"Even though small-cap value stocks have a strong track record, managers think the investing environment is about to change," said Randy Lert, Russell's chief portfolio strategist. "The catalyst for that change may be a spike in long-term interest rates."
Some managers predict that the market may reach a turning point when the 10-year Treasury bond — which rose from 4.05 percent to 4.55 percent in the month before the survey — reaches a yield of 5 percent.
"As the economy slows, the market may prefer companies that can sustain growth," said Lert. "On the flip side, it's no surprise that managers are shunning sectors that could suffer from a rise in rates. In addition to feeling negative about fixed income, they are bearish on financial services, utilities and real estate investment sectors."
This quarter, only 12 percent of the managers were bullish on real estate investment trusts, compared with 21 percent last quarter. Managers reserve their greatest degree of bearishness (84 percent) for U.S. Treasuries — an increase of 10 percentage points from last quarter.
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. Nearly 100 managers responded. On average, the firms surveyed individually manage an estimated $43 billion.
Additional findings from the current Investment Manager Outlook include:
Gains for Growth More than 70 percent of the managers surveyed predicted gains for large-cap growth stocks, up 8 percentage points from last quarter's survey and the same level of bullishness displayed in the second quarter of 2004. Support for large-cap value stocks was also fairly strong and growing quarter on quarter, with 45 percent bullish on this sector, up from 35 percent last quarter.
"Relatively low valuations in large-cap growth stocks may be driving this enthusiasm," said Lert. "Managers are encouraged by recent falls in the sector. They think that lower prices compress the valuations even more and could lead to investors paying little or no premium to buy companies with a better-than-average expected growth rate."
Opportunities Abroad The managers surveyed think the weakness of the dollar may persist and that some of the best investing opportunities may lie outside the United States in coming months. In fact, managers believe that many emerging market stocks have attractive valuations, and their support for emerging market stocks jumped from 47 percent to 57 percent this quarter. In addition, 61 percent of the managers are bullish on international stocks, up from 57 percent last quarter.
"These views likely reflect the belief that the dollar will continue to suffer on world markets, giving a boost to stocks denominated in other currencies," said Lert.
High Marks for Health Care Stocks Enthusiasm for health care stocks remained notable and increased from 58 percent to 65 percent this quarter, helping it retain its position as the most bullish-ranked sector, despite the recent removal of a top-selling drug from the market, question marks hanging over other drugs, and uncertainty over what some leading companies will do when their patents run out in a few years. When asked which health care sub-sector they found most attractive, 29 percent said pharmaceuticals, including biotechnology stocks and generics, followed by medical equipment (25 percent) and medical services providers (17 percent).
"Undoubtedly much of their bullishness lies in demographics," says Lert. "Today's baby boomers are edging ever closer to a time when they will need more health care products and services than they have up to now."
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 on russell.com.
Russell conducted the current Investment Manager Outlook between March 7 and March 14, 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 35 countries. Russell manages more than $131 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.
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.
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.
