"The managers clearly believe that long-term rates will rise sooner rather than later and that a slowing economy looms as a potential result of the Fed's maneuvering," says Erik Ristuben, director, client investment strategies, Russell Investment Group. "A significant number of managers have a lingering fear that Alan Greenspan will continue his year-long rate hiking activity and are perhaps mindful of earlier occasions when the Fed has raised rates too far too fast."
Despite their concerns over interest rates, managers still believe that growth stocks are poised to show strong gains and the market is fairly valued or undervalued, as the relative valuation for growth stocks remains a compelling argument. The enthusiasm for large cap growth issues was shown by the 69% of managers who are bullish on this asset class, while the sentiment for large cap value stocks fell 6%age points from last quarter. The number of managers who believe the U.S. equity market is a bargain (33%) outnumber those who find it overvalued (7%) by more than four-to-one, whereas a majority of the managers (59%) believe the market is fairly valued.
"The managers are becoming increasingly convinced that the pendulum eventually has to swing from value stocks to growth stocks — it's just a matter of when," Ristuben says. "Managers are placing a stronger emphasis on style rather than size — growth is replacing market capitalization as the main driver of opportunity in U.S. equities."
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 100 managers responded. On average, the firms surveyed individually manage an estimated $50 billion.
Additional findings from the current Investment Manager Outlook include:
Interest Rate Concerns Spill Over International Stocks Managers' concern over interest rates in the U.S. demonstrated itself in their fading enthusiasm for the global markets. While 61% were bullish on non-U.S. stocks in the last survey, 46% expressed that sentiment for this quarter.
"A fear that rising rates in the U.S. will dampen the global economy has led managers to become less bullish toward non-U.S. stocks," said Ristuben. "Other contributing factors in the waning support for international equities include the difficulties both the European and Japanese economy have experienced in recent months, and concern about the political instability and psychological impact created by the decisions of France and the Netherlands to reject the European Union constitution."
Interest Rate Sensitive Fixed-Income Investments Also Suffer Managers were bearish on corporate bonds (59%), high yield bonds (58%), real estate (56%) and U.S. Treasuries (53%), reflecting their concerns over the harm that rising interest rates would pose for these asset classes. The managers were more bullish on cash (21%) than either corporate bonds (11%) or high yield bonds (18%).
"Manager confidence that higher rates lie ahead has led to a preference for cash over bonds, as managers believe higher money market rates may provide higher returns than bonds in the coming months," says Ristuben. "Although bond yields might rise, prices will fall if they do, effectively canceling out much of the yield gain. Money market prices, however, generally remain stable in spite of rises in rates and so the yield you see is the return you get."
Sector Support Mirrors Inflationary Concerns Support for cyclical stocks, which tend to move in line with the ups and downs of the economy, has fallen sharply, as interest rate fears and the possibility of an economic slowdown play a significant role in manager sentiment. Bullishness for materials processing and producer durables are at their lowest levels of support for the past year, 27% and 25% respectively. Nearly double the number of managers were bearish on the financial services sector (44%) than those who were bullish (24%), another reflection of interest rate concerns
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 at www.russell.com/IMO.
Russell conducted the current Investment Manager Outlook between June 6 and June 13, 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 investment services, provides investment products and services in more than 39 countries. Russell manages more than $135 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
Fund objectives, risks, charges and expenses should be carefully considered before investing. A prospectus containing this and other important information can be obtained by calling (800) 787-7354 or visiting www.russell.com. Please read the prospectus carefully before investing.
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 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.
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.
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.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
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This is a publication of Russell Investments. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an
opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
