Santangel's Review

Commentary

Capital Allocation is King: GE Edition

The New York Times profiles General Electric’s return to its manufacturing roots. They buried the lead a little, but it turns out that the company’s legendary GE Finance division, which made the reputations and the fortunes of Jack Welch, Gary Wendt, and many others, was probably not a good use of the company’s capital over the long term. GE’s classic technology-led manufacturing businesses were the better ones:

The big-moat businesses can also be quite lucrative. Mr. Immelt points to G.E.’s jet-engine business as an example, saying that it has higher profit margins and returns on capital than the leading banks. “It doesn’t happen every quarter or every year,” he says. “But over a 10- or 20-year time period, the businesses that are hard to do had the best returns. So the arithmetic works over time.”

At the end of the day, a money manager is just a middleman: you allocate your capital to him, he allocates the capital to companies, and then the companies must in turn allocate capital to projects. This last link in the chain can make all the difference, especially as one’s time horizon grows. So before allocating capital to a money manager, one must evaluate how he evaluates the capital allocation of the companies in which he invests.