Press Release - Russell Investments

Russell Survey:
Manager Market Bullishness Corralled by Competing Concerns

Tacoma, WA — Money managers continue to be bullish on U.S. stocks for 2007, but an underlying current of concern may have dampened this optimism, according to the latest Investment Manager Outlook, Russell Investment Group's quarterly survey of investment managers. The managers are generally in agreement that the current economic environment is a relatively benign one, but they seem to have two very different and competing hypotheses as to how changes in the economy could push the markets to stumble.

"The overall market sentiment is bullish and tilted positively toward stocks, but these managers are nervous, cautious bulls," said Randy Lert, chief portfolio strategist, Russell Investment Group. "They see risk, but there is a sharp divergence in opinion on where the source of market turmoil ultimately lies. Some managers are worrying over inflation while others fear a slowdown. The managers are hoping that economic growth will be neither too fast nor too slow."

When asked about the largest risk to U.S. equity performance over the next 12 months, managers identified increasing inflation as their chief concern (22 percent). These are the managers who are nervous that too robust an economy could spur the Federal Reserve to delay the much anticipated rate cut later this year and consequently put a damper on equities. Two other major risks highlighted by the surveyed managers were geopolitical instability (20 percent) and a softening real estate market (15 percent).

"While some managers may fret over an economy growing too fast, manager unease over real estate reflects a competing viewpoint," said Lert. "They see an economic slowdown on the horizon, one that would be sped along by an unraveling of the real estate market, a consumer debt crisis and significant hits to the financial services sector."

Managers saw less value in the equities markets this quarter, as the percentage of managers believing the market is undervalued dipped from last quarter's all-time high of 37 percent to 24 percent. The February 27 across-the-board decline in equities took place midway through the Russell survey and may have influenced this broad assessment of the market. Thirteen percent of managers indicated their belief that the market was overvalued, and nearly two-thirds (64 percent) believe the current market is fairly valued.

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:

Post February 27 sell-off: manager sentiment on Treasuries soar, real estate and financial services tumble
The Russell survey spanned the February 27 equities sell-off, and the fairly even distribution of pre- and post-sell-off respondents (a roughly 40-60 percent split, respectively) provided insight into some significant changes in manager opinion that brought additional numbers to the camp most concerned by the risk of an economic slowdown. Manager bullishness on U.S. Treasuries soared dramatically from 10 percent to 30 percent after the broad market downturn. These managers may expect a slowdown in economic growth but do not anticipate a recession.

"While managers' increasing interest in fixed-income would typically speak to a flight from stormy stocks to the calmer water of bonds, we believe that they expect falling interest rates to cause the yield curve to revert from its current inverted state to a normal one, making longer-term bond investments more attractive," said Lert.

After the sell-off, 20 percent of managers pointed to a softening real estate market as the largest risk in U.S. equity performance over the next 12 months, reflecting a substantial rise in concern from only 8 percent before. In fact, the same number of managers identified a real estate slowdown as their main concern as those who cited inflation, the top-ranked risk factor for equities. In a similar swing, sentiment toward the financial services sector became dramatically less positive when managers responded to the survey after the market decline — 61 percent of managers said they were bullish on this sector prior to February 27, as compared to a much smaller 39 percent after.

"Many managers, and especially those who see an economic slowdown as a significant risk, may believe that a serious downturn in real estate could slow down the economy in any number of ways. They may think the mortgage industry and the consumer spending built up around rising real estate prices have been critical forces driving much of the U.S. economy's growth," said Lert. "After the February 27 broad decline in equities, managers became considerably less positive toward financial services, and rising concerns around real estate undoubtedly exacerbated that negative shift."

Managers are bullish on large-cap growth; favor technology and health care
The vast majority of managers (78 percent) are bullish on large-cap growth stocks. The annual returns for this asset style have trailed those for value stocks for a number of years, and managers are anticipating a return to the mean.

Managers also remain most bullish on the health care and technology sectors, at 73 percent and 72 percent, respectively. And, they are most bearish on autos and transportation (60 percent bearish). Managers also maintain their enthusiasm for non-U.S. equities in developed markets, but they have dropped their bullishness toward equities in emerging markets by about 15 percentage points from last quarter.

"Emerging markets experienced phenomenal returns in 2006, up 32 percent for the year*, and produced an annualized return of 26 percent over the past five years," said Lert. "Managers may believe performance has peaked, and something will occur to take the steam out of this asset class."

*As measured by the MSCI-Emerging Markets Index

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 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 Russell.com/IMO. For Index data, please visit www.russell.com.

Russell conducted the current Investment Manager Outlook between February 26 and March 5, 2007.
The manager research that Russell conducts for investment purposes is done entirely independent of the Investment Manager Outlook, and responses to the survey are on a purely voluntary basis.

About Russell
Russell Investment Group, provides investment products and services in more than 44 countries. Russell manages more than $200 billion in assets as of February 7, 2007, and advises clients worldwide representing approximately $2 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, Sydney, Singapore, Auckland and Tokyo.

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

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.

Index returns represent past performance and should not be viewed as a representation of future performance of any investment or the stock market.

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.

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.

Non-US markets entail different risks than those typically associated with US markets, including currency fluctuations, political and economic instability, accounting changes, and foreign taxation. Securities may be less liquid and more volatile. If applicable, please see a Prospectus for further detail.

MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006 the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

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 US and longer-established non-US markets.

Bond investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse repurchase transaction risk. Greater risk is inherent in portfolios that invest primarily in high yield bonds. They are subject to additional risks, such as limited liquidity and increased volatility.

Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes and tax laws and interest rates all present potential risks to real estate investments.

Russell Investment Group, a Washington, USA corporation, operates through subsidiaries worldwide. Russell Investment Group is a subsidiary of The Northwestern Mutual Life Insurance Company.

Russell Investment Group is the owner of the trademarks, service marks and copyrights related to its indexes.

RFD# 07-6618 First used: March 2007

Securities distributed through Russell Fund Distributors, Inc. member NASD, part of Russell Investment Group.

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