In a report just released, Russell Investments said that professional money managers expect a considerable bounce from the current market lows, and they anticipate this swing to take place sometime next year.
According to the latest Investment Manager Outlook, a quarterly survey of investment managers conducted by Russell Investments, exactly half of the managers surveyed expect the markets to rise at least 10 percent over current valuations, and another 27 percent anticipate the equity markets to rise somewhere up to 10 percent.
In another demonstration of the managers' current level of optimism, 72 percent of managers surveyed believe the market is currently undervalued, a figure considerably higher than the 45 percent from last quarter and over double the 34 percent one year ago.
"Managers believe that the market has overshot the damage done by the ongoing recession and is now oversold and undervalued," said Erik Ristuben, Russell's chief investment officer, North America. "In their opinion, this market has been driven by panic and fear as much as by economic fundamentals."
A majority of managers expressed bullishness in eight of the survey's 13 asset classes, doubling the previous high of four asset classes during the fourth quarter of 2005 and the first quarter of 2006. There were also record levels of bullishness in four separate asset classes — corporate bonds (60 percent), U.S. small cap value (54 percent), U.S. mid cap value (53 percent) and high-yield bonds (53 percent).
"Managers are retaining their faith in the financial system and have a positive outlook for 2009," said Ristuben. "While uncertainty remains, the vast majority believe that the markets will turn the corner next year."
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. About 200 managers participated in this survey.
Additional findings from the Investment Manager Outlook include:
Value closing the gap on growth-oriented investing; managers prefer U.S. equities to overseas
Managers retained their preference for growth investing versus value, but the gap in attractiveness between growth and value has shrunk considerably. While U.S. large cap growth remains the managers' favorite asset class at 67 percent, manager bullishness for U.S. large cap value jumped 21 percentage points from 40 percent to 61 percent. In past iterations of the Russell Investment Manager Outlook, the gap between these two asset classes is typically 20 percentage points at a minimum, as compared to only six percentage points this quarter.
"It appears that even growth-oriented managers are seeing opportunities in companies with slower growth," said Ristuben. "Bullish sentiment increased significantly this quarter which is an indication that many managers are seeing a bottom forming, in spite of the uncertainty they expressed in early November and the severe market downturn in October."
Bullishness on all three value classes increased at least 20 percentage points. Manager bullish sentiment for U.S. small cap value increased 20 percentage points from 34 to 54 percent, and manager bullishness for U.S. mid cap value increased 20 percentage points from 33 to 53 percent. The most recent figures represent new survey highs for these asset classes.
Manager enthusiasm for non-U.S. equities was not quite as pronounced. While bullish sentiment rose 9 percentage points from last quarter for emerging markets (37 percent) and 12 percentage points for developed-market equities (36 percent), they still reflect a minority opinion and are well down from the 49 and 61 percent, respectively, of December 2007.
"Managers see the financial crises facing other nations as taking longer to resolve than those faced by the U.S. and that the U.S. will come out of the global recession first," said Ristuben.
Corporate bonds and high-yield bonds bound up to new highs
While the outlook for equities remained guardedly optimistic, the greater appeal of bonds in the survey represented a major development. Manager bullishness for corporate bonds reached a historic high of 60 percent, up from 37 percent last quarter and from a survey low of eight percent in the first quarter of 2006. The level of bullishness for high-yield bonds also soared to a new high, reaching 53 percent from just 39 percent last quarter and 28 percent one year ago.
"In the current environment, managers see spreads as unusually attractive and a unique opportunity to attain equity-like returns with fixed-income investments," said Ristuben.
Managers believe surviving financial services companies could thrive
Despite all that has happened to the financial system, bullishness in the financial services sector grew to 45 percent from 40 percent last quarter. That number is well above the 33 percent mark of one year ago and not too far from the survey high of 53 percent in September 2006.
"Managers are indicating that they believe that at least some of those institutions that have survived will probably continue to do so and possibly thrive," said Ristuben. "While the government certainly wants to get paid for supporting viable financial institutions, managers believe that this will not happen at the complete expense of other equity investors."
Russell Investments is a global investment company with US$180 billion in assets under management as of September 30, 2008.