Believe it or not: US managers indicate record bullishnes

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 per cent over current valuations, and another 27 per cent anticipate the equity markets to rise somewhere up to 10 per cent, according to the December quarter survey in the US. In another demonstration of the managers’ current level of optimism, 72 per cent of managers surveyed believe the market is currently undervalued, a figure considerably higher than the 45 per cent from last quarter and over double the 34 per cent 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 per cent), U.S. small cap value (54 per cent), US mid cap value (53 per cent) and high-yield bonds (53 per cent).

“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 says that its 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 investment decision-makers at US large and small-cap equity investment managers, as well as US fixed interest managers. About 200 managers participated in the 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 US large-cap growth remains the managers’ favorite asset class at 67 per cent, manager bullishness for US large-cap value jumped 21 percentage points from 40 per cent to 61 per cent. 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 US small-cap value increased 20 percentage points from 34 to 54 per cent, and manager bullishness for US mid-cap value increased 20 percentage points from 33 to 53 per cent. 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 per cent) and 12 percentage points for developed-market equities (36 per cent), they still reflect a minority opinion and are well down from the 49 and 61 per cent, respectively, of December 2007.

“Managers see the financial crises facing other nations as taking longer to resolve than those faced by the US and that the US 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 per cent, up from 37 per cent last quarter and from a survey low of 8 per cent in the first quarter of 2006. The level of bullishness for high-yield bonds also soared to a new high, reaching 53 per cent from just 39 per cent last quarter and 28 per cent 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 per cent from 40 per cent last quarter. That number is well above the 33 per cent mark of one year ago and not too far from the survey high of 53 per cent 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.”