KEN IGE / KIGE@STARBULLETIN.COM Ted Truscott, chief investment officer of American Express Financial Advisors, says the stock market will return to results closer to historical averages.

Investing after
a burst bubble

American Express’
chief investment officer
sees more normal returns

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By Dave Segal
dsegal@starbulletin.com

Gazing out the window from the 17th floor of the Ala Moana Pacific Center, Ted Truscott, chief investment officer for American Express Financial Advisors, admires the spectacular view of the Ala Wai Yacht Harbor and the Pacific Ocean.

Unfortunately, he said, the view of the stock market isn't as clear, or as spectacular.

"Everyone's trying to pick a bottom, but timing the market is a fool's game," Truscott said. "If people could time the market, they should just buy put and call options on the S&P 500 and they'd be sailing about six yachts out of the harbor here every day and not worrying about their financial future."

That's where Truscott comes in. The Minneapolis-based company's chief investment officer, who was in Honolulu yesterday to meet with advisers and clients after a brief Big Island vacation, said investors need to get used to the idea that stock market returns are reverting to historical means.

"What we've generally been saying for the last six to eight months is that the return on stocks is gravitating toward a more normal return," said Truscott, whose company has five offices, 102 advisers and 20,000 clients in Hawaii. "The historical return on stocks over the very long run is 10 to 12 percent and people who were in the market in the late '90s have, quite frankly, gotten spoiled by double-digit returns up into the 20 percent range. That is not normal."

Truscott, who took over his new position just five days before the Sept. 11 terrorist attacks, has gotten used to practicing damage control. After the terrorist strikes, he immediately conducted television interviews, took out newspaper advertisements and conducted a conference call with advisers to get out the message that clients' money and records were safe.

Now, nearly a year later, he's dealing with a struggling economy that already was on the way down when it was struck below the belt on Sept. 11.

"What you are seeing today is the undoing of the bubble, and that is what is continuing to reverberate throughout the economy," said Truscott, who said the Federal Reserve could cut interest rates by a total of another half-percentage point by the end of the year.

"While the terrorist events made things worse, they are not really the source of the current economic malaise. It's really the overcapacity built up in the late '90s that is now being unwound."

Truscott, recognizing that both mainland and Japanese visitors fuel Hawaii's economy, said he expects it will be "tough" for the state's economy for "the next year plus."

"(Japan's) government clearly needs to do more to escape the disinflation brought about by Japan's own bubble," Truscott said. "On the U.S. side, obviously the economic growth rates are slower ... I'm sure California is the main driver of what happens here. And it's an easy flight. But, that said, California is in its own post-bubble adjustment period."

Truscott, who oversees about $212 billion in assets for the company's 2.3 million clients in the United States, said he expects the stock market to erase "a good portion" of its losses by year-end but that it will still finish in the red for the third straight year. His projection for next year is for returns of 7 percent to 10 percent.

American Express' portfolios currently are emphasizing health care, such as managed care and pharmaceuticals; cyclical stocks such as aluminum makers and steel; and consumer stocks such as casual dining. However, he said the portfolios have underweighted technology because of the belief that the sector will not be the leader as the economy emerges from the recession.

In the fixed-income area, he said investors who have the risk tolerance and a long-term view might want to look at high-yield and high-grade corporate bonds. Additionally, he said that while there still may be room to profit from government bonds because of additional rate cuts, municipal bonds may be good choices for high-tax-bracket investors because of the bonds' tax-exempt benefits.

"A lot of people are scared (of buying corporate bonds) because there are the bankruptcies and you have to take on a certain amount of risk, but that is where the money is going to be made in the future," Truscott said. "I think the returns from corporate bonds and stocks will be pretty similar going forward. A lot of money already has been made on the Treasury side (U.S. government bonds, notes and bills), and I always believe in trying to figure out where the rabbit is going, opposed to where it was."