to join the College Retirement Equities Fund (CREF) as vice president and economist. He was the head of CREF’s investment operation and supervised the fund’s common stock investment activities. He rose to become executive vice president and later chair. During his tenure at CREF, Murray continued to teach at Columbia as an adjunct professor in the fall and spring semesters.

CREF was established in 1952 by the Teachers Insurance and Annuity Association (TIAA) to provide retirement and insurance benefit plans to the faculties of colleges, universities, and related educational and scientific institutions. The TIAA board created CREF to respond to the rising cost of living caused by inflation after World War II. The TIAA board consulted with many economists— Murray among them—before deciding to go ahead with the plan to create the new organization. CREF was the first of the major pension plans to offer a variable annuity, a concept that had been only recently introduced. A fixed annuity is guaranteed to provide a fixed amount of money to its holder each year, which makes the vehicles popular with retirees. Because the annual payments are fixed at a certain dollar amount, however, the purchasing power of fixed annuities is eroded over time by inflation. A variable annuity, on the other hand, makes annual payments that vary according to

the investment performance of the investments held by the fund, typically a combination of bonds, convertible securities, and equities, which traditionally have done a better job of keeping up with inflation.

According to William Greenough, the CEO of TIAA at the time of the launch of CREF, “TIAA turned out to be a natural and, after some early discomfort, a congenial place for the variable annuity to originate. The problem of inflation was bothering some of the executive staff. The invention of CREF was a direct response to the inflation of World War II, rekindled soon after in Korea.”1 Greenough joined TIAA in 1941, when it was a small pension fund, and would serve as CEO from 1957 until his retirement in 1979. TIAA-CREF grew assets under management by more than 100-fold, to $82 billion, under his leadership. Greenough is considered the father of the variable annuity.

Greenough first conceived of the idea of a variable annuity in 1949 and invited Murray, then a vice president at Bankers Trust, to a luncheon to discuss the idea. When recalling his subsequent exchange with Greenough after the lunch, Murray stated, “When you invited me and a couple of others to do lunch to discuss the very general outline of what you had in mind, what you had been thinking about, it was not that you gave us a specific blueprint. Here you were talking about an annuity that didn’t have a ‘guarantee’ or a prescribed rate of anything.”2

Although intrigued by the idea, Murray was concerned “that it would be extremely difficult to get a bunch of academics to understand, sit down and listen in the first place” to the idea. He felt that “people had been indoctrinated from childhood to the certainty of [a fixed] annuity. You came into this world of annuity income with an expectation that it was going to be precisely the same amount to the penny for your life and for the life of your spouse.”3 Murray had no hesitation, however, in accepting the idea of pensions investing in common stocks. As Greenough recalled, “His expertise on investing in equities was why he was invited to lunch. He had been instrumental in getting a portion of corporate pension funds to try common stock investing at Bankers Trust.”4

Policyholders contributed premiums to both TIAA and CREF, and could choose what proportion of their contribution was invested in each investment vehicle. TIAA offered traditional fixed annuities, with their predictable annual payout, while CREF offered an annuity with a variable annual return tied to the performance of its stock portfolio, with the associated risk of stock market returns. Most participants elected to put the maximum amount (75 percent) into CREF.5 Because the CREF product was so new, most of the participants were young and not yet eligible to receive benefits, and thus the fund had large inflows from members’ monthly contributions and was not required to make meaningful payouts. As a result, the fund’s assets grew very quickly, which made deploying capital a challenge for the fund’s portfolio manager.

Murray was drawn to CREF for three reasons. First, he was a strong advocate of education. Second, he was a true believer in the importance of pension funds. Third, he was intrigued with the challenge of managing an investment portfolio with significant, and ever-increasing, capital to deploy. The fund had $450 million under management when Murray took charge in 1965, which was a considerable amount of institutional money to manage at the time. CREF was a balanced fund (invested in both stocks and bonds) with conservative objectives. Murray invested in companies with a long-term view, resulting in the fund’s low turnover of roughly 3 percent to 5 percent per year, implying an average holding period of over twenty years. Nonetheless, given the size of the fund, he was still forced to invest $15 to $25 million per year before any additional contributions from participants, which at the time was a significant amount of capital to deploy.

