One on One: "We see an economic recovery, but it’s easy to see why it’s not a shared view"

In spite of the market’s continued volatility, there is opportunity.

So says Michael Even, 42, the Stamford, Conn.-based chief investment officer of Citigroup Private Bank in New York, which has $162.9 billion in assets worldwide.

Mr. Even invests with a quantitative focus. That emphasis on a company’s financials, such as price-to-book or free cash flow as a percent of asset value, stands out, says Mark Lapman, Mr. Even’s former boss at Independence Investments LLC.

Citigroup Private Bank last year tapped Mr. Even, who had been with parent Citigroup Inc.’s asset management unit in Stamford since leaving Independence in 1997. The choice is “a reflection of the growing importance of systematic risk control,” says Mr. Lapman, the Boston firm’s CEO.

The fact that Mr. Even has run marathons will help him as he trots the globe for Citigroup, which has 90 offices in 31 countries.

“He’s not coming out of a marketing or sales operation,” Mr. Lapman says. “He understands risk. This is a time when you want to do that.”

Q War may be imminent, and the market is sliding. What are you telling clients?

A Our economists’ view, with the kind of money the government has pumped into the economy and the general posture of the Federal Reserve, is [that the possibility] the economy is going to make a double-dip recession is extremely unlikely. We’re operating under fairly benign macro conditions. We don’t see this whole thing imploding.

On a fundamental basis, there’s been a lot of cutting of earnings and growth numbers. Those sorts of forces are creating volatility. There’s a tremendous amount of volatility and fear. They come from three sources: economic uncertainty, the geopolitical situation and problems in corporate governance.

What we’re telling clients is that, to us, there are tremendous valuation opportunities in the market. Until we see some kind of change in the market, it creates more opportunity.

Q How would a war with Iraq affect the economy and the market?

A Obviously, the effect of war is a hard thing to define. It would drive up oil prices. But an awful lot is already priced in the market. It’s trading $7 to $9 above where it should be trading. A war can have a positive or negative economic impact.

Additional government spending could be helpful. But a long conflict, a prolonged conflict, will likely have a negative psychological impact. But, if an exit strategy is obvious, the war, after all the buildup, could be a relief.

Q What is driving the economic uncertainty?

A About the economic uncertainty, our economists are comfortable that there is a recovery ongoing. But the tremendously negative stock market is hurting the consumers’ confidence.

No matter how much we hate to admit it, if the bear market gets bad enough, it could drive the economy and have a long-term negative impact on the economy.

And housing is beginning to feel a little bit like a bubble, and if something happens to the housing market, it could have a negative impact. And the Japan financial crisis is still looming, still unresolved.

We see an economic recovery, but it’s easy to see why it’s not a shared view.

We’re telling clients to move to diversify in asset-class level and manager level. There’s an awful lot of risk in specific-stock exposure.

Q How does that work into investment advice? What does your model portfolio look like?

A We use the Morgan Stanley Capital International All Country Index. We are overweighting equities and underweighting fixed-income. Because of volatility and yield, fixed-income is priced unattractively. In stocks, we’ve overweighted the United States and Europe, and we’re negative on Japan, and neutral to negative on emerging markets.

On the fixed-income side, it’s bifurcated. Take part of your portfolio and reduce the duration, and take another part and expose it to risk, emerging markets, corporates, and high-yield bonds.

We increased the overall allocation to hedge funds. But diversification is absolutely critical in hedge funds, corporate bonds and junk bonds.

Q Do you expect any more corporate scandals or blowups?

A Those are hard to predict, unfortunately. We do a lot of research and avoided some of them but not all of them. Some of these scandals questioned the basic data so that they were impossible to see.

In general, we are still not comfortable, particularly with valuations on technology and a lot of the energy [companies]. With energy, we’re not comfortable with valuation, but the Iraq situation could benefit the sector. You have to think of the geopolitical risks.

But some global sectors are attractive. We like the industrial and health-care sectors. This is purely based on our belief in growth and long-term fundamentals.

Q What are clients saying these days?

A There’s two sets of responses from clients. One says, “I’m very involved with this, I’m following it every day. I want to reduce the volatility.” Or, clients say, “I want to take advantage of opportunities.” The potential is huge. They’re taking more aggressive advantage in re-balancing.

Q What strategies are you using to protect your wealthy clients?

A We look at this situation portfolio by portfolio and make specific recommendations. For example, we’ve been positive on value stocks, and small- and mid-cap, but now we’re much more neutral. The valuation differential between large-cap growth and the others is much more normal.

A taxable client in the United States can unwind his or her position, and take advantage of losses to offset gains.

I hate to sound so positive about something that’s so negative, but one benefit is that it allows you to rebalance more aggressively without taking significant hits on taxes.

Q What is your outlook for the bond market over the next three to six months?

A We’ve been negative on the bond market for six months because we’ve been expecting a smooth recovery. There’s been a lot of flight to safety. We are underweight bonds as an asset class. We’re saying to stay short on bonds and get yield on high-yield and emerging markets.

A smooth recovery would drive yields up and drive prices down and lower returns in bonds. But the opposite happened. The recovery was much weaker than expected. People have fled to bonds.

If people got more panicky, there would be an additional flight to safety. People are factoring a war across markets. If the war is positive, and we get rid of Hussein, get more oil, that would weaken bonds.

Q Will small- and mid-cap stocks continue their roll?

A I think they will perform in line with large-caps. The fundamental valuations for small- and mid-caps looked extremely attractive a year ago because of the run-up in large-caps, but the difference is not there anymore.

Q How about alternative investments such as hedge funds?

A We look at hedge funds as two things. They’re diversifiers and anchors to the wind in the kinds of markets we’ve been having. The returns have been difficult for hedge funds, but they’re still better than traditional asset classes.

SNAPSHOT

Michael Even, 42, Stamford, Conn.-based chief investment officer of Citigroup Private Bank in New York since 2001

Career: 1997-2001, managing director, head of global quantitative analysis, Citigroup Asset Management in Stamford, Conn.; 1984-97, Independence Investments LLC in Boston, rising to managing partner and director of quantitative research

Education: Bachelor’s degree in operations research and economics from Cornell University, 1982; master’s in business administration from the Massachusetts Institute of Technology, 1984