Russell Investment Manager Outlook December 2008 (Russell.com)

Russell survey: Fifty percent of managers believe equity markets will rise 10 percent or more in 2009
72% of managers believe U.S. equity markets undervalued — new high shatters previous survey results

Tacoma, WA — December 16, 2008 — Professional money managers expect a considerable bounce from the current market lows, and they anticipate this swing to take place sometime next year, according to the latest Investment Manager Outlook, a quarterly survey of investment managers conducted by Russell Investments.

Exactly half of the managers surveyed expect the markets to rise at least 10 percent over current valuations, and another 27 percent anticipate the equity markets to rise somewhere up to 10 percent. In another demonstration of the managers' current level of optimism, 72 percent of managers surveyed believe the market is currently undervalued, a figure considerably higher than the 45 percent from last quarter and over double the 34 percent one year ago.

"Managers believe that the market has overshot the damage done by the ongoing recession and is now oversold and undervalued," said Erik Ristuben, Russell's chief investment officer, North America. "In their opinion, this market has been driven by panic and fear as much as by economic fundamentals."

A majority of managers expressed bullishness in eight of the survey's 13 asset classes, doubling the previous high of four asset classes during the fourth quarter of 2005 and the first quarter of 2006. There were also record levels of bullishness in four separate asset classes — corporate bonds (60 percent), U.S. small cap value (54 percent), U.S. mid cap value (53 percent) and high-yield bonds (53 percent).

"Managers are retaining their faith in the financial system and have a positive outlook for 2009," said Ristuben. "While uncertainty remains, the vast majority believe that the markets will turn the corner next year."

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 senior-level investment decision-makers at U.S. large and small cap equity investment managers, as well as U.S. fixed-income investment managers. About 200 managers participated in this survey.

Additional findings from the Investment Manager Outlook include:

Value closing the gap on growth-oriented investing; managers prefer U.S. equities to overseas
Managers retained their preference for growth investing versus value, but the gap in attractiveness between growth and value has shrunk considerably. While U.S. large cap growth remains the managers' favorite asset class at 67 percent, manager bullishness for U.S. large cap value jumped 21 percentage points from 40 percent to 61 percent. In past iterations of the Russell Investment Manager Outlook, the gap between these two asset classes is typically 20 percentage points at a minimum, as compared to only six percentage points this quarter.

"It appears that even growth-oriented managers are seeing opportunities in companies with slower growth," said Ristuben. "Bullish sentiment increased significantly this quarter which is an indication that many managers are seeing a bottom forming, in spite of the uncertainty they expressed in early November and the severe market downturn in October."

Bullishness on all three value classes increased at least 20 percentage points. Manager bullish sentiment for U.S. small cap value increased 20 percentage points from 34 to 54 percent, and manager bullishness for U.S. mid cap value increased 20 percentage points from 33 to 53 percent. The most recent figures represent new survey highs for these asset classes.

Manager enthusiasm for non-U.S. equities was not quite as pronounced. While bullish sentiment rose 9 percentage points from last quarter for emerging markets (37 percent) and 12 percentage points for developed-market equities (36 percent), they still reflect a minority opinion and are well down from the 49 and 61 percent, respectively, of December 2007.

"Managers see the financial crises facing other nations as taking longer to resolve than those faced by the U.S. and that the U.S. will come out of the global recession first," said Ristuben.

Corporate bonds and high-yield bonds bound up to new highs
While the outlook for equities remained guardedly optimistic, the greater appeal of bonds in the survey represented a major development. Manager bullishness for corporate bonds reached a historic high of 60 percent, up from 37 percent last quarter and from a survey low of eight percent in the first quarter of 2006. The level of bullishness for high-yield bonds also soared to a new high, reaching 53 percent from just 39 percent last quarter and 28 percent one year ago.

"In the current environment, managers see spreads as unusually attractive and a unique opportunity to attain equity-like returns with fixed-income investments," said Ristuben.

Managers believe surviving financial services companies could thrive
Despite all that has happened to the financial system, bullishness in the financial services sector grew to 45 percent from 40 percent last quarter. That number is well above the 33 percent mark of one year ago and not too far from the survey high of 53 percent in September 2006.

"Managers are indicating that they believe that at least some of those institutions that have survived will probably continue to do so and possibly thrive," said Ristuben. "While the government certainly wants to get paid for supporting viable financial institutions, managers believe that this will not happen at the complete expense of other equity investors."

About Investment Manager Outlook
Prior to the end of each quarter, Russell polls a sample of investment managers to collect top-line opinions about their outlook for 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, the 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 on www.russell.com/IMO. For Index data, please visit www.russell.com/indexes/.

About Russell
Russell Investments is a global investment company with $180 billion in assets under management as of September 30, 2008. Russell serves individual, institutional and advisor clients in more than 40 countries and provides investment solutions including mutual funds, retirement investments, institutional asset management, implementation services and global stock market indexes. Russell is world-renowned for its depth of manager research, quality of manager selection and access to some of the world's leading investment managers. It helps investors of all sizes put this access to work in corporate defined benefit and defined contribution plans, and in the life savings of individual investors.

Founded in 1936, Russell is a subsidiary of Northwestern Mutual Life Insurance Company. Headquartered in Tacoma, Russell operates principal offices in Amsterdam, Auckland, Johannesburg, London, Melbourne, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto.

Contacts:
Jennifer Tice, 253-439-1858
Matt Burkhard, 718-875-2122

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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Large capitalization (large cap) investments involve stocks of companies generally having a market capitalization between $10 billion and $200 billion. The value of securities will rise and fall in response to the activities of the company that issued them, general market conditions and/or economic conditions.

Middle capitalization (middle cap) investments involve stocks of companies generally having a market capitalization between $2 billion and $10 billion and considered more volatile than large cap companies. Mid cap investments are often considered to offer more growth potential than larger caps (but less than small caps) and less risk than small caps (but more than large caps).

Small capitalization (small cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than $2 billion) than larger company stocks (large cap). Small cap investments are subject to considerable price fluctuations and are more volatile than large company stocks. Investors should consider the additional risks involved in small cap investments.

Financial services: This sector consists of companies that provide financial services including banking, finance, life insurance, and securities brokerage, and services companies.

Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or, such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments.

Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short term or have grown consistently over the long term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors' perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments.

Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages.

Non-U.S. markets entail different risks than those typically associated with U.S. markets, including currency fluctuations, political and economic instability, accounting changes, and foreign taxation. Securities may be less liquid and more volatile.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and less mature, and to political systems that can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer-established non-U.S. markets.

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RFD 08-1386 First used: December 2008