Investment Managers Bullishness for non-U.S. Stocks Runs at Highest Level in a Year (Russell.com)

Investment Managers Bullishness for non-U.S. Stocks Runs at Highest Level in a Year
Oil Prices Expected to Have Only Modest Impact on Capital Markets

TACOMA, Wash. — September 28, 2005 — With U.S. stocks lagging, investment managers are looking outside the country to find improved returns.

Support for non-U.S. stocks and emerging market issues is running at the strongest rate in a year, according to the latest Investment Manager Outlook, a quarterly poll of investment managers conducted by Russell. The swing to non-U.S. stocks comes as managers show less enthusiasm for domestic issues.

"Although they remain confident that the U.S. market is sound, U.S. investment managers have become more cautious," said Randy Lert, chief portfolio strategist, Russell Investment Group. "Managers appear reluctant to commit themselves to any U.S. market segment except large-cap growth stocks, and even that support has slipped from last quarter."

Managers view the non-U.S. developed markets more bullishly than every U.S. equity asset class except large cap growth. Fifty two percent of managers are bullish on non-U.S. domiciled equities.

Within the United States, large-cap growth stocks continue to be the favorite, with more managers bullish on that segment of the market than any other. Still, managers have become more cautious than in the June survey, reducing their bullish outlook for all segments of the U.S. equity market except small-cap growth, which showed a modest uptick, and mid-cap growth, which remained unchanged. Almost one fourth of managers believe stocks are undervalued, a drop of nine percentage points from the 33 percent of managers who saw opportunity in the market last quarter.

"Although the high price of oil would be a reason to be cautious with investment portfolios, managers are downplaying that factor in the Russell survey by a vast majority," Lert says. "Only one in 10 believes crude oil prices will have a significant negative impact on the U.S. stock markets over the next six months — about the same number go so far as to suggest oil prices will positively impact the market, presumably by falling."

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. More than 80 managers responded.

Additional findings from the current Investment Manager Outlook include:

Manager Bullishness Drops Dramatically for Consumer Driven Sectors
Managers are anticipating a downturn in consumer spending and believe that U.S. households are reassessing their budgets, with negative implications for consumer-driven sectors of the market. Only 35 percent are bullish on consumer staples, down from 44 percent last quarter, and only 21 percent are bullish on consumer discretionary stocks, less than half the 43 percent support the sector received last quarter.

"Discretionary buys are expected to be the first to slow as households pare back their spending, followed by the consumer staples," says Lert. "Most managers who responded to our September poll appear ready to support only some fraction of U.S. equity markets, and the most negative of these may be that a spending downturn could in turn slow the growth of the economy."

Managers are reserving their enthusiasm for a few sectors of the U.S. investment universe; two-thirds are bullish on integrated oils and nearly 60 percent on "other energy." They are more bullish than last quarter, too, on material processing which will benefit from the rebuilding that will take place in the wake of Hurricane Katrina. Sixty nine percent (69 percent) are also bullish on health care.

Managers Downplay High Price of Oil
Investment managers apparently believe that the worst for oil prices will be over by the end of the next six months. Sixty seven (67) percent of respondents believe oil prices will have only a modest negative impact on the markets in the next six months. One in 10 believes future oil prices will have no impact on the capital markets.

"Managers are not overly concerned about oil prices," says Lert. "The rising cost of crude may have a greater impact on the markets through the flexibility it provides the Fed than through any deleterious results to corporate profits or consumer spending."

About Investment Manager Outlook
Prior to the end of each quarter, Russell polls a 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, 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 at www.russell.com/IMO.

Russell conducted the current Investment Manager Outlook between September 6 and September 12, 2005. 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.

About Russell
Russell Investment Group, a global leader in multi-manager investing, provides investment products and services in more than 39 countries. As of June 30, 2005, Russell manages more than $136 billion in assets and advises clients worldwide representing more than $2.3 trillion. Founded in 1936, Russell is a subsidiary of Northwestern Mutual and is headquartered in Tacoma, Wash., with additional offices in New York, Toronto, London, Paris, Singapore, Sydney, Auckland and Tokyo.

Contact:
Jennifer Tice 253-439-2921

Large capitalization (large cap) growth stocks are securities which fall into the Russell Top 200® Index. This index consists of the top 200 securities in the Russell 1000® Index, as ranked by total market capitalization. This "Blue Chip" large capitalization index represents approximately 75% of the Russell 1000® total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $45.9 billion; the median market capitalization was approximately $24.0 billion. The index had a total market capitalization range of approximately $386.9 billion to $13.8 billion. Growth stocks tend to exhibit higher price-to-book and price-earnings ratio, lower dividend yields and higher forecasted growth levels.

Middle capitalization (mid cap) growth stocks are securities which fall into the Russell Midcap® Index. This index measures the performance of the smallest 800 securities in the Russell 1000® Index, as ranked by total market capitalization. This index accurately captures the medium-sized universe of securities and represents approximately 25% of the Russell 1000® total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $4.7 billion; the median market capitalization was approximately $3.6 billion. The index had a total market capitalization range of approximately $13.7 billion to $1.8 billion. Growth stocks tend to exhibit higher price-to-book and price-earnings ratio, lower dividend yields and higher forecasted growth levels.

Small capitalization (small cap) growth stocks are securities which fall into the Russell 2000® Index. This index measures the performance of the smallest 2,000 securities in the Russell 3000® Index, representing approximately 8% of the Russell 3000® total market capitalization. As of the latest reconstitution, the average market capitalization was approximately $664.9 million; the median market capitalization was approximately $539.5 million. The index had a total market capitalization range of approximately $1.8 billion to $182.6 million. Growth stocks tend to exhibit higher price-to-book and price-earnings ratio, lower dividend yields and higher forecasted growth levels.

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 mature, and to political systems which 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.

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 base, 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.

Consumer staples are primarily companies that provide products directly to the consumer that are typically considered non-discretionary items based on consumer purchasing habits. Because such companies typically offer products that are not dependent on cyclical economic conditions, their securities are frequently considered defensive or conservative.

Consumer discretionary and staples are companies that manufacture products and provide discretionary services directly to the consumer. Some industries included in this sector are jewelry, watches and gemstones, advertising agencies, cosmetics and household furnishings.

Integrated oils include domestic and international integrated oil companies involved in all parts of exploration, production and refining process.

Other energy includes all energy related business other than those included in the integrated oils sector. Two distinct groups are: (1) gas distributors and gas pipelines and (2) other energy companies which include mining, producing, servicing and drilling companies.

Materials and processing contains companies that extract or process raw materials. Some industries included in this sector are agriculture, fishing and ranching, building materials, forest products and steel.

Health care companies are involved in medical services or health care including biotechnology research and production, drugs and pharmaceuticals, and health care facilities and services.

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.

RFD 05-5443. First used: September 2005

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