Citibank's trust chief sees the bull market as long-term
Ahoy, investors! Meet the captain of Citibank's investment ship, Peter Vermilye.Skip to next paragraph
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Mr. Vermilye, a seasoned salt, guides one of the largest ships on Wall Street , the Citibank trust and pension department, which manages $20 billion in assets. When the stock market jibed sharply in August, suddenly taking off, Mr. Vermilye was among the managers who helped push the markets up. He was also a steady buyer of stocks in the spring, however, when no one else was. At that point, he told Business Week, ''You buy straw hats in January when no one else wants them.''
Last week, in an interview, he talked about his outlook for the markets and what he believes will be the ''winds and currents'' affecting them over the next few years.
To begin with, Vermilye believes this is the start of a long-term bull market , perhaps lasting as long as two years. To back up his words, Citibank's common stock funds are now 85 percent invested in the stock market. (Fully invested for him is 90 percent.) ''We are still buying,'' he states, ''but at a reduced rate.'' Most of his buying has been in consumer durable stocks. But unlike many managers, he has purchased some cyclical stocks, which he thinks will improve. These include the aluminums, forest product stocks, autos, and housing.
The stock market, he maintains, will benefit from some major wind shifts in the investing environment. First, the rate of inflation will stay low for some time. He expects that inflation this year and next will stay in the 5 percent area. With low inflation, he points out, earnings increases are more meaningful.
For example, if a company has an annual growth rate of 15 percent, but inflation is running at 12 percent, the earnings gains don't mean much. But if the growth rate remains the same and inflation comes down, the growth rate becomes important. He believes this is what is happening in the stock market: that investors like him now feel corporate earnings will be more significant and will give stocks a higher valuation. Thus, price-to-earnings multiples will expand even though corporate earnings will not be hyped by inflation.
At the same time, investor psychology has shifted. Before the market's low in August, most investor services were bearish. Institutions had huge amounts of cash. Mr. Vermilye, who prides himself on being ''an observer of mankind,'' notes that most institutional investors were surprised by the market's sudden upturn.
He maintains that these investors have become too short-term-oriented. Clients constantly compare their pension fund managers' results, and reward those with the best performance. Thus, the managers increasingly turn to the same advisers - who they believe have the best track records - for market predictions.
By listening to the so-called market ''seers,'' institutional investors got caught by surprise because they were waiting for the long-predicted third leg down in the stock market. When it didn't come, there was a great rush to get into the market. With some $500 billion in pension money available for investment, even a small shift in investment policy creates large waves on Wall Street.
The emphasis on short-term performance by clients bothers Mr. Vermilye. ''Short-term performance is a loser's game,'' he says. ''It's a winner's game to take the longer view.''
The final force affecting stocks, Vermilye says, is the direction of interest rates. Although he thinks Fed-watching is ''a bit overdone,'' he believes investors have to get the direction of interest rates correct. There is now no question about the Fed's motives, he says: It intends to supply the cash to get the economy moving again.
The actual state of the economy, he points out, is not that important. ''There have been so many false predictions about the economy,'' he states, ''that it is not that influential.''
Nor does he put much stock in earnings estimates. ''Consensus earnings estimates are useless,'' he commented. ''It's only when there is a shift in the direction of the earnings compared to the consensus that the multiples and earnings improve.''
This is not to say there are not shoals ahead. The obvious ones, he says, are the South American loans which the major banks, such as Citibank, have made, and the huge federal deficit and large defense budget. Of defense outlays, he said, ''We must find a way to get more bang out of our buck.'' He adds, ''We have to hope the world system hangs together and the IMF (International Monetary Fund) and the others will tide the debtor countries over.''
Despite Mr. Vermilye's denigration of managers who only look at the short term, he constantly compares his portfolio managers' investment performance. He is competitive, frequently using sports analogies when talking about investment concepts. In last year's annual review of Citibank trust performance for customers, he compared what the bank is doing to a professional football team. In our interview, he called himself the ''coach, or general manager,'' of a professional team. Since Vermilye rarely smiles, some people compare him to Tom Landry, the successful coach of the Dallas Cowboys.
And like Mr. Landry, he only wants the best people working for him. In his normal direct manner, he states, ''Only the top 10 to 20 percent of (investment people) have any value. The rest are average and we don't have any use for them.''
In his message last year to his clients, he elaborated on what his elite group of managers is like: ''These are unusual people: They tend to be surprisingly young, to be driven by a consuming skeptical curiosity about what makes companies and stocks move, and to have an extra sense that perceives those forces. They are a temperamental and rather demanding group - creative, egotistic, sensitive, and competitive.''
This description might turn off some potential clients. But the captain of the Citibank trust ship believes it's the right way to crew his vessel.