Russell survey: Managers press pause
Managers lower bullishness for emerging markets and corporate bonds from record levels last quarter
SINGAPORE, September 30, 2009 - The results of the latest Investment Manager Outlook, a quarterly survey of U.S. investment managers conducted by Russell Investments, reveal that professional investment managers have dialed down their bullishness from last quarter, particularly in the areas of emerging markets and corporate bonds. Half of the surveyed managers, 54 percent, also believe the U.S. equity markets to be fairly valued reflecting the significant market move since early March. The remaining managers are split nearly evenly between considering the markets to be undervalued or overvalued, 24 percent and 22 percent respectively.
"The highly bullish expectations that managers had earlier this year have been tempered by the strong showing from equities and fixed income as well as a 'wait and see' approach to the level of economic growth that likely began sometime in third quarter," said Bruce Pflaum, CEO Russell Investments Asia. "The managers that believe the market is fairly or over valued have effectively pressed the pause button, waiting to get a clearer reading on the consumer, housing and unemployment numbers."
Suspicions about the true strength of the economy were also revealed in manager responses to a question asking about expectations for the Consumer Price Inflation index. More than 70 percent believe the year-over-year rate of consumer price inflation will be between 1 percent and 3 percent at the end of 2010. And, of the remaining managers, there were more who believe the CPI will be below 1 percent at the end of 2010 than who believe it will be above 3 percent (16 percent versus 12 percent respectively).
"Even with an economic recovery underway, businesses will not likely be in a position to raise prices, and workers' wages will also not increase in a meaningful way, both of which are inputs to the managers' view on inflation, at least in the short term," said Mark Eibel, Director, Client Services at Russell Investments. "Instead, the consensus appears to be that we are in the midst of a post-recession recovery that will not measure up to historical standards, even though we all know this has been no ordinary recession."
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 200 managers participated in this survey.
Additional findings from the Investment Manager Outlook include:
Managers no longer fixed on fixed income
Manager bullishness for fixed income took deep dives in this latest iteration of the Investment Manager Outlook. Bullishness for corporate bonds fell from 66 percent last quarter's survey to 44 percent this one. Similarly, the positive sentiment for high yield bonds fell from 66 percent to 52 percent. These two asset classes experienced some of the largest declines in this survey, yet still remain at relatively high levels of bullishness over the history of the IMO.
"At the end of last year and at the beginning of this one, the managers saw fixed income as a tremendous opportunity that was offering yields at historic levels," said Eibel. "While there has already been a tremendous payoff in fixed income, the managers remain positive and see the asset class as one that is still ripe and not yet spoiled."
Manager economic concerns filter through to sector sentiment
Manager concern over the strength of the economic recovery reflected itself in a decline in bullishness for several sectors that go hand-in-hand with economic growth. The three sectors that fell the most in this quarter's manager survey were two sub sectors of energy (integrated oils and other energy) and materials and processing:
- Bullishness for integrated oils declined from 61 percent to 46 percent, while bearishness increased from 14 percent to 21 percent;
- Bullishness for other energy fell from 70 percent to 56 percent, while bearishness rose from 10 percent to 19 percent; and
- Bullishness for materials and processing declined from 60 percent to 53 percent, while bearishness decreased slightly from 22 percent to 20 percent in September.
"When businesses and consumers believe with conviction that the economic recovery is real and sustainable, the demand for oil and energy will grow, and the need for materials will rise," said Eibel. "These are economically sensitive sectors, and the managers are waiting before throwing their support too strongly behind them."
Technology repeated as the sector garnering the most manager bullishness, rising three percentage points from its previous all time IMO high of 75 percent to 78 percent. "Managers see technology as an investment play that can do well in various economic scenarios, both good and bad," said Eibel. "Strong balance sheets and a falling dollar in a sector that is global in nature make it an area that managers like, and they have been rewarded for being there this year."
Managers looking outside the U.S.
The top two asset classes for managers in the latest Investment Manager Outlook were emerging market equities and non-U.S. (developed market) equities, 67 percent bullish and 63 percent bullish respectively. While manager optimism for emerging markets fell 7 percentage points from the June survey, bullishness for non-U.S. (developed market) increased 10 percentage points.
"India, China and the other emerging markets will remain an investment story for many years, but emerging markets have run so hard of late that it makes sense that managers have pulled back a bit at this moment," said Eibel. "It was a bit of a surprise to see managers so bullish on non-U.S. (developed market), but these investment professionals might be expecting an echo of what we've seen in the U.S. markets over the last six to nine months — a reassessment of value in a market that had been teetering on the edge."
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/Helping-Advisors/Markets/InvestmentManagerOutlook.asp. For Index data, please visit www.russell.com/indexes.
About Russell
Russell Investments is a global investment company with US$151 billion in assets under management as of June 30, 2009. 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.
Forecasting represents predictions of market prices and /or volumes patterns utilizing varying analytical data. It is not representative of a projection of the stock market or of any specific investment.
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