Russell Survey Finds Managers' Optimism Tempered (Russell.com)

Russell Survey Finds Managers' Optimism Tempered By Concerns Over Economy and Geopolitics
Growth/Value Style Gap Narrows Despite Growth Stocks Being Undervalued; Health Care Still Most Favored Sector; Improvements in Financial Services and Utilities

TACOMA, Wash. — Sept. 28, 2004 — U.S. money managers remain largely bullish on stocks, believing they will continue to outperform bonds in the 12 months ahead, according to third quarter results from Russell Investment Group's Investment Manager Outlook.

Managers' outlook on U.S. equity market valuations shows net bullish sentiment (percent of managers bullish minus percent of managers bearish) increased from 19% in the second quarter to 25% in the current quarter.¹

But survey results also show managers shifting to a more cautious optimism when asked about their outlook on equity asset classes, according to Randy Lert, Russell's Chief Portfolio Strategist. While a majority of managers see the market as fairly valued (57%) or undervalued (34%), the percentage of managers bullish on individual equity asset classes was somewhat lower compared to the previous quarter.

"We believe that deepening concern about the strength of the economic recovery and political events combined with sensitivity to interest rate increases helped to lower managers' expectations," said Lert.

Managers are likely becoming concerned about the slowing macro environment, Lert added, as evidenced by a substantial majority (84%) who believe that the Federal Reserve will increase rates less aggressively during the fourth quarter than the past few board meetings.

"Over the recent months, the market has clearly reacted more to small changes in interest rates or almost negligible information about inflation than to the many positive corporate profit announcements. And yet, managers clearly still see real opportunities when it comes to equities and market valuation," said Lert.

"Going forward, it will be interesting to see whether the macro distractions will take a back seat to fundamentals — such as profits, growth prospects and valuations — which in the long run have proven to be the most positive drivers of stock price."

Russell's Investment Manager Outlook is intended to generate a meaningful snapshot of investment manager sentiment each quarter. For the current installment of the survey, Russell collected the opinions of a representative sample of senior-level investment decision-makers at U.S. large cap and U.S. small cap equity funds. A total of 128 managers responded. On average, the firms surveyed individually manage an estimated $44.7 billion.²

Further key findings from the Third Quarter 2004 Investment Manager Outlook include:

Style Gaps Narrow
Managers became less optimistic about growth stocks in the third quarter: net bullish sentiment fell 28% for large cap, 16% for mid cap, and 18% for small cap. At the same time, managers' outlook for value stocks remained relatively unchanged quarter-on-quarter: net bullish sentiment fell 6% for large cap, was stable for mid cap and fell 2% for small cap.

"This decreasing enthusiasm toward growth stocks has erased any discernable style bias and comes at a time when growth stocks are relatively undervalued compared to value stocks based on key yardsticks such as price/sales ratios," said Lert. "Managers are clearly focusing heavily on overall economic and investment conditions rather than on company valuations when analyzing potential investments."

Sector Outlook
"At the sector level, managers are being very tactical and betting on the individual sectors they prefer," said Mr. Lert. "The resurgence in the industrial economy and supply and demand imbalances in commodities are providing managers with an effective hedge against more defensive sectors."

Health care remained the most favored sector, with net bullish sentiment at 47%. However, this sentiment declined quarter-on-quarter by 24%. Similarly, net bullish sentiment declined in other growth sectors such as technology (declined 28%) and consumer discretionary (declined 21%).

Interest-sensitive sectors saw an improvement in sentiment: the quarter-on-quarter net bullish outlook for financial services improved by 41% and utilities improved by 33%.

Placing Bets on Large Cap
Most respondents still favor large cap over small cap stocks. The majority of respondents were bullish on U.S. large cap growth (53.6%) and U.S. large cap value (51.6%) while only approximately one-third were bullish on U.S. small cap growth (33.9%) and U.S. small cap value (34.7%).

"Despite bullish sentiments overall, managers are undoubtedly concerned that small cap stocks are overvalued and that future economic growth is slowing," said Mr. Lert.

Bond Outlook: Improving
Managers continue to be bearish toward bonds, although sentiment is improving compared to the second quarter. In the third quarter, net bullish sentiment improved by 21% for U.S. Treasuries, 32% for corporate bonds and 44% for high yield debt. However, the bearish outlook dominated with 63.5% of managers bearish on U.S. Treasuries, 54.8% bearish on corporate bonds and 47.2% bearish on high yield bonds.

"The bearish outlook is a reflection of current low yields and the fact that the Federal Reserve seems to be in the early stages of its tightening cycle," said Lert.

About Investment Manager Outlook
As the creators of the Russell indexes and the only firm that monitors more than 1,700 investment managers every day, 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. Detailed results and analysis from the Investment Manager Outlook are available online at www.russell.com.

Russell conducted the third quarter 2004 installment of Investment Manager Outlook between September 7, 2004 and September 13, 2004. 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,
Kerstin Parkel, New York, 718-875-2121

1 During the period 9/7/04-9/13/04, managers were asked to evaluate the current U.S. equity market: 34% of managers viewed the market as undervalued; 57% viewed the market as fairly valued; 9% viewed the market as overvalued. Net bullish sentiment is determined by the percent bullish minus the percent bearish.

2 Estimated assets under management is based on a majority of survey respondents for which data was available in Nelson's Marketplace as of May 2004.

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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