Russell Survey: More than 40% of Managers Believe Markets to be Undervalued
Battered but not Broken, Money Managers See Glass 'Half Full'
SINGAPORE April 3 - In a new high for the Investment Manager Outlook, the quarterly survey of US investment managers conducted by Russell Investments, 42 percent of money managers believe the markets to be undervalued. That figure is up eight points from 34 percent in the fourth quarter of 2007 and double where it was in the second quarter of 2007.
Though markets have struggled through the first quarter of the year, two-thirds of the managers responding to the survey still believe that U.S. equity performance will be positive in 2008 - only a drop of 10 percentage points from the December 2007 survey. In fact, 26 percent of managers believe market returns will exceed 10 percent by year-end, a drop of only four percentage points from last quarter. Even though such a move would amount to a significant reversal in the Russell 3000 Index (which was down nearly 12 percent when the survey closed on March 7), almost exactly the same number of managers predict this major shift in the markets as expect U.S. equity markets to end 2008 in negative territory.
"Despite being beaten, battered and bowed, investment managers remain unbroken," said Bruce Pflaum, Managing Director for Russell Investments in Asia.. "Managers are resilient in their belief that government action will revive the economy, that U.S. equities have room to grow, and that equity performance will reclaim positive territory in 2008."
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. More than 250 managers participated in this survey.
Additional findings from the Investment Manager Outlook include:
Commodity sectors on the move
In the latest survey, managers indicated that they saw new buying opportunities related to commodity sectors. Those sectors that benefit most clearly from an increasing demand for commodities - other energy, integrated oils, and materials and processing - saw double-digit increases in manager bullishness from the last survey and reached highs not seen in more than two years. Sixty-two (62) percent of managers responding to the survey were bullish on other energy, an increase of 12 percentage points from last quarter. Fifty-five (55) percent of managers were bullish on integrated oils and 48 percent were bullish on materials and processing - increases of 12 and 14 percentage points respectively.
"The managers see a commodity-driven expansion worldwide as emerging and developed market economies compete for energy inputs and the raw material to build out their infrastructure," said Pflaum. "The same sectors that managers link to commodities are the ones most highly leveraged to economic activity - a fact which underscores the managers' larger belief in a turnaround for the markets and the economy in the second-half of the year."
As they have the past four quarters, health care and technology continued their lock-tight grip on managers' bullish sentiment. While manager bullishness for health care remained relatively stable, moving down from 73 percent to 71 percent this quarter, enthusiasm for technology dipped noticeably and posted the survey's single largest major sector decrease, dropping from 78 percent last quarter to only 63 percent currently.
Fixed income products reach new highs while managers temper their enthusiasm for growth stocks
While their outlook for the equities market remained steady and upbeat, manager bullishness for corporate and high-yield bonds recorded the highest scores in the history of the survey, 37 and 32 percent respectively. Meanwhile, managers reduced their expectations for growth stocks. U.S. large-cap growth, which has consistently topped the list for bullish sentiment over the past 12 quarters, experienced its largest drop since the second quarter of 2006, decreasing from 75 percent last quarter to a current level of 64 percent. Similarly, U.S. mid-cap growth decreased from 60 percent to 49 percent in bullish ratings and U.S. small-cap growth dropped from 47 percent to 36 percent.
"With increased market volatility following the credit crunch eruption last August, managers looking for a safe harbor have been increasing their bullishness toward fixed income products, including cash," said Pflaum. "However, we see a barbell pattern, with as many managers bearish on these products, which may indicate that managers collectively expect spreads to effectively remain unchanged in the near term and that greater opportunity lies with investment grade corporate bonds and equities."
About Investment Manager Outlook
Prior to the end of each quarter, Russell polls a sample of US investment managers to collect their 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.