Craig Ueland assumed the role of chief executive officer of the Russell Investment Group on Jan. 1 — just in time to see the Tacoma, Wash.-based manager of managers surpass $100 billion in assets under management. The firm expects to add $7 billion more when its pending purchase of London-based Pantheon Ventures, a private equity manager-of-managers specialist, closes. Founded in 1936 as the Russell Co., the firm now is a subsidiary of Northwestern Mutual Life Insurance Co. Mr. Ueland, a 21-year veteran of Russell, joined the firm in 1983 as a research analyst. He opened the firm's Sydney, Australia, office in 1986, and later headed the company's international operations from London and Tacoma. He spoke with Chief of Bureaus Joel Chernoff.
Q Where do you see the firm going in the next five to 10 years?
A I believe we're in the biggest change environment since ERISA was passed in 1973-'74. If you look at the last century in the United States, the two biggest sets of regulatory change have come on the heels of the biggest bear markets. In the ‘30s, you had Social Security … and you also had government-insured deposits at banks. In 1973-‘74, you had ERISA and the modern era of the pension industry.
This time, we see additional changes, not all of which we can be certain. But one thing we are quite confident of is a movement back to more trusted quality partners. We're also going to see a low-return decade. In a low-return decade, you're going to see investors seek out different ways to add value than just buying diversified portfolios of stocks and bonds. Hence, interest in alternative investments: hedge funds, real estate, commodities and other areas.
Q How does Pantheon fit into Russell?
A If you look at our asset allocation work for our clients and you take a five- to 10-year horizon, the only major asset class that has a double-digit return expectation is private equity, where we project a 12.2% annual return. Money market investments are likely to post low single-digit returns. Bond investments are unlikely to be higher than mid-single digits. We, like many people, think listed stock returns are likely to be mid- to upper-single digits, but not double-digit returns.
Recommendations for asset allocations vary, but it's hard to come up with a long-term investor that shouldn't have at least 5%, maybe 10% of their total portfolio in private equity.
Q Do you expect further acquisitions in the alternatives space?
A We don't expect further acquisitions, as a general matter of strategy. Since ERISA, Russell has grown at a compound rate of over 20% a year. And we haven't needed acquisitions to sustain that growth. At the same time, in changing environments like we're in now, opportunities come up to enhance your skills or provide a capability. … So we will consider them from time to time, but it's not part of our strategy to gobble up other firms.
Q What will pension funds or endowments and foundations look like in the future?
A Pension funds in the U.S. are going to begin looking more like endowments and foundations, not that they will get as far. Increasing diversification is one of the trends. We actually see institutional investors seeking out new return-enhancing strategies, and having a broader definition of diversification.
If you look at the desire for return-enhancing strategies as one component and desire for broader diversification as another, private equity has both. You can improve your expected return and more broadly diversify your portfolio. Non-directional hedge funds only have one. It's difficult to forecast non-directional hedge funds to have a higher return expectation than a U.S. stock portfolio. But it does have a very low correlation that improves significantly your diversification but it doesn't enhance your return.
We recommend a minimum of at least 15% to alternatives, with at least 5% each to private equity, hedge funds and real estate. My guess is that, five to 10 years from now, the aggregate average number will be higher than that 15%.
Q Are clients considering liability-hedging strategies?
A If accounting standards change, then it's a new game. Under the current rules, we are not seeing a lot of clients seriously considering liability-matching strategies. We are seeing a lot of clients comparing their assets to their liabilities with much more rigor.
There's no question that there will be more consideration given to asset-liability-type strategies. … We are looking with clients at a wide variety of return-enhancing and risk-reduction strategies, including portable alpha strategies. It's more in the discussion stage than in the implementation stage. You see sophisticated investors looking at different ways to use leverage as part of those strategies, trying to get their portfolio above the efficient frontier by using leverage.
Q How has Russell's overseas business developed?
A We have clients in 35 countries. We have been in London since '79, in Toronto since '84, Japan and Australia since '86. The business continues to grow faster outside the U.S., even though in the U.S., it continues to grow at quite a nice pace. It's like a lot of other global firms. There are essentially more people, in aggregate, with more wealth collectively outside the U.S. than there is in the U.S. We make approximately 30% of our worldwide profits in the Europe, Middle East, Africa region. We make another 10% in Canada, and another 10% in the Australasia region. If you look 20 years out, you'll see Asia pick up its share. It's likely within the decade, Russell will invest in China or the countries surrounding China. We already have an office in Singapore as well as Tokyo. Our Japanese business is growing rapidly.
Q Where does the consulting business fit within Russell?
A It's an integral part of what we do. We have been the pre-eminent consultant to large pools of capital since before ERISA. We remain in that position today, and would like to remain in that position a decade from now. It's worth noting that (consulting) has not been our primary business — as a business — since the year I joined, in 1983. … For 20 years, we've been committed to it, and I expect we will be for 20 more years. But its contribution (to Russell) is not profit per se, or profit growth. Its contribution is beyond that: the reputation, the knowledge capital, the quality that comes with being pre-eminent.
Q What types of questions has the SEC inquiry of consultants raised for you?
A When we got the query from the SEC in December, we were very happy they were focused on some of these issues. The thing that was difficult for us was the breadth of the questions: asking about any e-mails or memos or correspondence you have over the 23-month period ended November '03 that relates to either managers or sponsors. On our first look we had 3.8 million. They allowed us to screen on some of the words that were of most interest to them, so we narrowed the list of what had to be individually reviewed to 125,000.
We had Mike Phillips, our chairman, and Karl Ege, our general counsel, individually reading hundreds and hundreds of e-mails … and people working as late as midnight on New Year's Eve and all day New Year's Day. The encouraging thing for Russell is, we know we don't do pay-to-play. But it was extremely intensive.
On the individual investor side, we also got the SEC inquiry related to mutual funds. We don't typically attract market-timers. But when they call, we use the Nancy Reagan defense: "Just say no."
