New Russell Poll Finds Investment Managers Positive About U.S. Equity Markets At Mid-Year (Russell.com)

New Russell Poll Finds Investment Managers Positive About U.S. Equity Markets At Mid-Year
Bulls Outnumber Bears by 3-to-1; Majority of Managers See Market as Fairly Valued, Despite Interest Rates, Oil Prices and Iraq

TACOMA, Wash. — June 29, 2004 — Despite expected rate hikes from the Fed, rising oil prices, and the transition of power in Iraq, U.S. large cap equity investment managers remain positive about the direction of the U.S. equity markets. According to Investment Manager Outlook, a new quarterly poll from Russell Investment Group, more than 90 % of managers believe the U.S. equity market is either a bargain or is at least fairly valued. Those who believe the market is undervalued outnumber those who see it as overvalued by a 3-to-1 ratio. In addition, managers are particularly bullish on the health care sector — with 75% reporting a positive outlook, versus only 4% that are bearish.

"The results of Russell's first Investment Manager Outlook are a good indication that the last market cycle of the 20th century has finally ended," said Randy Lert, Chief Portfolio Strategist for Russell Investment Group. "After the wild and painful cycle that began with a bubble in 1998, then led to an excessive correction through the spring of 2003, followed by a rally through the end of last year, we seem to have finally begun a new investing environment. From the perspective of professional investors, the 21st century has finally arrived."

Investment Manager Outlook is intended to generate a meaningful snapshot of investment manager sentiment each quarter. For the first installment of the survey, Russell collected the opinions of a representative sample of senior-level investment decision-makers at U.S. large cap equity funds. In subsequent quarters, Investment Manager Outlook will expand to encompass additional asset classes and global markets.

Further key findings from the Second Quarter 2004 Investment Manger Outlook include the following:

Valuation
Overall, the view presented by the money management community is consistent with the notion that the market has returned to a "normal" level of pricing. Less than 10% of the respondents characterize the current U.S. equity market as overvalued while roughly 63% see it as fairly valued and 28% find it undervalued. So the majority of managers see the market as fairly valued; and among the rest, the bulls outnumber the bears by 3-to-1.

Asset Classes
Managers' outlook for U.S. large caps is largely positive, with 71% of the respondents in the bullish camp for large cap growth stocks and just under 60% bullish on large cap value. The negative sentiment towards bonds (84% bearish towards treasuries, 80% bearish towards corporate bonds and 76% bearish towards high yield) most likely reflects concerns about the rising interest rate environment.

"The 12-month outlook from investment managers appears to be consistent with the belief that the economy is entering the 'middle leg' of an economic recovery," said Mr. Lert. "As much as it can ever be the case, we seem to be in 'normal times' with the excesses of the late '90s and the ensuing correction behind us."

A striking area of disagreement among investment managers is the outlook for small caps. The view on small cap value is nearly uniformly split among bearish (33%), neutral (32%) and bullish (35%). And while the plurality of managers (42%) are bullish on small cap growth, the remaining 58% are either neutral (30%) or bearish (28%). According to Mr. Lert, this most likely reflects the relatively strong performance of the small cap market over the last 12 months.

Sectors
When asked about economic sectors, investment managers are clearly most bullish on health care stocks, with 75% bullish and only 4% bearish.

"One market statistic supporting the managers' views is the relatively modest valuation currently seen for health care stocks," said Mr. Lert. According to Thomson ISI, the P/E-to-growth ratio (or PEG ratio) for the health care sector is second only to the financial sector in attractiveness (financials are often among the most attractive on a PEG basis due to the way they are priced).

The technology sector is also viewed favorably, reflecting "the increasing growth in the economy and a cyclically favorable environment," said Mr. Lert. Another favorite of the manager community is the oil and energy sector, which Mr. Lert attributes to current oil prices and increasing worldwide demand as global economies recover.

Overall, managers show a preference for sectors that stand to benefit from the middle leg of an economic recovery — primarily large cap cyclically sensitive stocks (e.g., technology, consumer discretionary over staples; energy and materials over transportation). The survey shows little enthusiasm for interest-rate sensitive areas of the market (i.e., utilities and financials).

Election Year
The manager community does not appear to be dramatically concerned about the impact of many of the high-profile world events, including Fed policy, the transition of power in Iraq, and the U.S. presidential election, according to Mr. Lert. Managers highlighted the economy, inflation and oil prices as key investment and election topics, but more than 25% reported that election issues are unlikely to affect their investment strategy.

"Ultimately, managers focus on more fundamental issues such as the economic climate and company specifics," said Mr. Lert.

About Investment Manger Outlook
As the creators of the Russell indexes and the only firm that monitors more than 2,700 investment managers on an ongoing basis, Russell Investment Group has extraordinary access to senior-level investment decision-makers. Prior to the end of each quarter, Russell polls a representative sample of those decision-makers to collect their top-line opinions about the direction of the markets, sectors and asset classes to watch, and trends on the horizon that could impact investment strategy.

In addition to the quantitative results, Investment Manager Outlook provides qualitative analysis and commentary from one of Russell's senior investment strategists — starting this quarter with Randy Lert, Chief Portfolio Strategist.

Russell conducted the Second Quarter 2004 installment of Investment Manager Outlook between June 7, 2004 and June 15, 2004. In total, 107 investment management firms from across the United States participated in the survey. On average, the companies surveyed individually manage an estimated $38.7 billion in assets. The manager research that Russell conducts for investment purposes is done entirely independent of Investment Manager Outlook, and responses to the survey are on a purely voluntary basis.

Contact: Steve Claiborne, Tacoma, 253-594-1858,
Matt Burkhard, New York, 718-875-2122

Russell Investment Group is a registered trade name of Frank Russell Company, a Washington, USA corporation, which operates through subsidiaries worldwide. Frank Russell Company is a subsidiary of The Northwestern Mutual Life Insurance Company.

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