State of the Trust

At a time when investors are setting their sights lower, corporate profits and strong markets have left the world awash in money, and Lissa Rurik, an 18-year veteran portfolio manager and senior investment officer at the Minneapolis office of United States Trust Company, doesn’t see that changing anytime soon. U.S. Trust, an investment and wealth management firm based in New York City, entered the Minneapolis–St. Paul market just six years ago with the acquisition of Minneapolis-based Resource Bank and Trust. Since then, the Minneapolis office has built its assets under management to $2.7 billion in stocks, bonds, and alternative investments. Rurik manages about $400 million in assets.

{Q} Lately, the financial services industry has been telling investors to lower their sights and expect modest returns on virtually all assets, including equities of maybe 5 to 8 percent. But the markets have been very strong. What’s going on?

{A}I think corporate profit growth is exceeding expectations. Usually that dissipates this far into a cycle at a point where expense levels can’t go much lower, and where labor costs start to increase. But productivity has been quite high through this cycle. Companies have become really efficient in the globally competitive environment. Emerging markets have been growing strongly and their governments have better fiscal policies. They contribute inexpensive global labor and inexpensive capital from their rising savings. Add all those things up and you get a little more mileage out of these inputs than people may have anticipated. 

{Q} How long do you expect it to last?

{A} Outside of normal market pullbacks, I think equity returns will be strong as long as liquidity stays high, and we don’t see that ending anytime soon. Of course, central banks are trying to reduce liquidity somewhat by raising interest rates, but they are also constrained because these ample supplies of global labor and capital have also resulted in excess capacity in many industries, which is a deflationary influence. So that counteracts inflation as well as higher interest rates. And when the central banks reverse course, we expect to see some higher price-earning multiples.

{Q} How much influence does the private-equity market have on the liquidity equation?

{A} The private-equity market is a beneficiary of that liquidity. Institutional and private investors have heard the same message: Returns are going to be lower. Pension funds are one example of that scenario. Since 2000, they were hit with a double whammy, because not only did they lose on the equity side when those markets fell, but they also were hurt by falling interest rates. Now, a lower interest rate requires more assets to fund future benefit obligations for pension beneficiaries. Pension funds have had a lot of ground to make up.

{Q} How are pension funds going to recover?

{A} They have shifted capital along with other investors into alternative investment opportunities, like private equity and hedge funds. And that capital is being stretched farther with the evolution of the credit-derivative markets. Private-equity transactions are using more debt at a lower ultimate cost, and hedge funds are buying that debt and using credit-default swaps and other sorts of derivatives to offset some of the risk to other parties.