Riccardo Ricciardi 1981:Worked at French bank Indosuez. 1983:Joined French fund house IMI. 1990:Moved to London as manag ing director of IMI Invesco. 1995:Became sole chief invest ment officer. 1999:Promoted to chief invest ment officer for Invesco's European investments. 2001:Chief investment officer for all Invesco's non-US operations. DESPITE HAVING A high-powered job, Riccardo Ricciardi does not come across as a keyed-up financial type who spends every waking hour poring over the movement of stocks and markets. The London-based Italian is as happy to joke about the English weather as engage in an earnest discussion on investment. And the Invesco executive, who sets the tone for the management of US$46 billion, suggests a similarly laid-back approach in the present market environment even though equities have made a strong start. 'Wait . . . we have lost enough money. Cash doesn't go down,' Mr Ricciardi said. He's telling Invesco fund managers 'to stay conservative, to keep cash'. 'I would be neutral equities, possibly underweight if Japan is important on the index because I don't think Japan is going to do particularly well or the yen. I would begin to accumulate corporate bonds, I would overweight cash ready to take advantage [of equity weakness].' After three down years for global markets, investors are learning to be more cautious with their money and he said that was still the right approach. 'The likelihood of having volatility and being able to pick up stocks at a lower level is high,' he said. Those who chase the rally 'may well end 2003 up but perhaps with modest returns, whereas if you hold on and buy at lower levels it will make all the difference'. 'If by the end of the year you expect the market will be up 5 per cent and you buy 10 per cent lower, you will have a 15 per cent gain,' he said. At the top of Mr Ricciardi's worry list for 2003 is the likelihood of a United States-led invasion of oil-rich Iraq. He argues that the balance of probabilities weighs in favour of markets being put in a tailspin before the issue is resolved. The 'dream ticket' scenario would be that Saddam Hussein backs down and goes into exile allowing a 'much nicer' leader to take over. 'Then we are going to have a much more sustained and prolonged upwards move [by markets] but that is dreaming,' he said. However, if investors do want to play out Iraq scenarios in their heads, they also have to consider that President George W. Bush will be eyeing the polls in 2004. 'He knows perfectly well that if he gets himself into a military trap in the Middle East he is not going to be re-elected, the economy is going to suffer, the financial markets are going to be in disarray,' Mr Ricciardi said. But there are other dangers lurking besides Iraq which could fulfil his expectations of a fresh bout of equity selling worldwide. 'I put the accent on the war as No 1 but we may have further corporate scandals. Consumer spending [in the West] may weaken nevertheless because it is the only positive factor and it gets tired,' he said. 'We must not forget that the corporate sector has a very high level of debt. There are several uncertainties out there and if we can take a few of them off the table we can say 'hang on a minute, very low interest rates, very strong support for economic growth from the policy-makers in general'.' This does not sound like the fund management refrain of old: 'Buy and hold stocks'. Mr Ricciardi freely admits that clients, their financial advisers and fund houses themselves have to acknowledge a role for once-frowned-on market timing. 'Yes, there will be more market timing, there will be more cyclical rotation but the long-term assumption that equities will do better than bonds will still hold,' he said. 'We will still have low-level inflation and we will still have better managed economies and companies than we had in the past.' There was some justification in higher earnings for the big gains by stocks in developed markets in the 1990s. But as much, if not more, of the upside came from the rising multiples investors were prepared to pay for earnings as the New Economy euphoria really took hold in 1998 and 1999. That kind of earnings multiple expansion was unlikely to be repeated for a generation, Mr Ricciardi said, backing up the argument for more frequent market cycles. 'One of the things we would clearly expect is more stable multiples on price earnings and prices would move according to earnings,' he said. 'Earnings may have exciting moments of growth but then they also cool off.' The new environment will mean the fund management industry having to work harder and smarter to justify their fees to clients. 'Markets have clearly helped fund managers to cover some of their weaknesses and mistakes and they clearly won't now,' he said. Invesco is already responding by introducing additional funds that try to beat cash rather than a market benchmark. 'We have to put on the market more and more products that deliver absolute returns as opposed to relative returns,' Mr Ricciardi said. 'I would say that brokers, financial advisers and big intermediaries who sell them will have at least as big a problem [as fund houses]. 'At the end of the day we provide fund management tools to distributors who have the onus of managing clients' money.' Mr Ricciardi plays the lead role in helping shape asset allocation decisions for Invesco Global, the company which oversees Invesco's non-US operations. The house takes a sector and theme approach rather than investing by geographical markets. Country weightings are only considered after sector and stock specific decisions. When pushed, Mr Ricciardi said: 'Between Europe and US it is a hard call. Europe is cheap but US is better. 'The dollar is going down but so will the euro eventually because the European economy is not going to recover if the euro gets strong. 'While you may see the dollar going lower for a while shorter term, eventually the Europeans are going to have to counterattack. 'That is going to be very bullish. There is only one way to devalue currencies and that is by printing money. The more money that gets printed the more likely that some of it is going to capital markets.' But Mr Ricciardi warned it would be some time until all the excesses of the 1990s were cleaned out and a more stable investing environment returned. By 2005 'we should have completely cleared the air and you will have good markets with interest rates low and profits growing faster', he said. In the meantime, watch out for the downside.