December Investment Manager Outlook Managers Bullish on Large Cap Growth Stocks, Expect Corporate Profits to Drive Market in 2005 Corporate profits and interest rates will drive the markets in 2005, according to investment managers polled by Russell Investment Group. And, they add, those earnings will drive the markets higher, particularly U.S. large company growth stocks, on which six out of 10 managers are bullish. The managers were polled in Russell's quarterly Investment Manager Outlook. "Investment managers believe a new trend is emerging — one that favors domestic and foreign large-cap growth stocks at the expense of domestic small-cap stocks — and, as interest rates rise, this will hurt bonds and real-estate investments," said Randy Lert, Russell's chief portfolio strategist. "The scenario has not played itself out as most managers thought it would by now, but they are convinced it is only a matter of time before it does." Many money managers cited corporate earnings and interest rates as the issues that will figure most heavily in their investment decisions during the next year. "What is striking is that professional managers are resisting the distractions of geopolitical fears and energy horror stories, and have their sights set for the most part on what always have been the basic drivers of the market," said Lert. "Now it will be interesting to see whether investors as a whole are able to resist these same distractions." 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 and small cap equity investment managers, as well as U.S. fixed income investment managers. A total of 109 managers responded. On average, the firms surveyed individually manage an estimated $56.6 billion. Additional findings from the current Investment Manager Outlook include: Growing Interest in Growth According to the investment managers surveyed by Russell, bullish sentiment for growth stocks increased across all three U.S. equity asset classes compared to the results of last quarter's Investment Manager Outlook. Bullish sentiment rose nine percentage points for large caps (from 54% to 63%), one point for mid cap (49% to 50%) and six points for small cap growth (34% to 40%). "Managers remain convinced that more gains for growth stocks lie ahead, and that overall trends in other areas of the stock market and in the bond market so far this year will reverse themselves," said Lert. "At least among those 109 managers who responded to our survey, the verdict appears to be quite conclusive — the relative underperformance of growth stocks will end soon." International Allure International stocks are more strongly favored than they have been in the last six months. Indeed, the support for non-U.S. stocks in developed markets (57%) is higher than that for U.S. mid-cap or small-cap stocks and is almost as high as that for U.S. growth stocks. Notably, managers are more bullish on emerging markets (47%) than they are on U.S. small caps. "To some degree, investments in international stocks are currency calls as the managers believe non-U.S. stocks are likely to be boosted by further falls in the value of the dollar," said Lert. Sector Outlook Managers still believe, as they have for six months, that health care is the sector of choice. Fifty-eight percent of managers are bullish on health care. The energy sector outside of integrated oils is in second place (48%), with integrated oils (44%) and technology (42%) not far behind. The lowest support (7%) for any sector is shown for autos and transportation. "Although health care has not performed as well as managers have hoped, bullish sentiment remains high for this sector, probably because of the long-term appeal that demographics lend to these industries," said Lert. Bond Sentiment Downgraded Manager's bearish sentiment toward bonds intensified significantly in the fourth quarter. Seventy-four percent of managers are bearish on U.S. Treasuries, an increase of 10 percentage points from last quarter's poll. Similarly, bearishness for corporate bonds increased 17 points to 72%, and the negative sentiment increased 24 points to 71% on high-yield bonds. About Investment Manager Outlook Prior to the end of each quarter, Russell polls a representative sample of investment managers 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 on russell.com. Russell conducted the current Investment Manager Outlook between November 18, 2004 and November 30, 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. 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. RC 4126			The REPORT View the entire Investment Manager Outlook. (PDF, 1.1mb)   Why RUSSELL? 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