In Murray’s words, “I figure in the next 10 years it’s going to be a billion and a half dollars. There’s an interesting problem. How do you manage a fund of that size effectively?”6 Murray’s prediction proved to be true. Due to continued member inflows and capital appreciation of investments in the fund, assets grew by 35 percent per year from 1957 to 1967. The fund started 1968 with assets of $950 million and collected an additional $190 million in new contributions that year.7

As a trained economist, Murray always took an economic outlook into account before making any investment decision. His goal in this analysis was to establish guidelines for the principal sectors of the economy by identifying the dynamics of change and the principal determinants of future growth. He spent time trying to stay abreast of the latest econometric models in use at the time. He liked to incorporate long-range studies coming out of governments, think tanks, and private industry into his analysis and apply his own perspective to them. As Murray commented in 1968, “Investment decisions are oriented to the fundamental approach with an economic appraisal of the market. We have staying power—if the fundamentals are right we can do a job relatively few investors are able to do. If we like the long-term outlook—even if the next year or two doesn’t look good—we can stay in the [stock] until it turns up.”8

One of the challenges Murray faced as a long-term, contrarian investor was trying to determine if a negative change in a company’s financial performance was a temporary cyclical one rather than a permanent structural adjustment. Murray was aware of this uncertainty: “There are days you don’t know. It could be a structural change and I could be pouring money down a rat hole.”9 While passionate about equity investing and the potential attractive returns, Murray was a cautious investor. Although he could have been more aggressive in his investment style because his fund was part of a much larger organization, he maintined, “We’re just not about to play games with people’s retirement income. I have seen a lot of stars go by the horizon.”10 Murray further articulated the challenge he faced managing a large institutional portfolio, “We are still groping, still researching and developing some systems of decision-making where we don’t rely on the instinct, intuition, or flair that someone has. 225,000 teachers shouldn’t be dependent on my flair for their lifetime savings. Most of them hold no other major resource.” Furthermore, Murray states “ . . . the goals of CREF are sufficiently long range to permit a relatively conservative pace. Total return from the portfolio is what matters.”11

Murray brought more than just a financial focus to the role of managing other people’s retirement savings. He was never reluctant

to vote or take a stand against management if he thought one of their proposals would be opposed by his investors. There was significant social unrest at the time and, in anticipation of today’s emphasis on environmental, social, and governmental (ESG) investing, his constituents [college professors] were highly vocal on questions of social justice and felt strongly about the types of companies Murray held in their retirement portfolio.12 Murray took that responsibility seriously.

Murray was elected chair of the CREF finance committee and promoted to executive vice president in 1967, two years after joining the firm. During his tenure at CREF, he was directly involved in managing the equity research department, were he had twelve analysts reporting directly to him. Similar to his hands-on approach to interacting with students as a professor, Murray met with the analysts regularly and took a keen interest in their research. To show his direct involvement in managing the fund, Murray would meet with the research analysts for a couple of hours every two weeks to discuss general business matters and his outlook on the economy and the stock market. Murray also took a personal interest in his fund’s holders, “I answer all of the letters personally and it’s not burdensome.”13 The CREF board also established two special committees at Murray’s recommendation to make an extensive study of methods for managing large-scale equity funds.

Although Murray was busy as manager of the fund, member of the boards of five different financial corporations, trustee of five organizations, and adjunct professor, Murray never seemed pressed for time. He always was able to juggle his commitments without anyone feeling that he was distracted or in a hurry. He had a relaxed manner, was quick to catch a joke, and laughed vigorously to show his appreciation of the humor.14

Murray retired from CREF in 1970 but continued serving as trustee until 1972. During his tenure as an investment manager, CREF’s assets grew from just under $500 million in 1965 to over $1.5 billion in 1970. He returned to Columbia Business School fulltime in the fall of 1970, once again as the S. Sloan Colt Professor of Banking and Finance.

“When someone asks me, ‘How do you account for your success?’ I give a lot of credit to Columbia Business School and Roger Murray. While I had

in the early 1960s, it wasn’t until I had Professor Murray at Columbia in the fall of 1965 that I saw the sun, the moon, and the stars align themselves and knew that was what I wanted to do.”

“When I look back at my career in investing, which spans over me was Roger Murray. As our security analysis professor, he showed a great deal of excitement for the subject matter.”

“Sometimes you get lucky in life. That certainly happened to me when I was accepted into Professor Roger Murray’s course in security analysis at Columbia Business School in 1968. . . . Murray taught more than a full generation of students from 1958 until his retirement in 1978. During this period, he carried the torch of value investing that Ben Graham passed on to him directly before retiring to California. Many of Murray’s students

torch still burns brightly today!”

“There was a quiet murmur of anticipation as the speaker rose to address the room. Very few people in the audience had heard the gentleman approaching the podium speak in person and most barely knew who he was. . . . The speaker was introduced by Mario Gabelli. There was deference in Gabelli’s voice when he made the introduction, which was uncharacteristic. . . . Showing his respect and deep appreciation, Gabelli closed his brief introductory comments with, ‘Professor Murray has forgotten more about equities than most of us will ever know.’ And with that the speaker took the stage.”

—FROM THE INTRODUCTION